The United States is Facing the Biggest Bubble in HISTORY
There are two countries in an economic depression as of 2020. They are Zimbabwe and Japan. The facts are, both countries have been in depression for over 30 years, since the 1990s. In 1990, Japan entered the “Lost Decade,” now the “Lost Decades” as it nears the 40-year mark.
A very important point is that both countries are rich countries. Zimbabwe, once known as Rhodesia, was the Breadbasket of Africa. Today, Zimbabwe is the basket case of Africa. Japan, on the other hand, is a very rich, high-functioning, productive country. And yet it’s been in depression for 30 years. The problem is the differences in their governments’ fiscal and monetary policies. And the fact that Japan’s debt is financed in Japanese currency, the yen.
What About America? In 2008, America entered its “First Lost Decade” and I would argue that, in 2018, America entered a second “Lost Decade”.
Many people think the United States is headed for a depression. I think it will be a deflationary depression, with a slight difference.
The U.S. dollar is the reserve currency of the world, which makes America a little different. The U.S. dollar became the reserve currency of the world in 1944, at the Bretton Woods Conference. The problem is that in 1971 the United States broke its promise to keep the U.S. dollar backed by gold. Today, the world is in debt to the United States.
In other words, the U.S. dollar is strong because hundreds of trillions of dollars of global debt is in U.S. dollars.
A giant stock-market crash is coming, but the market crash is not the problem. Predicting a market crash is not a big deal. All financial markets go up, and all financial markets come down. Market cycles are a part of life. Predicting a market crash is like predicting the coming of winter.
The issue is that the next market crash will reveal big problems. The next crash will be especially hard because three generations have pushed a bigger problem forward—the problem of how people support themselves once their working days are over. That is an unprecedented problem that grows bigger every day.
Short Term Signs We’re in a Bubble
#1 Market Cycles
Since 1970, the average business cycle has lengthened from five years to seven years—approximately 82 months.
It’s easy to see this as true by looking backward:
In February 2016, investors left stocks and went running to safe-havens like bonds and gold, primarily driven by concerns about economic growth.
Seven years prior to that, in March 2009 the Dow fell up to 6440. A percentage decline exceeding the pace of the market’s fall during the Great Depression.
Seven years prior to that, The 2001 recession was an eight-month economic downturn that began in March and lasted through November.
If you want to know when the next downturn will be, estimate 7 years from 2016.
Some economists are predicting December 2022/January 2023 for the next trough.
In February 2020, the unemployment rate hit 3.5 percent. According to cycle trends, the date in history could mark the peak of the economy.
Researchers suggest that when unemployment is at an all-time low, as it was in February, one could predict that five to seven months later the stock market will reach it’s high for that cycle.
#3 Advance-decline line
The advance-decline line, a technical stock market indicator to measure the number of individual stocks participating in a market rise or fall is making a new high.
A lot of technicians will point that out and they draw the conclusion that with the AD line making a new high, the Dow, the S&P, and everything should follow.
1929 Style Top
In my opinion, the next crash will be a big one and a long one. The last Great Depression lasted 25 years, from 1929 to 1954. In 1929, the Dow peaked at 380. It took 25 years, until 1954, to reach 380 again. This next depression may last longer because the Fed and Central Banks throughout the world are out of ammunition (at sub-zero interest rates and Quantitative Easing, ie: printing money) and cannot save the world again.
Unfortunately, the coming crash and possible depression will wipe out the pensions of millions of people, many of whom are Baby Boomers who are out of time. On the flip side: it will be the “sale of the century” for those who are prepared.
No one knows how long the coming depression will last. The Great Depression that began with the stock market crash of 1929 lasted for 25 years, until 1954. The most important question is: Will you have sustainable cash flow and be able to survive and thrive for what could be several decades?
So, Where Are We Today?
Just as it did in 1929, if the stock market does crash like so many are predicting, it will eventually come back, but remember that it took from 1929 to 1954 for the market to return to the all-time high of 381.
When the stock market does come back, there will be new companies making up the Dow. New blue chips will dominate. The real estate market will eventually come back when populations grow and jobs finally return. But there will be new families living in the old mansions. And there will also be many more homeless people.
But the old economy, the economy as we knew it, is not coming back. The economy has moved on. The old economy born around 1954 is dying. A new economy is being born, an economy that will be led by kids born after 1990, young people who only know the invisible, high-speed world of the internet.
There is good news for those who are ready to move on into a brave new world: This is the best of times for those willing to study, learn quickly, work hard, and not join the chorus of negative people. Learn from the past to succeed in the future. This is your time to become rich—if you want it to be.
Look out for part two: the longer term…
Editor, Rich Dad Poor Dad Daily