Wednesday, October 10, 2007

The Spending and Investment Wave Propelled by Demographic Trends-Corporate Cash Machines

Harry S Dent has an article on their web site titled "The Spending Wave" (Click here to read the whole article) where he expects that US stock Markets will begin to decline starting in 2010.

He goes on to say;

"We are forecasting that the U.S. economy (and the global economy) will continue to boom into around 2010 before experiencing an extended slowdown into 2023. Stock prices are likely to peak by late 2009 or 2010 and then bottom around late 2022 or so. The Dow could reach 25,000 and the Nasdaq could surpass its old high above 5,000 before the end of the decade when this boom ends. Investors should be moving back into equities, and businesses should be investing in marketing, technology and productive capacity ahead of the final stage of this boom. But conversely, investors should be moving back into defensive fixed income investments as we approach 2010, and businesses should attempt to maximize market share by 2010 and not over-invest in capacity in the late stages of this next boom. "

and went on to say;

"In fact, businesses should decide whether to cash out and sell around the end of this decade, or use their dominant market share positions gained in the boom to further increase their dominance and/or buy-out their competitors in the bust – thereby preparing for the next boom to come from the echo boom generation from 2023 into around 2050. Europe and most of the developed world will follow us into this next demographic downturn. But Asia will still be booming for years and decades to come after the initial crash that is likely to set in between late 2010 and early 2013. Sectors that benefit from older consumers, like health care, will also boom after the initial crash in stock prices. "

I agree with Mr. Dents premise on demographic trends however, I think the markets will change to suit the new trends. I think the following will happen;

1) Stocks will begin increasing dividends as investors demand income over growth. This explains why income trusts became so popular so quickly. Company's will turn into "Cash Machines"

2) Investors will demand tax changes that make dividends tax deductible to a corporation but fully taxable in the hands of the investor (retiree) just like interest payments. This will drive stock valuations up.

3) Workers will continue working past 65 years old thus slowing the propensity to sell stocks.

4) Corporations will find creative ways to satisfy investor requirements of investing for income.

5) Home prices will be under more selling pressure than stocks as retirees cash out to pay for living expenses and purchase income producing assets such as stocks.

My strategy is to keep on acquiring income producing assets so that I can enjoy a rich life with passive income.

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