Finally…I understand the stock market.

And no, this is not some sarcastic screed on the “Wall Street Casino”. I finally found somebody who could explain the mysterious vagaries of the waxing and waning of the market terms that even an artist can understand. Probably because there are lots of pictures. And because the meat of the “book” is only about 50 pages long… in large type.

It’s more of a detailed pamphlet really.

The author, Daniel Arnold, is just a smart guy who wanted to know how to make his money work for him after he retired. He was an electrical and bio-mechanical engineer who had worked for GE for a number of years. He was good at understanding process and the importance of how the pieces fit together. So, with some time on his hands, he started looking at basic, publicly available economic information and began utilizing the data in a way that developed into a very interesting theory.

He started from the assumption that you always hear brokers and stock houses hammering home to investors. One shouldn’t look at how a stock does over a short period of time. Instead, they should look at the long range performance. But the people he listened to or read weren’t talking about long range trends. They were all focused on short term trends and short term results.

When one looks at long term economic flux, there are a lot of theories to choose from. One of my favorites is a long-range theory from a Russian economist named Nikolai Kondratiev. He was tasked with “proving” capitalism could not last because it was a flawed system. What he found instead was that the economies of capitalist countries waxed and waned; although he did not or could not offer a suitable explanation as to why this occurred.

These findings were seen as having the potential to undermine Stalin’s plans for the Soviet Union, so he was sent to the Gulag and sentenced to death. But, his findings align with Arnold’s findings quite nicely. But, Arnold’s prime cause for the fluctuations are a far simpler, more elegant and intuitive explanation than the ones offered by economists trying to find an explanation for the Kondratiev “Wave”.

Any artist or scientist or mathematician will tell you that there in a beauty, a “rightness” to certain solutions. The pieces all fit; like a puzzle. As I read this pamphlet, I kept having those “Ah, that makes sense.” moments that never came while I was studying other economic theories.

So I’ll give you the most basic and important part of his theory here and if you want to read more you can go to his website: The Great Bust Ahead

Let me say first though, as an artist, I will tell you now, the site screams “SCAM”, and if I had seen the site first it would have been easy for me to dismiss the pamphlet as sleazy profiteering. But I’ll give him a pass. He’s an engineer and may not realize how visual cues lead people to certain unconscious conclusions.

The data he presents is easily accessed through public files at the Bureau of Labor Statistics, the CIA fact files and the INS. So if you have doubt, get the information and crunch the numbers yourself.

Finally down to the nub of it.
In a nutshell:

  • The GDP (gross domestic product) is, in the simplest definition, You and I spending money.

Here he uses Fully Industrialized Democratic Nations (FIDN) as the basis of this data point. The more people, the more they spend, the higher the GDP. And it holds true.

  • If there is a group within the given population of a country that spends more money, they are the main driver of a “good” economy.
  • The age group comprising the biggest spenders in these FIDN is the 45 to 54 year olds.

Why? We are at our peak earning power at this age. We buy cars, we buy houses, we have kids with the attendant school, medical, college expenses. So we are also at the years of our peak expenditures.

  • The strength of the economy rises and falls as generational cohorts come into or move out of this peak earning/expenditure age.

He takes birth data and census data back to the 1920’s and follows the 45-54 year old cohort, correlating it with the rise and fall of the stock market. He has to make adjustments for inflation, but there is an incredibly tight correlation between the peak earning 45-54 demographic and stock market performance.

Until the 1960’s. It took him a while to suss out why the shift occurred. It was the Pill. It allowed women to forestall childbearing. And keeping it basic here, we won’t go into the economic ramifications. Suffice it to say that he adjusted for the data and the correlation resumed its lockstep behavior.

He found he also had to adjust for immigration. He notes that the average age of immigrants to this country is 30 years of age. And once they are assimilated, earning money, making families, they contribute to the upward trend of the stock market in the same way as a birth cohort.

This chart shows the correlations, but there seems to be some divergence in the data. My guess is that if he could find a way to account for illegal immigrants, who contribute to the economy as much as any other worker, it would, once again fall back into alignment.

Sorry about the smudge in the lower left....

I’d like you to notice that after 2010 there is a precipitous drop in the number of people in the 45-54 year old cohort. The Baby Boomers are busting. They are no longer at peak earning power, the kids have gone to college (and come home) and there is a gap of quite a few years until another peak earning demographic comes into prominence.

So, what does that mean? Well, if the trend holds, it means a precipitous drop in the market. It means a long depression. It means a very long, very tough road for people over 50.

So, now that you understand how the stock market works, you can see that we have been trying to put the cart before the horse. Jobs and wages create disposable income. Disposable income creates a thriving economy. And that is simply all there is to it.

No magic. No fractal Elliot Waves. No Wall Street Wizards or brokers who can earn you lots of cash. If you want to get rich in the stock market, make sure people have jobs and money to spend. Then when a generational cohort hits age 40, get in the market. When they hit 50+, get out.

Simple.

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1 Comment

  1. August 3, 2011 at 2:54 pm

    Couldn’t agree with you more. Basics of finance. People who have money can (and usually will) spend it. People who don’t have money don’t have the luxury of choice.

    For someone who doesn’t profess to understand the stock market, I’d say you did pretty well. 🙂


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