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How to take advantage of Demographic Trends throughout the Boom-Bubble-Bust Cycle

Written on the 22 September 2016 by James Cagney

Australia's economy is very dependent on the demographic cycles of other countries especially our major trading partners. The commodity boom over the past few years, which was mostly due to the changing demographic trends in China, resulted in the biggest boom in Australia's history. Now that that China's 'Boom" is definitely over how will the Australian economy survive?

Below are the previous articles I have written on how Demographis Trends that have a profound affect on the Australian economy. I recommend you read these before you read the rest of this article to be able to follow the full story behind Demographic Trends. Wayne Gretsky one of the greatest ice hockey players in our time sais " In myice hockey career I have always scatted to where the uck is going to be and not where it is right now". And, that is what made him the great player he was. You need to look to the future anticipating where the markets are going to be rather than where they are now and you will make money. Click on each topic below:

"Protect your assets in the Boom-Bubble -Bust Cycles"

"How the Baby Boomers have influenced the Boom-Bubble-Bust Cycles"

"Boom-Bubble-Bust Cycles and Gen X is about to get the worse unless ......you take ACTION now" 

The concerns raised in the previous article on Demographic Trends are:

  1. Where are we in the "Spending Cycle" in Australia now and into the next few years?
  2. How will the imminent change in the spending trends of the Baby Boomers change Australia's economic growth rate?
  3. How will spending trends of Generation X, Generation Y and the Millenniums change the economic environment?
  4. Which country will replace China as the economic powerhouse?
  5. Will Australia be able to take advantage of the economic growth within these new economic power houses?

I will answer points 1-3 in this article and points 4 and 5 in the Finance & Property article to be published on the 30th September 2016.

It has been eight years since the Global Financial Crisis (GFC) and yet the global economy is still in recovery. Global economic growth has been fickle and modest since the GFC. The combination of high debt, weak investment and slowing population growth in Australia and in our major trading partners is constraining economic growth. Australia needs to look at the Japanese economy, from the early 1980's onwards, and learn from it if we are going to survive the coming BUST in the BOOM-BUBBLE -BUST CYCLE.

Japan's economy has struggled over the past 20 years due to a lack of consumer spending. However, Australian households over the past 35 years are taking on massive debt to their income ratio. In 2015, the household debt to income ratio was 185% in Australia. Effectively this is $1.85 of debt for every $1 of income. and there is no sign that Australian consumers are refraining from spending on consumption and housing given their debt commitments.

Percentage of household debt to disposable income

Source: Reserve Bank of Australia and Datastream.

Since 1950, Australian private debt levels have risen from 20% of GDP to today's level of around 160% - an 800% increase in debt. During the commodity boom the Government couldn't believe how much money they had pouring in from the mines and through income and other taxes. Tax revenues flooded in and politicians' promises poured out through baby bonuses, generous means testing, tax free super pensions, disability schemes, green schemes, pink bats, solar energy panels, free gas heating systems for motels etc. etc.

In 1950 Australia's GDP was around $50 billion. Today it exceeds $1.5 trillion. That's a 30-fold increase in economic activity. And what does Australia have to show for this prolonged period of prosperity? We have a $379 Billion in Public Debt. The government's latest budget is one of austerity and cutbacks because of the long list of unfunded entitlements. Debt has fueled Australia's growth and the wasteful spending of government and the public's "She'll be right mate" attitude without a thought as to what would happen after the BOOM is all too evident.

What can we to do to increase spending and promote economic growth. Increase our population is one solution. Australia's annual population growth slowed between 2009 and 2015 from 2% to 1.3%,  This largely reflects lower immigration numbers initially introduced by the Rudd Labour government.  An ageing population is a concern for Australia's long-term growth prospects particularly as the Baby Boomers have come off their peak spending period which is between 45 to 55years of age. The natural birth rate is slow and the Government's immigration policy must avoid the situation that Japan faces with an ageing and declining population. Its population has been falling -0.2% per year since 2010, and 26% of its population is aged over 65 years compared to Australia's  over 65 of 15%. We need vast numbers of skilled and business migrants to stimulate the economy.

Australian household debt is high, business investment is subdued and population growth is slowing. Therefore our increased intake of refugees must be counter balanced through "Skilled" and "Business Migration" policies.  Refugees cost money to relocate, educate and assimilate into Australian society.  Skilled and Business migrants bring money into the country and create demand for manufactured goods, retail, housing and across the board range of services.

Decades of growth in Australia has created a mindset of prosperity. Real estate values in our capitals like Sydney and Melbourne keep on rising and the BUST, although imminent, is ignored. Wages that Gen X's and Gen Y's have become conditioned to are expected to continue to rise but this cimply cannot happen. Shares, managed funds and Superannuation balances generally, although moderately, will have to increase. Employment opportunities abound as the government seeks favour with the public and international bankers. This unfortunately this has created a mindset of entitlement and dependency on the government.

Many property developers and businesses in Australia have experienced how brutal the banks can be when an economic crises hits. The banks in 2008 to 2011 put many into bankruptcy overnight. The Stimulation package of the Labour government prevented this from filtering down to the mortgage holders. You are about to see what the world looks like when credit is no longer available from international banks and global credit boom will be over. When the Australian Reserve Bank pulls in household debt by increasing interest rates how will the home owners who paid high prices for their homes when interest rates were low be able to pay their mortgages, car leases, rates and taxes, electricity and numerous other luxuries we have become accustomed to.  Service companies will be the most affected. Gen X's mortgage holders will have little disposable income and they will be forced to cut back on garden services, window cleaning, house cleaning, vehicle servicing, eating out, holidays, Foxtel channels, private health etc. The BOOM days are over and those who are prepared will reap the benefits of plunging share prices and real estate.

Gen Y's will have to relinquish their thirst for the latest electronic and digital toys. No longer will there be queues outside of Apple and Samsung retail stores for the latest mobile phones. The fast cars and jet ski's will be at the auctioneers as people will have to cut back on luxuries because their wages are static and many may become unemployed. Fortunately for Gen Y's they are technologically savvy, and, as in the early years of the Dot.com era many will start their own businesses due to the lack of employment. Do not be surprised to see the era of young millionaires of the early 2000's blossom again. Unfortunately for the Gen X parents you can only expect your adult children to leave home in their thirties because of the lack of employment and opportunities in the BUST years to come. However, every BUST is followed by a BOOM so do not lose hope that they will never move out!

The entitlement attitude of the Millenniums may cause conflict in many households. It's our own fault - we have spoiled them rotten - and when that comes to an abrupt end as families try to cope financially frustrations may surface. Many Millenniums will complete their schooling with little prospects for gainful employment. For those who are academic they have the opportunity to go on into tertiary education which will keep them occupied. However, it remins the parents' responsibility to guide their children carefully into the courses they take. Choose courses which will lead to future employment otherwise they will have to compete for menial jobs with semi-skilled Australians. Science, electronics, health, engineering, education and robotics are the likely careers of the future.

Even if Japan's debt and demographics are not reflective of what Australia faces we can learn from their innovation, invention and intuition which has made them a major exporter of electronic and digital goods and saved their economy from collapse over the past three decades. This is why the current government is focusing on "Innovation".

This message is not one of doom and gloom - it is a wake up call to help us prepare for our economic future. It is also designed to assist us to look for new opportunities for Australia as another global power house closes. How can Australians prepare for another commodity BOOM? This will be revealed in our upcoming Financial & Property Update due for publication on the 30th September 2016.  

If you want to protect your assets and take advantage of opportunities that will arrive in the coming BUST phase of the Boom-Bubble-Bust Cycle contact James Cagney on 0416 137 645 or click >>> HERE.

This is not financial advice. You should not act solely on the basis of the material contained in this Property Update for your investment strategies. Changes in government and legislation occur frequently and without prior notice and financial markets are unpredictable.
Please note that the information herein is of a general nature only and is not intended as specific advice for any particular person or entity.

This information was written and compiled by James Cagney.  The opinions expressed herein do not necessarily represent the views and opinions of his associates including
Asset Finance Pty Ltd.


Author: James Cagney
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