How to grow grey hair and think 10 years younger.

I hate to say it, but as you are reading this blog you have aged. Don’t bail out, what I have to share with you will at least give you some financial security as you cultivate that grey hair.

Wednesday I wrote a blog about demographics being the big dog that wags the stock market tail. Invest a few moments of your life and read this post first, it will make more sense, I hope. Don’t shoot the messenger!

http://franchisewhale.com/2008/04/demographics-and-stock-market.html

Last November I wrote a post that talked about the recession was baked into the 2008 pie because of a very accurate indicator that screamed contraction the day before Thanksgiving 2007. Doh! Darn economic tryptophan!

http://franchisewhale.com/2007/11/thanksgiving-surprise-locks-in.html

Those stories are background to this main point. Just like everything else in nature, people, groups and even countries, all go through growth and decay cycles. As an entrepreneur, our job is to help people live better through the growth a decay cycles and make money in the process. Let’s first look at the major growth markets and then we can drill down to the industries.

Young people take more risk than old people.

Insurance companies know this too well. I live in Arizona and trust me, the dinner-before-5-bunch do not drive any better than the High School musical crowd. The elderly have a better grip on their own sense of mortality however. I know this for a fact, at 40 years old I found myself bouncing down the road at 50 miles an hour with no helmet! At that exact moment in time, I realized, “This is really going to hurt!” Time literally stopped and 138 feet later of an epidermis laden skid mark, I realized, I was mortal.

Most people are much wiser than myself and discover that obvious jewel of mortality wisdom earlier than I did. At some point we all realize it. That realization makes us more cautious, more risk adverse and more conservative in our financial affairs. When you have a country full of people that realize they are getting older at the same time, the economy will also “slow down.”

We are almost at the peak of a very tall spending hill. 2010, we will start down the hill and will spend less each year for the next decade in America. What breadcrumbs can we follow to put together our Macro hotlist of countries that will keep spending and growing while we are getting older and more conservative?

• What is the average age of the country we are interested in?

• If I find a real young country, do the political and economic systems support growth? (Afghanistan is full of youngsters but would be a nightmare investment environment.)

• As countries urbanize, they have fewer children.

• Fewer children, fewer spenders, slower growth (Think Europe and Japan).

The geography box score looking ahead:

• Slower and declining growth: Europe, America, Canada and Japan.

• Moderate growth: China.

• Fast growth: Latin America, South East Asia and the Middle East.

• The Mother of all growth markets: India.

I know some of those seem counter intuitive. How can China actually be in the moderating growth column? Two big reasons. The “one child” policy put a kink in the Chinese birth canal. In 2015 their version of the Baby Boomers will enter their peak spending cycle top. They will also be nursing a slowdown as their biggest export market, America continues to spend less. Double Wammy!

What about India? They are packed with youngsters, a very bureaucratic but democratic system none the less. Combine that with a massive birth rate, huge human capital pool and pro business planners. They will not peak in their spending until 2065! Also they have avoided the mistakes the social planning meat heads made behind the rice curtain. The Chinese do not have a corner on the market of dumb growth policies. Japan and Germany have very rigid immigration laws and the USA is moving in the wrong direction building a wall when it should be opening an express freeway for bright, honest foreigners. Check out the birth and immigration trends in Japan and you will see why the Nikkei average peaked December 29, 1989 at 38,916. Today the average is at 13,342. Still down 65% after 14 years! The US stock market declining from 2010 to 2023 is impossible! Think again.

When God gave the commandment in the garden, “Be fruitful and multiply and replenish the earth”, it was the biggest stock tip in the history of the world! If you produce fewer consumers than yourself, you are digging an economic grave for yourself.

A brilliant move the Indian planners made was to skip the industrial phase and jump right to services. It took the USA about 100 to ramp up and take the manufacturing power away from Europe. China took that away from us in about 30 years. India realized, why fight over declining margins and try and compete with a bigger labor force. The planners jumped straight to the services and information phase. Do you ever see your kid’s toys or your clothes labeled “made in India?” When was the last time you had someone in tech support or a call center help you from India? If you told a guy in the 1950's that they would one day pay someone else to change their oil in their car, do their yard work and repair their dishwasher, he would have thrown your pansy candy butt out of his yard! Things change. Change is the only guaranteed certainty in the future.

Africa is a real wild card. That could be a very interesting market for the brave at heart but too much to analyze in this story and much lower hanging fruit around the world to consider first.

I know, Harris, easy boy, I am not that adventurous and want to make money in the USA. OK, you just need to figure out where people will still spend money as it grows grey and get there before they do. Next week I will be interviewing some CEO’s that will open your mind to the accelerating franchise boom providing services to the elderly.

Demographics and the stock market.

In 1987 I had the incredible luck of hearing from my manager that I passed the securities examination. He told me the results on Monday the 19^th day of October. For you younger readers (I can't believe I typed that) in one day, the Dow Jones went down 22.6%! This was a very big day.

At the time it was blamed on too much portfolio insurance. I know, how can too much insurance make things fall apart? Wall Street always has a nice answer to each major catastrophe. I think they love putting a name and reason on each big crash to give us that feeling that it was all expected, no worries. This round it is too many subprime loans, underwritten and bought by the wrong people. I can’t wait to hear the next excuse in 2010, but more on that in a moment.

One thing I learned at Lehman, all crashes are caused by the big boys running for the exit at the same time and trying to slam the slow guys fingers in the door. This round, Goldman Sachs and JP Morgan Chase made it to the door first, Bear Stearns was a little too old and fat. The good news, Wall Street is not going away, the bad news, we are.

Out of all the clutter I have read by over educated economists that are long on theory and short on real experience, Harry Dent’s work really stands out. He is a Harvard chap, we don’t hold that against him, but he has cut his teeth as a fund manager and has a elegantly simple answer that is eerily correct over the past 50 years.

The stock market is controlled by demographics.

I know not earth shattering breaking news for some, overly simple you might say. I love simple. Here is the theory. We go through economic cycles as individuals from the moment we pop out of the womb to the time they stick us in a pine box. Studies have shown that between the age of 46 and 50 we peak in our spending patterns. His theory was, if I project ahead 48 years and overlay the stock market on the birth cycle, it should correspond.

More consumption= more production= higher stock prices.

Check out the chart on the top (Click the chart to see a large version). Do you see that giant red top like a bloody roller coaster? That is 2010. That is when the herd of baby boomers will have passed their prime economic spending and each year after that we take a long slow painful decline for 12 years until Gen-X enters their prime spending. Twelve years!? It will make the crash of 1987 look like a speed bump.

This not only has corresponded with each blip in births for the last 50 years it makes total sense. Our economy is a scary 80% consumer spending now and 20% savings and manufacturing. If the spending slows down, prices will go down. As we start out we don’t spend much until we get to high school. In college the cash starts getting consumed even as we live like a monk. Next we get our first jobs and need fancier clothes, eat out more, need a car. Next I am getting married; need a house, bigger car, more spending…when we get to about 48, things turn over. We pull our horns in and realize we will not live forever and we take less risk, spend less and prepare for the day we need to live off of equity, not add to it. (See chart).

If Harry is right, by 2010 you better have a solid 10 year plan.

So where do we go for opportunity in all of this. The answer might surprise you. Friday I will dive into how we can capitalize on getting into the right demographic markets internationally and what are the hot franchise opportunities domestically after 2010. Next week, I will be interviewing some CEO’s that are running businesses that will thrive while most sectors will be in triage for the next decade.

Buckle up, it is going to be a bumpy ride!

Thanksgiving surprise locks in recession for 2008

The stock market gave us a real turkey in the Wednesday session before the long weekend. The closing price was not only at a level that indicated the market will go lower; it was the method of the close that was most alarming. We will have a recession in 2008 if the Dow Theory is correct. The last time we had the same signal was September of 1999 which led to the recession of 2000-2002.

Our friend Mr. Dow is best known for the creation of the Dow Jones Averages. What makes his story so unique is Dow was a self made man. He was a reporter, financial writer, broker, member of the New York Stock exchange, analyst and editor.

Having moved off the floor of the exchange to commit full time to the fledgling Wall Street Journal in its 2nd year of existence, he developed the Dow Jones industrial and transportation averages to give readers a better feel for the broader market. During his 22 years on the street, he lived thru three financial panics which resulted in a contraction on the overall economy later on. He had a unique feel for human emotion and how it was expressed in stock market prices. This brought him to this conclusion.

“The price trend is not saying what the condition of business is today, but what it will be months from now.”

The market close last week was below the August low and the divergence of the move on the way up confirms a “Dow Theory” Recession is on the way. We had one right before the crash of 1929 as well.

So how do we create a thriving licensing and franchising business during the next downturn? High volume low margin businesses rely on commercial credit to fund their operations and consumer credit to buy their products. During a recession, they will get hit the worst. You can moderate the market you are in by controlling the price or controlling production. Businesses that rely on the production model are the most susceptible to recession. Position your brand accordingly and you will thrive while others get the squeeze.