198: When Is That Depression Coming Anyway?

Buck: Welcome back to the show everyone today my guest on Wealth Formula Podcast is a contributor to ITR economics specifically to their flagship publication ITR Trend Reports. Her name is Catherine Putney and she specializes in the applied research of business cycle, trend analysis, gross cycle analysis in implementing cyclical analysis at the practical company level. I’m not exactly sure all of what that means but Catherine welcome to Wealth Formula Podcast.

Catherine: Thank you again.

Buck: And you know we did have Alan Beaulieu on the show a couple years ago and that was that was really fun. We talked about his book but just so you know so we get a little bit of a background on you know where you’re coming from. Tell us a little bit about ITR economics and you know what you do over there and you know some of the some of the highlights.

Catherine: Yeah absolutely I mean we try to make economics as fun as possible as interesting as possible but here at ITR we were founded in 1948. We’re the oldest privately held continuously operating research and consulting firm in the United States. So we deal a lot with with consulting and figuring out what’s best for each company to make two decisions to make in regards to the economy so we we work with everything from small companies all the way up to the fortune 500 level. What we want to do is provide the best economic intelligence to ensure that we’re we’re instilling a good type of kind of background in an environment where the business can make those those profitable decisions to maximize themselves, essentially trying to to maximize those profits. So we’re always trying to kind of give that information on an economic level to you know to the point where they can make that money they can they can take away that information which I’m hoping to kind of talk about today as well.

Buck: Yeah absolutely you know one of the things that I thought was pretty impressive is you know ITR has been a lot around for a long time and the track record in terms of predictions has been pretty darn good. Can you talk a little bit about that.

Catherine: Yeah absolutely I would definitely use the word darn good as well I think what we’re you know we’re very very proud of that accuracy and I think a big reason is that what separates us from some other of the forecasting firms that are that are in the US is that we don’t necessarily do straight-up regression modeling. We have a touch of art to it because when you look at forecasting in terms of regression it’s using all the historical data transit that we certainly look at but it doesn’t build in the artistic factor that economics brings to the table right so knowing that we have you know we’re in an environment where tariffs are something that are is causing inflation right now. That’s something that a regression model cannot build into the future so we like to to kind of bring in that artistic work bring in the kind of the nitty-gritty specialties of what each company each company operates are you making price hikes in your business, what are we expecting from you know even and we’ll talk a little bit about the coronavirus, things like that that regression modeling cannot predict in our system, our leading indicator trends really hit home and create some really great forecasts for us .

Buck: Yeah and I remember Alan saying something like the accuracy was somewhere like 96 percent

Catherine: Right now we’re at 95%

Buck Yeah and I mean that’s obviously pretty special especially when it comes to predicting the future you know it’s not an easy thing to do. You know one of the things that Alan and you know the book I keep referring to this because I think a lot of the general theses come from this book is you know he describes this idea of this next decade being the Roaring Twenties followed by you know Depression of the 30s and I’ve heard ITR talk about this I mean for at least five six years now just in terms of various conferences I’ve been at as well. Does ITR still believe those targets and if so what are really the driving forces behind you know those respective decades you know the roaring 20s and the depression?

Catherine: That’s a great comment and question to ask I mean every time I talk about the depression of 2030 when I go on the road and speak I get a lot of groans and moans in the audience but it’s always a good thing to know it’s coming right that’s the whole point is if we know it’s there we can prepare for it. We can utilize the next 10 years of what we’re going to call you know the essential roaring 20s to our advantage to make money because we make money in times of recession if you prepared for it the buy low sell high mentality. So as we are heading through this next decade we will hit this 2030 depression and some of the drivers too that I’ll mention demographic trends right so we have 10,000 baby boomers each and every day retiring from now until 2030 that’s a lot of that’s a lot of people coming out of the workforce and entering into an age where they require medical attention essentially driving up inflationary cost when it comes to the medical industry which is already in a high inflationary environment on top of the fact that we are somewhat financially strained in the Social Security market. That’s something that that is going to be very much constrained as we head through the next 10 years and it’s not going to be one particular driver that’s going to put this this depression into the you know the decline, it’s going to be somewhat the aggregation and his sort of camel’s back of a multitude of factors such as that booth demographic trends that we’ve mentioned the inflationary trends that we’re expecting with with a booming economy for the next 10 years. I mean with Social Security there are ways to fix it I can get into that as well but that is definitely going to be one of the drivers and on not the Great Depression but another depression.

Buck: When you look at the twenties is it what makes it roaring? Because obviously we’re we’re sitting here right now and there’s so many predictions of okay we’re in the longest expansion of GDP in US history and it’s you know we’re still doing well and you know half the podcasters out there or in the space or you know predicting a zombie apocalypse tomorrow what what what drives you know what is your opinion about the 20s that make it roaring?

Catherine: So it’s funny you ask that because I was going to bring up the fact you know when we look back to the roaring 20s of the 1900s that was labeled the roaring 20s there was actually three recessions during that time. During that decade there were three recessions they called it roaring because if you look at the overall trend line from the early 20th to the late 20s that it was overall ascent so it’s actually a general rising trend but it was not impervious to recession at all so that is what we’re expecting in the next decade that we will be still vulnerable to these downturns and our forecast for right now is we’re kind of in the middle of it we’re heading into the next couple quarters that’s going to be a mild recession depending on which industry you’re in and then another one in 2022 and heading into 23. So when I say roaring I mean the overall theme of the economy heading into that ascent.

Buck: Let me ask you this in terms of those and I think this is a an important point to drive home because you know when we talk about a decade, a positive growth decade one that people can do well in I think you know your your point is taken well right I mean it doesn’t mean you don’t have some unnatural cycles but is it ITRs take that we’re not you know this huge depression or not a huge depression but a huge recession or major depression is not really something that you’re predicting in the next few years, I mean certainly some dips but nothing like we saw and say like a you know 2008 or something like that.

Catherine: Correct yeah we’re not going to be heading into that 2008 territory which steps that mean that recession was driven by the you know the housing market and things like that we’re not expecting any type of trends going on there. We will go through our our rises and declines here and there especially in 2022 we will feel a little bit of a more severe downturn but it’s not going to be comparable to what we went through last is the last decade or in early 08–09, 10 years ago.

Buck: You know one of the things that I find fascinating about this again is you know these drivers that you’ve brought up that that lead to the 30s and stuff but these are you know these are some long-term predictions right and recently and certainly since the book was written there have been some substantial shifts in US foreign policy trade policy you know terrorists isolationism how do you factor in that kind of unpredictability in the long-term predictions?

Catherine: Yeah I mean we definitely will if things if things get integrated or into the marketplace we will integrate them into our overall outlook. We’re very transparent but at this point in time submit the catalyst the drivers that I discussed earlier with demographics inflation in our national debt those are long term fundamental trends that aren’t being budged right now by by the foreign policy or the trade war or the recently ratified USMCA the new NAFTA 2.0 that those aren’t really moving the needle on the fundamental drivers to this 2030 depression. So yes we could have near-term movement here and there that changes the growth or decline which we will work into our outlook you know the tax reform when it when it first was put into place did have a tiny bit of an extra boost on on the economy but normalized but it did move the needle a small amount enough for us to to mention it to the audience and mention it to everyone and say here we’re going to work this in because you’re right we don’t just stick to the same exact forecast forever and ever but at this point in time 2030 work if we see something that’s that pops up that could potentially change it will let you know but at this point we do not we still don’t see any any type of aggressive movement in foreign policy or anything on Wall Street to change that this 2030 outlook but if it does well we’ll make sure to let you know.

Buck: So there’s a couple things right now that I think you know just looking at you know the very short term, we’re in an election year I generally as a business owner hate election years because fourth quarters it seems like everybody freezes and they don’t know what to do. So that is happening you know that’s coming up and then we’ve got this coronavirus and you know it sounds like it’s really potentially freezing up China. How are these two particular issues right now? How do you see them you know affecting us in the short-term are these impetus or you know short-term recessionary activity or not so much?

Catherine: So I think actually it’s funny I was going to apologize earlier for my sniffles that I’ve been having I hope it’s not the coronavirus. So just disregard that but as we have as we head into the cycle we always even before these tears even before the the not will no inner is an election cycle this was this was expected already this downturn that we’re heading into it’s really gonna it could potentially move the needle somewhat but the overall theme in terms of the tariff situation is that yeah it will cause somewhat inflation but it won’t you know it won’t really move the needle on the overall trend and when we look at the election I mean it happens every four years so it’s normal to assume that let’s say on a yearly basis that sales pick up in the Christmas time or the holiday season that’s a normal thing to expect similar to every four years it’s normal to expect that we will see some sort of movement depending on what’s going on on in the who’s running and if it’s more favorabe to red or favorable to blue that it could potentially either halt spending or catalyze spending. A big thing I personally believe in is that as we head into this election cycle with the tariffs going on right now if you know Trump’s going out for for re-election he might take a look and say well are these tariffs causing a lot more good than harm in terms of my ability to get reelected or vice versa causing more bad than good and that could potentially move his his strategy with the tariffs. He could be more aggressive with them or he could be more reserved with them to potentially get to votes.

Buck: Well payroll taxes I mean some of these things that there’s still potential role for you know some tax mitigation things that might get people excited about that and then what about so you’re you know you guys are factoring that in already and it seems like we’ve got this little bit of decline that as you mentioned by the way that we’re already in you said that right you were kind of already in that do you think right now we are potentially already in some recession in some sectors?

Catherine: It depends on the sector you’re looking at. When I say decline I could potentially be saying a slow down a business cycle decline or recession so the US Industrial sector right now so if you’re tied to let’s say manufacturing or anything commodity related that is on the brink of entering into recession. The consumer economy when I when I say consumer I mean GDP because it’s mostly Confessional consumption that is actually avoiding recession during this cycle but it is in a slowdown so we are on the brink of one quarter of decline in GDP but it will be back to the races again as we head into the second half of this year. So when I say general descent or decline it could either mean beat meaning slowdown or recession depending on your industry.

Buck: Got it so that makes sense so basically we’re talking about and to your point what most people think about when they think about recessions is this you know what you’re describing right now is having a little bit of a slowdown and then probably picking up in the next quarter and then maybe we don’t see another slow down or that kind of thing until 2022?

Catherine: Correct yeah 2021 will be a great year 2021 will be a good year for the economy the slowest point in in anyone’s business whoever’s listening will it will be right right here right now in the first half of this year until 22 so next year will be good but that I will copy out that with the fact that that’s if you move with the economy you could lead it you could lag it you could be in different points in your business do you typically move ahead of the game do you move behind the game that’s important to know too because you have to make that mental shift whatever you hear you know the Wall Street Journal today about the economy may not pertain to your exact business at this point in time you have to figure out your relationship to the economy.

Buck: Let’s just go back to that coronavirus. What are your thoughts on this I mean is it going to affect anything in the big picture not so much?

Catherine: I think on overall business standpoint depends what you’re in. We have been seeing it you know cause a lot wreak a lot of havoc and people getting scared and holding back on going out especially in China but I think China is starting to try to mitigate that impact by there was recently they’re cutting down and some of their tariffs toward us by they’re cutting the slicing them in half to try to hopefully mitigate and increase some of the activity going back and forth because they are seeing a lot of pull back and spending patterns right, no one’s going to go out and go to a restaurant or shop or Park because they don’t want to go out and contract the virus but at the end of the day so the death rates between the flu and coronavirus are somewhat similar. So I think it’s more of a more of a speculation on it rather than what the actual impact is. It definitely is impacting China more than us and we’re not going to be sending our you know we’re not gonna be importing anything from China as much as we used to given this virus especially in the agriculture industry.

Buck: Yeah and I actually agree with that to it my background is, I don’t practice anymore but I use am a physician and I am looking at a lot of this from the standpoint of the actual health implications are really not any more than the flu and so there’s certainly a big it’s a sexy thing to bring up in the media right now it’s a vaccination you’re probably in better shape from the flu. Let’s go back to the 2030s because this is a thing that whenever you guys talk about and I know because you know I been in the audience and you know I’m part of the newsletter and whenever we talk about this, people’s ears perk up. And so let’s let’s talk about what it looks like ok 2030s are here with predictions that come true is this some kind of a you know inflationary or deflationary or what does it look like?

Catherine: yeah it will most definitely be inflationary as we head into the next year not in 2030 when you know everything hits the fan but for the next 10 years it definitely will be inflationary because of the increasing demand in this I don’t want to say the roaring 20s but with higher demand come higher prices the law of economics. So that’s what we’ll be seeing as we head through the next 10 years on top of the fact that the medical attention that’s going to be demanded from a huge baby boomer demographic cohort that’s going to also increase a lot of the inflation as well. So we definitely think that there’s going to be a lot of inflation as we head into 2030 and then I like to call it the next decade will be the stairway to heaven and then the highway to hell will be 2030 so we’ll see that decline.

Buck: In that Highway to hell though is that a deflationary environment I mean it not that you know when you’re in the twenty when you’re in the 2030s if you’re holding assets do we expect those assets to you know deflate in value or do we I mean basically I’m looking at as it is like an inflationary depression or a deflationary depression?

Catherine: I would say more on the deflationary side because people will not be spending so when you’re not spending prices go down that causes the deflationary environment to take hold. Interest rates will likely be extremely low there because the government wants us to catalyze spending or create incentives to go out and spend so I would say there more on the deflationary side of things as we get into 2030 and then the 2020s will be more inflationary. So the big thing is to look at the US in general is a very reactionary economy and a reactionary nation. We wait for things to happen and then we fix them we are not proactive because because if we are proactive this would not be a problem right now and it’s a very good reference here. I’m not sure you’ve heard the seen the movie Armageddon with Bruce Willis and there’s an asteroid coming to earth and basically they send out your crew out there and you have to blow up this asteroid before it crosses a threshold and if he passes that threshold the earth is done for. Similar to the economy in this 2030 depression if we don’t fix things in the next few years we can do whatever we want in the few years before the Great Depression it’s not going to solve it.

Buck: And what will these things be?

Catherine: I mean we have two sub eight so what we’re looking at is the deviation in the Delta between the the tax receipts and our entitlement programs. So we have Social Security Medicare Medicaid because our national debt right now is you know over twenty two trillion dollars we need to move the needle somewhat by either raising taxes or decreasing those type of transfer payments by the government because if that continues our debt’s going to increase and increase and increase and there’s easy ways to do that with especially with social social security. Right now it’s a twelve point four percent tax employer employee contribution for social security. You increase that to fifteen percent as decades added to the Social Security ability to pay it to pay out you get rid of the hundred and thirty four thousand cap dollar salary cap that’s on Social Security you add decades more on top of that but it’s political suicide. So if it does that’s something we’ll let you know and integrate into our outlook but we really don’t think that it’s likely going to take place.

Buck: The reason I keep asking you about this depression you know this deflationary versus inflationary aspect is that you know you mentioned a couple things about what happens in 2030s and you know all of a sudden you know the the feds gonna be you know the rates will be negative and when all of that happens and there’s helicopter money in reviving reviving the economy at that point I’m just wondering what happens if I’m owning real estate at that point is that real estate go way up and in nominal value or does it go down? You see what I mean like that’s and I’m not an economist I don’t really understand this part but I you know it seems to me that with all the activity that would be necessary to mitigate some of the the pain in the 30s that you would need to print a lot of money right and then in that scenario would the value of assets nominally go up?

Catherine: I think that there would that would be essentially mitigated by the fact that it’s kind of we’re going to be in this in this depression but assets such as real estate is something that we think you need to hold on to for this point in time. And the reason for that is because it you need to weather the storm with your assets especially on the real estate side on that land because we’re coming out of it in the later parts of the 2030s so is it on a time frame basis you want to hang on to that for a full reason too. We look back at the at the O 809 recession that we went through they were the huge might shift away from single-family housing into renting multifamily because no one could qualify for a mortgage people were defaulting on their mortgages so they needed to rent instead so if you own housing in the next 10 years that’s a source of income for you god forbid does you know a job is lost during that time in the 2030s if that’s the case you still have assets such as housing takfir potentially to rent or if your kids are out of a job you can you can have a place for them to live things like that where you have these assets that you’re able to kind of bring in that cash flow and then weather the storm through the 2030s and be back on your feet pretty well again. It’s really so difficult for you know housing prices to really fall off a cliff because you know 08–09 was centrally housing it was all tied to housing. This downturn 2030 will not be all tied to housing so we don’t expect a similar type of movement in the housing market than we did 10 years ago.

Buck: Yeah although presumably you know rent rent will have to go down those kinds of things. I’m also assuming that you know and I’m focusing on real estate because we’re such a real estate heavy show but the I would also assume that if you were gonna hold that real estate through the 2030s that you would be thinking you’d be best off probably having things with pretty low leverage.

Catherine: Yeah absolutely well I think just was just weathering that storm in the in the early twenty thirty period independent it’s different for every type of situation you want the you want the property by the water Canada is a big one too if you can get to the Great Lakes on up you know the north or south side of them those are the types of areas where you’ll really come out on top because people will probably be looking to move in in the 2030s as you know if the economy is wreaking havoc with this depression people typically like to get up and move there at the job and that’s when there’s going to be more activity in the overall housing market.

Buck: How about throughout the world is this will this be a global depression or is there any countries that will be spared or at least minimally hit?

Catherine: Yeah this will definitely be a global recession our depression it will definitely wreak havoc globally. If you look at the US Europe China and Japan those four countries together are seventy six percent of the global economy. I mean that’s a really really big number there. All those four are going to be going into this depression they’re definitely going to be some safe havens which I’ll get into but so we look at your pan there in that this is something I like to say is that you know what once Japan turns we know that the US is going to follow suit because Japan is in such a terrible population growth pattern they’re popular you know with the one-child policy in China even all of Asia or most of Asia is just really really bad the sale of adult diapers has surpassed the sale of baby diapers in Japan it’s wild so once they’re going to be the first to tip because you think you want in terms of population growth in birth rates you want you want an upside-down pyramid you want it funnily you want each generation to be larger than the other. I mean my parents my mother is one of nine you don’t see that anymore. So who’s going to be watch which who’s going to be stimulating this economic growth with their taxes? We need to create some more ways to increase those taxes and I mean Japan also their government tax funded is sponsoring dating websites like tinder those types of random dating websites because they want people to have babies they need to have their baby so this will definitely be a global downturn in some of the areas that are opportunistic and I know that Brian and Alan Beaulieu our CEO and president here at ITR they talk about it in in their book Prosperity in the Age of Decline, Switzerland Canada Australia those three are some pretty good financially stable countries that may weather the storm a lot better. If we look at the difference between I mentioned earlier that our transfer payments in the US are much higher than what we’re bringing in and tax receipts it’s the opposite for Canada. They’re taking in more than what they pay out in terms of transfer payments they’re financially much more stable so is Australia and Switzerland they’re going to be the winners or they’ll win the most, I’m not going to say they’re not going to fall but they’re going to safe havens to you know once once Japan tips get out of equities go into bonds in those particular three countries those will be the safe havens as well as the countries that have a good younger population because those again won’t be hit as hard with the with the younger generation being kind of picked it back on their feet again even absorb a lot of the assets when these older generations die off that’s something that we think that could potentially buoy the impact of this depression is all the assets that are transferred in excluding the the death tax to the younger generation could put to mitigate some of the severity of the downturn with all of those assets being transferred.

Buck: Interesting. Well it is always fascinating to hear about this I guess this demographic cliff really. So for real estate investors hold on to things maybe decrease your leverage etc during that period of time but in the meantime try to make as much money as you can in the next decade I think. So tell us a little bit more about where we can learn about your work and the work of ITR economics. I’m a subscriber to one of your newsletters but maybe you can tell us a little bit about that and how how people could potentially sign up.

Catherine: Yeah absolutely so we offer some great quality products and emails and services so you can subscribe to our free services if you go to our website ITREconomics.com there should be a resources tab at the top and then you scroll down to the free enrollment for the updates and what we’ll do is we’ll just send out periodic emails of usually on a monthly basis of what’s going on in the economy just kind of a blurb here and there. It’s a really great piece of just you know insightful insightful information for what’s happening and what’s new in the economy today or tomorrow.

Buck: Absolutely and you know one of the things I think is really interesting is being able to get ahead of stuff with the smart team that really is more unbiased than I think a lot of the economists that you hear in the press so again thanks very much for being on the show, Catherine.

Catherine: Of course thank you I’m very happy to be here and happy to do it again.

Buck: Thank you that would be great. We’ll be right back