The Independent Market Observer | Outlook. Opinion. Insight.

3 Trends That Won’t Last Forever

Written by Brad McMillan, CFA®, CFP® | Nov 19, 2014 6:07:00 PM

“If something can’t go on forever, it will stop.” — Herb Stein

When you think about it, we really do live in an age of miracles. Less than 24 hours ago, I was in London, but I slept in my own bed last night and am back at work in Boston today. While in Europe, I kept in touch with my family via video-call and simply pulled out my credit card to pay for things. It was all astonishingly seamless.

On a heavier note, I found the closing general session at the J.P. Morgan conference I attended both thought-provoking and unsettling. The speaker, the editor of The Economist, took as his text the quote above, one of my all-time favorites. What follows are my thoughts on some of the topics he raised (attendees were asked not to directly refer to the remarks of any of the speakers). These are my opinions, not his, but they’re inspired by terrific questions he asked.

Which trends should investors be keeping an eye on?

Think back to the U.S. housing bubble or the Internet stock bubble. Everyone knew it couldn’t last forever, but very few thought in depth about what might happen when the bubbles inevitably burst. Which trends are we not paying enough attention to today?

High market valuations. I would argue that one of the biggest, here in the U.S., is the very high valuation of the stock market. I won’t trot out all my arguments again, but the market conditions today are very similar to those of 1999 and 2007, as well as earlier periods. The trend now is up, and that’s likely to continue for some time, but we should be thinking about the consequences when the tide turns. History suggests it could be bad. What is your plan for a market downturn?

Federal benefits. Another prime example of something that can’t continue forever is U.S. government benefit promises. In fact, we’ll probably hit the end of the road in less than 10 years, but few are thinking about it. When we run out of money, something will have to go—either lower benefits or higher taxes. Looking at the demographic breakdown, I suspect it won’t be the benefits. What is your plan for higher tax rates?

Chinese growth. Looking abroad, every real estate expansion like the one currently taking place in China has ended in tears. What will happen to the world economy if China isn’t the exception?

Similarly, very few countries (three, I believe) have made the transition China is now attempting, from middle-income to developed status; the vast majority have failed. China’s export- and infrastructure-based growth cannot go on forever. What if China doesn’t make the transition successfully, as sheer numbers would suggest is likely?

These aren’t the only trends to watch, of course. For December, I’m planning a series of posts that will explore this idea in greater depth, highlighting things that we can’t count on forever, and what each stopping point might mean. Stay tuned . . .