It is not just the rising spending (demand), but the simultaneous rising productivity (supply) of an aging generation that creates an economic boom with falling or low inflation. This in turn creates rising stock prices from rising earnings and rising valuations in stocks. But when the generation finally reaches its peak spending and then slows down, earnings fall and so do stock valuations – creating an extended downturn for many years. The same demographic cycles in Japan (the only major country that had no baby boom after World War II) caused us to forecast as early as the late 1980s that Japan would see a major downturn from 1990 into the early 2000s, while most economists thought Japan was invincible and could do no wrong.

We are forecasting that the U.S. economy (and the global economy) will continue to boom until 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 reach its old high of 5,000 before the end of the decade when this boom ends. While investors should be in equities in the final stage of this boom, they should be moving 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 boom.

In fact, businesses should decide whether to cash out and sell as we near 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. In constrast, 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.

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Class 5: The Inflation Indicator