Tuesday, March 17, 2009

Can the Dow Jones Industrial Average and Age Demographics foretell Economic Depression?

What do the DJIA and the demographics of people between the age of 45 and 54, and a financial depression all have in common? Quite a bit, according to Daniel A. Arnold, author of:

The Great Bust Ahead: The Greatest Depression in American and UK History is Just Several Short Years Away.
This is your Concise Reference Guide to Understanding Why and How Best to Survive It (Paperback)
Product Description
The Great Bust Ahead is a concise, straight to the point short book laying out in stark terms the case for a coming depression of historically unprecedented magnitude. It will be worse than the 1930s, beginning nominally in 2012, but perhaps as early as 2009-2010 and lasting up to thirteen years.

Centered on hard fact demographics, the book boldly claims that the data presented are so irrefutable, that the outcome predicted by the book is equally as irrefutable. The compelling proof presented accurately accounts for the detailed trend of the economy from 1920 to today (something never before accomplished), and projects out to 2030.

The book is very easy to read and understand, and requires no prior knowledge of economics. Down to earth things the average person can do to prepare for what is coming are covered. A summary of the catastrophic domestic social and international consequences is offered.

January 2009 Update:

1. First, read the 2007 Update below.

2. 2008 was the victim of a self inflicted sub-prime financial crisis. This has nothing to do with the demographics based massive depression that is yet to come, as described in the book. The sub-prime consequences are however very similar though mild so far compared to what is coming our way. The book clearly spelled out that along the way unpredictable short-term (1 to 3 years) disruptive events could happen. The sub-prime crisis is just that. It should be regarded as the warmer upper or hors d'oeuvre for the big one that is now rapidly closing in on us all.

3. The great unknown at this point is whether the sub-prime based crisis will drag on beyond 2009 and then blend into the demographics based massive decline which, per the book, could begin as early as 2009-10. Being short-term by definition, this period is totally unpredictable.

4. There is the strong possibility that we will see an interim recovery manifested as a last hurrah rally in 2009 of perhaps 30% on the Dow after a new low of around 7,000. However, this is very speculative. The only historical certainty is that in the long-term the Dow always returns to the demographic. This lends some credence to such a rally as the immutable demographic, as you can see from the chart, remains in a very strong upswing as it moves toward its 2012 peak before crashing. Also waiting in the wings ready to surge back into the markets are trillions of dollars earning very little in money market funds.

October 2007 Update: In 2002 when this book was published, in addition to the massive depression beginning around the end of the decade, it forecast:

1. The economy, as reflected by the DJIA, would resume its upwards march in late 2002 or 2003. This is exactly what happened.

2. The DJIA would have a snapback to 13,000 to 14,000 and the FTSE to 6,000 to 7,000 by 2004, but delayed possibly by wars/politics/terrorism/scandals. This is exactly what has happened. Although the full snapback has been delayed for the reasons described, the DJIA has now closed over 14,100 and the FTSE over 6,700.

3. The DJIA returns from 2003 to 2012 would average a historically long-term normal of 7% to 8%. So far, with the delayed full snapback for the reasons described, DJIA actual returns have averaged a more modest 5.8%, as would be expected.

4. Interest rates would increase from 2003 onwards. This is exactly what has happened.

From the Publisher
If there ever was a book that should be read by the entire adult population, this is it. The events described in The Great Bust Ahead will be the greatest story of the first quarter of the twenty-first century, if not the century. All of our lives are going to be dramatically affected beginning in just a few years from now.

The depression of epic proportions that is predicted has THIRTY MILLION unemployed and stock market losses of over eighteen TRILLION dollars. The book leaves you with the conviction that for the first time you understand what the economy is all about. Everything presented in the book is so factual, so unchallengeable, it is hard to know what to say other than "go read it" and then start preparing as best you can.

Well, I've had this book for a while, and last night I read the whole thing. It only took an hour and a half to read, because it's only 64 pages long, and printed in large type.

I tend to regard most of these kinds of books with a lot of skepticism. I find reading the customer comments section for such books very helpful. Often, people who have read the book already can give you a very good idea of whether or not the book is even worth bothering with. Some very sharp minds often tear these books to shreds, exposing their bias, bad research and inaccuracies, saving you the time and trouble. But this book got a higher approval rating than similar books; the comments were intriguing, and since it only cost $8.95, I decided to give it a try.

The comments on this book were varied and interesting, and even most of the author's critics didn't completely disagree with the his contention that there is a relationship between the DJIA and the most productive age demographic. The thing they most argued with were about some of the conclusions that Arnold formed based on this data.

I would also question some of those conclusions, for the same reasons others have mentioned in the comments. But the Demographic data is fascinating, and I've yet to see a really effective rebuttal to it.

It was easy to read and follow Arnold's explanation of the data, and his premise takes into account a lot of variables such as immigration, wars, etc. He also shows how there are a number of short term factors that can cause the DJIA to waver temporarily from the demographic, but it always returns to the demographic.

Fascinating stuff, but what it all means for our future financial planning isn't so clear, as the conclusions are open to interpretation, and influenced by short term variables that we can't predict. For instance, Arnold recommends putting your money in U.S. Federal bonds. But with the huge deficit spending we are experiencing now, how safe are those going to be?

He has some interesting ideas about real estate and some other options, but it's late in the game now. The book was written in 2002, and if he's right we may already be on the brink.

The author also has a website, at TheGreatBustAhead.com.

Related Links:

Global Banking Crisis? Leading to...?

An Economic 9/11? A Depression? Trends...

What would a U.S. currency collapse look like?

1 comment:

Economic Depression said...

I received this book as a gift from my friend, well it was indeed a great read. The thing I like the most about this book is that the author had used a direct reasoned prediction. It is brief and simple which makes it easier to understand.