128: The Roaring 2020s and the Depression of 2030

Buck: Welcome back to the show everyone. Today my guest on Wealth Formula Podcast is Dr. Alan Beaulieu. He’s the CEO of ITR Economics. ITR Economics was founded in 1948. It’s the oldest privately held continuously operating economic research and consulting firm in the United States. ITR’s long-term accuracy rating is 94.7% including successful forecasts of major economic events such as the 2008 recession well in advance of its occurrence. Alan serves as the chief economist for numerous US and European trade associations and his unparalleled track record of accurate forecasting and knowledge global markets has earned him the respect and appreciation of many business leaders globally. He’s also the co-author of Prosperity in The Age of Decline, which is a fantastic book which we’re gonna link to, a powerful look at how to make the most of the US and global trends over the next 20 years, and Make Your Move, a practical guide on increasing profits through the business cycle changes. Alan, welcome to the Wealth Formula Podcast.

Alan: Thank you very much. If I may, just because Brian may listen to this. My twin brother brian is actually the CEO I’m the president.

Buck: Got it, got it. That’s right, that’s right. You know, and I want to add that you are also co-author with him on a book called But I Want To, which is now my nine, five and three year old daughters’ favorite book at night, right? It’s an economic book about saving for children which is another thing that we’ll get a link to as well, fantastic little book there as well. So I want to start a little bit more about just a little bit of background on ITR Economics. Obviously, started in the 40s who was running it then and and how did you and your brother end up picking picking up the firm and taking it from there?

Alan: Well a very thoughtful and very ingenious economist named Chapin Hoskins started the Institute for Trend Research as it was known then. This pathway in the early 70s his successor was Helen Langmaster, she brought in Brian in 1983, he bought her out in 1987 and he brought me as his partner in 1989. I came from industry, he came from government.

Buck: Interesting. So that you know what what’s striking to me is the track record of forecasting, you know obviously that’s a big part of what ITR is known for: forecasting the economy, major economic trends and that’s been really impressive. For us non-economists who wish we could predict the future, can you give us sort of a high level of indicators that you look at when making those kinds of forecasts, and maybe differentiate between the way you guys do it and others do it because you know not all economists seem to be that accurate.

Alan: Well that’s good thing for us that’s our competitive edge, that and we are nice guys. But at the highest level it rests on the cyclical theories that Chapin developed in the 40s and they’re still working today. There are business cycles, there are industrial cycles, price cycles and there are harmonics involved. It’s a wonderful system that provides a construct at which everything else is viewed. Right now there are only two people on the planet that know that theory, theoretical base, that’d be my brother and I, but we’ll pass that on in due time. We’re beginning to pass it on and now as a matter of fact to his kids, and which is a good thing. And then below that though we find that we do use leading indicators in a different way than a lot of people doing that. We use rate of change, the rate of growth of something. So you might hear on the news for instance, that consumer confidence is up, that’s not a great leading indicator. That monthly number that’s in the news has the accuracy of flipping a coin, it’s fifty percent accurate. But when you convert it to a rate of change look at the year over year growth rate on a three month rolling basis, 12-month rolling basis, one month rolling basis, now you have a tool where there’s a lot in the ways that smooths out and you start seeing trends and they relate those rate of change trends to what’s happening in the economy: GDP, industrial production, mining distribution, whatever, and now you find that you can build a system of leading indicators, which would use the purchasing managers index from the Institute for Supply Management on a rate-of-change basis. Housing starts on a rate of change basis, and all the ones that you would normally think of running across total industrial capacity utilization rate, machinery capacity utilization rate, things that would impact consumer spending like the savings rate, all the things that are out there, our differentiator is using rates of change applied to rates of change because it’s a mathematical certainty that those rates of change lead people’s perceptions, will actually lead what a lot of people see as a trend in the data. A lot of people see noise in monthly data, but with the rate of change actually see a trend developing.

Buck: So in other words you’re looking at this as a dynamic indicators in a more dynamic way probably than some of these others who seem to not be quite as accurate. Now let’s dive into that accuracy a little bit more because obviously when you say 94%, you know you can say 94% you know when we predict a week before or after it happens. So let’s look at 2008, you know obviously you know what happened in 2008. Did you know it was coming more than you know how long ahead of that did you know it was gonna happen?

Alan: We were out publicly in 2005 with that. And we were speaking to Vistage Groups about it beginning in about 2006, which I know you’re familiar with Vistage, and we were using our leading indicators and our theoretical construct and we were learning what CDS’s were along with everybody else and once we we started hearing those terms to start putting it together what this is a ticking time bomb. And we just put it together with all the other pieces. Consumer spending, irrational behavior, housing money going to people who could never pay, at that and you know the closer you got the more obvious became that this was just waiting to explode. It was absolutely predictable. So people said they could never see it coming. We’re actually of the mindset, how could you not see it coming? And that 94.7% relates to 12 months into the future.

Buck: Yeah. And what was it about, let’s just kind of you know just briefly, I know it’s a complex topic, but what was it in 2008 that made it so obvious ?

Alan: The fact the CDS’s we’re not finding a market, I mean that was right before the crash, in fact you know where exactly to place that. When you look at the the guarantees by the Federal Reserve weren’t guarantees wrong word, fund the assertions by the Federal Reserve Board that prices were going to stay up and there wasn’t gonna be any harm when you knew they weren’t really looking at the problem and they were looking over to the left when the problem is actually on the right, they made us worry about oh my gosh they’re not even gonna be dealing with this until it’s too late. And their assertions public assertions, which we took them on face value we’re actually correct, they were looking to the left when they should have been looking to the right. And that’s one of those things where if they’re missing that train coming it’s the wreck is going to be unbelievable.

Buck: You know and it brings up a good point because they think you know, and you point out or you and your brother point out in your book you know Prosperity in the Age of Decline, the Fed has been wrong frequently if not most of the time, but it’s made up of quite a few smart people and so the question to me that comes in my mind is do they say one thing and believe another in an attempt to sort of, not in a malicious way, but in a way to influence the economy in a better way, do you think there’s an element of that?

Alan: There used to be an element of that. Alan Greenspan was famous for his doublespeak, you probably remember that, and that’s because he wants to say the truth without anybody being able to parse out what was. But dr. Bernanke was really an open and a straight-shooter, the you actually hit upon the answer earlier and that we used a dynamic model and they used a static model, you know, that’s all the difference in the world.

Buck: So I was listening to an interview you did back in 2016 in which you said that you were optimistic about the US economy until maybe the latter stages of 2018 when we might start experiencing a slowdown and then possibly a recession in 2019. We’re obviously sort of in the later stages of 2018, are we slowing down right now?

Alan: Most markets are not, most industries are not, but we are there as far as that forecast goes, because all leading indicators that we use the G7, JP Morgan, the ones I’ve already mentioned, the stock market 12:12 rate of change, earnings per share warnings by you know S&P 500 for the stock market, I mean there’s a long list of them. All of them except the US leading indicator is saying the economy will be slowing down next year. Copper prices, rates of change moving, down all these rates of change are hitting the deck or moving lower and telling us them that the economy will be slowing down and there will be some recession in some industries.

Buck: Yeah and so along that line I wonder how much of you know a big tax cut from the Trump administration might have delayed some of that, but on the other hand I’ve heard you say that you know politics doesn’t really affect the economy, you know? We’ve got a big tax cut, you know we’ve got some pretty significant differences in this administration, a big tax cut, tightening of immigration, you know a little bit tighter trade policies, do these issues ultimately really not matter that much in the long run?

Alan: I’m laughing because when you heard me say that in the past and reporting elsewhere, I should have had the foresight to say when Congress and the government’s operating as normal.

Buck: Ok that’s right.

Alan: I don’t know about you, but I run into business leaders all the time. All they say is, we never thought we’d live to see things like this. The pace of change and the way things are forced, absolutely incredible. So the tax law change does seem to be having a positive impact, not nearly as big as Washington would have hoped, but and we’re not seeing it much in capex yet. One month of good data for capex, the retail spending is a little better than last year. not a whole lot better, so you’re probably seeing some benefit from tax law change. You mentioned immigration tightening up on immigration does have slower impact on the economy but it’s going to exacerbate the existing problems as a lack of flavor. We don’t produce enough labor in this country internally so we need immigrants in order to fuel, quench the thirst for labor, not there.

Buck: So you know when you’re predicting this recession, one of the things that you know, and the these I would call them sort of alternate financial podcasting communities that I’m sort of part of peripherally, you know a lot of death and doom and destruction predictions all the time and so that’s one of the reasons that I really enjoy listening to you and your brother is because it really is coming at it from a slightly, it’s a different perspective, you know. It’s a little bit more in my view a little bit more rational. When this recession happens though, and I think now you guys are predicting it that doom-and-gloomers are predicting it, what does it look like? I mean does it, it doesn’t look like 2008 where is this something that you know happens that we don’t even, most of us don’t even really realize happened until somebody tells us that happened two months ago or something like that?

Alan: You know I think the large part of the population is going to see that things have slowed down so I think the person on the street is gonna probably notice that they’re feeling some pressure on prices because inflation is taking away some of their discretionary spend. Businesses are going to see that the demand of intense pressure they’ve had to hire and to do is gonna ease up some. You used the word recession which is technically true because there will be two quarters of decline in industrial production, but I want to make sure that I’m clear that it’s not in GDP, GDP just flattens out, so there’s no technical recession in GDP, just in industrial production. And some industries will just see a softness. In your question how observant are a lot of people to notice the softness, the nuance of a softness as opposed to an actual crash, there won’t be a crash so a lot of people will dismiss it.

Buck: Yeah and so you know the other thing that makes me think of is you know you’re used to I think talking to business owners. The first time I actually met your brother was through a Vistage meeting. And how do we as investors look at this more you know this short-term recession? Do we look at this is something that we should be reacting to at all? I mean obviously there is some from the real estate side at least we’re you know I’m most familiar and I think the stock market where most people would agree there is some asset bubbles there. Do you see, is there any part of your prediction really kind of relate to those bubbles and possibly deflating in of some of those asset bubbles?

Alan: I think we are seeing some of that but not like what will be in the future or not like what we’ve seen in the past. As far as action items I think is to look at it as period of opportunity. 2019 will be a period we’re offering as opportunistic purchasers can be made of real estate and of equities.

Buck: Because of a softening?

Alan: That’s right. To us it looks easy to see that there’s a correction coming the stock market. A lot of people will flee, but to your listeners I hope they take it as a buying opportunity, because it will come back on the other side we’re looking at a nice 2021 so if prices go back 15, pile in and take advantage of it.

Buck: Yeah, yeah. And you know that brings me to the next thing which is even, and we’ll get to the depression in a second because again that that’s what I remember Brian talking about at the meeting, but what I’m really fascinated about is what you guys are calling “the coming of the roaring 20s”. Tell me about the roaring 20s because really I’m not hearing any economists talk about this right now. What what is gonna make it roar?

Alan: Millennials will make it roar, is a short answer to your question. And that’s a bit of a misnomer. Brian and I know what we mean historically by that but we have not done a good job communicating that so thank you for asking. The roaring 20s of the 1920s, as they recall the roaring 20, saw the national wealth double. So we’re going to see wealth creation and we’re gonna see the nation get wealthier and people get wealthier, but there were still three recessions in the 1920 so when I say Roaring Twenties, often people think there’s no downturns. It’s likely to be two or three recessions in the coming decade and one of them we think will be very noticeable, so like the first tremor coming for the Great Depression you’re talking about. But more than that well perhaps as important is that in the 1920s there’s cultural change. We had flappers, we had Prohibition, we have women getting a vote. You know there’s a pretty big items that we look back and go well no and I believe this is not ITR Dogma this is Alan speaking. The Millennials who now make up most of the workforce are gonna grow in power, they’re gonna grow in wealth, and they’re gonna be putting change into our culture and that smart business owners have to be ready for that. Your audience has to say all right I’m used to dealing with this type of client /,but the new client is this type of client and I better adjust my focus here, I better be ready for that, and impact products and in fact supply chain impacts everything, I think that’s part of the roaring 20s is the change that will be occurring in that time period to our culture, driven by a new generation with slightly different values, a very strong generation, very smart generation, very driven generation, they get all kinds of bad press but these are actually the opposite of what the bad press says there.

Buck: Do you see that GDP growth doubling though? Do you see that kind of that kind of you know financial reflection on that as well? Or just in general just say hey these are, this is a decent decade?

Alan: Probably better than decent. Back then the numerator was so small you could double, now the denominator is so big it’s impossible to double. Good wealth creation and something you and I would remember, inflation’s gonna come back. And in the 1920s had an inflationary period we’re going to see if we think in the latter half of the 2020s where we’re likely to see mild pleasant inflation in the first half of the decade and everybody lives with is comfortable and that’s not going to really take off and if you like the late 1970s early 1980s again. Which means the baby boomers are gonna love it because they retire with high fixed income so if you’re again our listeners today, they’re gonna have a nice high fixed incomes because they’re going to take their nest egg, whatever size it is, I’ll be able to just casually get eight, nine, ten percent. Today it’s like a lot of work in this risk, but it would be safest home so safe this years but that’s no longer applicable. And they’ll get will have a nice comfortable retirement it’s going to be great for us. For Gen Xers it’s a tougher time because they’re going to their peak years high interest rates going to slow things down, it’s going to eventually lead to a downturn in the economy right that in their peak years. And Millennials who are so at that point looking to buy their first house and looking to get the car, looking to start the family, they’re gonna set themselves up for a lot of failure because of what follows in the 2030, so it’s a great time for me, it’s a good time for you, it’s very dangerous for a lot of other people who are just not prepared for it.

Buck: So let’s go to the 2030s now because this is something that you know ever since I heard Brian talking about this, frankly I have been planning a little bit around this, to be positioning myself to potentially exit various things you know in the late 2020s etc. Tell us about this confluence of issues, you know namely demographics, debt inflation, all these things that are coming together and when that happens, why that happens, etc.

Alan: Sure I’ll be happy to. And it begins with understanding the confluence, and thank you for mentioning that word because a lot of people want to look for a cause and it’s not a cause,it’s multi-cause, in fact that these things are happening together that makes difference. And it’s confluence globally, not just nationally. If it was just Japan than the United States, we’d you know take a serious hit to the bow, but we’d be fine. If it was just Chine, it would hurt but nothing to sink the ship. The fact that involves Japan and China and Russia and Germany and the United Kingdom and Canada and Mexico and you know the major nations of the world, really makes a difference, because the United States as much as you like to think we’re isolated, we need the rest of the world. We need the rest of the world to buy goods. We’re the second largest exporting nation in the world so if they’re gone that’s about six percent of GDP that doesn’t have much to sell to. And more importantly, we need them to buy our debt. I’m you well in tune with that. but as a debtor nation, having to sell a three billion, our average is three billion dollars a day, if those nations are having great financial troubles, they’re not gonna be buying our debt to the level that we need to sustain our economy. The US government eats, in the US government is about 21 percent of our GDP, and if all of a sudden they’re struggling financially and they’re not spending money it really hurts borrowing, costs go up dramatically, and as borrowing cost go up dramatically that takes more out of the federal budget which makes everything else a little worse, and the thing begins to implode on itself by inches until all of a sudden it’s just all in on itself. It’s also driven by an aging demographic around the world. Japan’s population shrinks every year, as does Russia’s. By the way, it actually goes down. Ours is shrinking just by inches every year because we’re not Pro-creating enough. People listening can decide what they want to do with that, but the reality is the fertility rate is not what it’s supposed to be or what it should be, which is two point one. So with all of us baby boomers that are going to be drawing down on Medicare and prescription drugs, while there are less people to pay for it, well our debt problems are growing bigger. We find a top if you will that is spinning, but as it slows down all tops become less stable as they slow down, and there’s nobody out there to spin it again because they’re all experiencing the same problem. So we have inflation driving up interest rates, we have an aging population really dragging down the federal government on spending, we find borrowing needs growing at a time when borrowing becomes very hard to do.

Buck: You mentioned China in this, I’m curious to know more about what’s gonna happen with China. Right now, you know I love this in your book you talk about how we used to look at Japan in the same way that we’re looking at China right now, you know like Japan’s gonna take over the world, Japan’s gonna be the biggest economy, all these you know ideas and then boom all of a sudden Japan just kind of went away. The Chinese one-child, they had for a period of time I don’t even know if they still have it but a law basically allowing for one child per family, is that gonna come back and just decimate the economy?

Alan: It already is and you’re absolutely right and I would add to besides the one child policy should probably add the phrase with gender selection, that was optional, but they chose males. CIA estimate blast I saw, is that there are a hundred and twenty five million young men without women in China today. And talk to anybody you want, sociology and probably economics that breeds all kinds of, well it doesn’t breed, actually results in all kinds of social instability, and social instability is one of the worst things that can happen in China because that’s their biggest fear and they also have China to continue that discussion, a huge debt problem. The provinces debt GDP is the debt is much higher than GDP and that doesn’t get much press. The United States gets it all the time. And the state-owned enterprises aren’t paying back to state-owned banks. So you have a banking system that is getting hollowed out and since the government owns them both they ignore all, but that’s not healthy for any economy to have an unhealthy banking system, even then they command and control and it becomes problematic. And the president as he began his second term, was handed the keys to the kingdom literally and then they made him president for life. So with that he decided to go away from free trade and move back to state-owned enterprises and remark that he would have free trade paid for. So we had an inefficient system being supported by the efficient system which only breeds cost increases. While there’s cost increases we’re cleaning up the environment, while there’s a banking system, while this debt, while there’s a population problem, all that is a heavy load that will keep them from surpassing the United States, it’s just not gonna happen, not my lifetime.

Buck: Yeah so I’m 45 years old, if knowing what you know in terms of the the upcoming decline, how would you recommend, I mean I’m not asking for financial advice, but in broadly speaking, how would you look at somebody who’s 40 you know mid 40s today and say this is how I would position myself if I was in my mid-40s and I know what I know right now.

Alan: The answer would depend upon their position in life. So I’m going to assume somebody who owns properties and has a modest amount of wealth, it’s not extremely wealthy but has enough wealth and they’re comfortable and happy in life. If you mentally prepare this by saying I have 12 years to finish what I what I want to finish, because in a Great Depression the rules all change. So I have 12 years to decide, all right if I own some property, will I ride it through a Great Depression knowing that values are going to come down the rents are going to come down, rate is going to go up so do I want to do that or do I want to sell it right before it all comes down? And of course the ideal thing is to sell it right before it all comes down. So let’s assume you have a million dollars worth of real estate. You sell your million dollars worth of real estate in 2029, you go off to the side with it, you get a reasonable rate of return for a few years, which by that I mean 70% in an Australian bond for instance or some highly stable bond, probably not a US bond. And then somewheres near the drop, and nobody times to drop exactly in my world, but somewhere near the drop, you take that million dollars plus a little bit of interest and you go back into real estate but what you sold per million can now buy back for five hundred thousand. So you’re going to then buy it back in theory or like assets and you’re gonna write it up at the other side so that it rides back up to a million and then more. You’re young enough to be able to do that so you’re gonna have pocketed a half a million dollars in profit, you different an asset base that’s the same as you started with. And so the depression actually becomes a great wealth creating opportunity for somebody like you.

Buck: Right and in terms of the types of things that one should you know consider being invested in, what types of things, I mean generally, I mean the good news for for the audience that I have here is that we all kind of believe in owning assets, real assets that generally will probably do well in inflation. I mean they will inflate with inflation. What what’s not a good idea to told on to?

Alan: That’s the opposite of what most people ask by the way usually I get asked, what is a good idea? You don’t want to be owning assets or businesses or property, those that are tied to the consumer. If it’s a strip mall or if it’s a mall of any kind it’s going to go empty, the stores be going bankrupt, you go bankrupt along with it. But if you have you know set of apartments where you have a low cost basis because your mortgage is old and you can see your rents go down and it’ll be safe and fine then you have obviously no risk. It’s a question of what type of real estate we have and the closer tied to the consumer the more dangerous it’ll be. If you own property that you’re leasing to your brother-in-law who runs an automobile dealership, he’s gonna stop paying the rent. He’s not gonna have a choice. If you want to rent farmland to farmers, that’s good business because they’ll be there and they’ll be selling green. And you know the people are still going to eat.

Buck: So basically the things that you know getting back to basics. It’s things that are essential and you know people as you’ve pointed out and I think it’s a really good thing to take away from this which is you know a depression for somebody who knows it’s coming can be one of the greatest wealth creating periods in your life. I mean the number of people who who came out of the Great Depression who in the 20s who built their you know multi-generational wealth is fascinating and I think there’s an opportunity potentially to do that again. I want to shift gears a little bit and talk about and this book that I’ve specifically have been reading to my kids it’s called But I Want To and you and your brother wrote it. My girls are nine, five and three. Tell us why you wrote it and and what what you’re trying to emphasize there.

Alan: Sure! If I may I’ll add that my wife was primarily involved in writing it too. I don’t wanna leave my wife Dawn out of it. Our names are on the cover, we could not have done it without her because she worked with kids all over life and she took our idea and even what I wrote and she said these are not adults, these are not little adults, these are children, and she wrote the text to fit kids which were very grateful for. The reason we wrote it was so that another generation, skipping the one right behind us the two right behind us actually, would learn what it means to budget, to save, and also to do good with money, and that the moral uses were good, I didn’t mean well I meant good. And so there are subtle obligations may be too strong but there are subtleties to humanity that requires we have money and you can help somebody out that’s a good thing. So it’s about saving, budgeting, spending wisely and being a good citizen as you go along. It was written with those four things in mind, and as you know we have the slot machine in the book and the O stands for others and savings. We also wrote it for charity. One hundred percent of the proceeds of every book we’ve the three of us cover the cost ourselves, one hundred percent of the proceeds goes to charity. At the moment it’s a children’s charity here in the New Hampshire. Breaks the heart when you look at them, underprivileged kids looking for food, looking for clothes, looking for boots for the winter. The last time we wrote a check it was fortuitous it was not, certainly not planned, they were two weeks away from going out of business as a charity and we just happened to have, it was a time for us to write our quarterly check and so they were able to stay in business. So that’s the way we did it.

Buck: We’re definitely gonna link to that, and I will plug it again because actually as I was telling telling you earlier that my daughters really liked the book. It’s one of their mainstays for their bedtime right now, which makes me proud as a guy who’s interested in money and investing. My five-year-old especially, she once read it like twice a night so, tell us all, like I know your your your newsletter and such they are geared more towards business owners or you know, is this something, first of all tell us about the newsletter that you put out how we can get it and who is appropriate for.

Alan: ITR Trends Report is the newsletter you’re talking about and it is appropriate for folks in industry, be it manufacturing, distribution, construction. These the single entrepreneurial professional wants something else, we call that the Insider and that’s the ITR Insider, there’s a 99-cent version on our website. And that is much more geared for the newsletter click, read what’s going on in the economy stock market, that kind of kind of approach. So two very different items and I think most of the people based upon our early conversation that we’re talking about here talking to here would be the ITR Insider.

Buck: The ITR Insider. And how do you how do you get that?

Alan: Right through our website, not sure how many months in 99 cents, and then it goes to $20 a month running a credit card and then stop whenever you want, it’s as easy as that.

Buck: We’ll definitely again link to that as well. I want to I want to thank you Alan for being on Wealth Formula Podcast, it has been great.

Alan: Well I had a lot of fun. Thank you for letting me on the show with you. Appreciate it a lot.

Buck: We’ll be right back