With so much news crossing in front of us each day, it is difficult to keep up day-to-day, much less think about the implications of the changes we are seeing. There are certainly many reasons for pessimism – the continuing sovereign debt issues in Europe, the “Arab spring” and related uncertainties in the Middle East, high unemployment and deficit spending problems at home, the moribund real estate market, to name just a few.
But we thought it might be interesting to speculate on a few major changes we might see play out over the span of this decade. We try to look beyond the news of this week, this month and this year and think about how things could ultimately turn out over a five to ten year period.
So please take this list of “surprises” as food for thought, not as hard predictions. As always, we welcome your comments, criticisms and questions.
- With the tacit support of Russia and China (who want the U.S. military out of the region), the regime in North Korea topples after the death of Kim Jong-il. North and South work out their own version of reunification, setting the stage for a new economic engine which works to eclipse Japan in the succeeding decade.
- After a shaky start early in the decade, the U.S. real estate market bounces back. Once foreclosures begin to decline in mid decade, home sales begin a sustained pick up to meet pent up demand. Slowly but surely, the echo boom (boomers’ children) spawns a resurgence in single family homeownership that stabilizes and then lifts real estate prices. For much of the decade though, the focus is on existing homes which can be bought for far less than replacement cost.
- The Eurozone survives and thrives amid new integration strategies spawned by the age of fiscal responsibility. But this is not before its weaker members survive near-death experiences. Debts of Greece, Portugal, Ireland and Spain are restructured in the first half of the decade, causing the banking system to recapitalize with help from the European Central Bank. By facing the debt crises head on, the Europeans adapt and change well ahead of the U.S.
- China redirects its focus to domestic initiatives, putting in place the social safety nets needed to support a consumer-based economy. However, growth slows to the mid single digits as exports fall significantly – a growth scare which brings about a major, but short-lived, bear market in Chinese stocks. Recognizing its rapidly aging worker population, China actively encourages family formation and sets the stage for strong domestic growth for decades to come.
- A green revolution ignites the auto industry as consumers are drawn to new technologies that reduce oil dependence. The industry ramps us production to exceed the previous annual peak of 17 million vehicles sold in the US. China sales eclipse the U.S. by a wide margin. Ford and GM once again become industrial powerhouses, chastened by much stronger competition.
- Fueled by a huge youth population and languishing economies, the Arab Spring drags on for years without major regime change or progress toward democratic reform in the region. Freed up by lower demand for oil, less public support for terrorist activities and successes in removing terrorist leadership, the U.S. views the region as less strategically important and shifts its focus away from combat to containment. Russia and China, acting in their own enlightened self-interests, become U.S. allies in this effort.
- Facebook launches the biggest IPO in U.S. history, coinciding with a peak in U.S. stock prices for the first half of the decade. After another significant setback, stocks begin a long bull phase while bond investors struggle to break even.
- America’s unemployment rate stays above 7% throughout the decade, which keeps wage inflation (and therefore reported inflation) at bay. Baby boomers stay at work in record numbers, ironically leaving fewer job opportunities for their own children. Advances in cancer and aging research begin to extend life expectancies significantly, exacerbating the funding crises in Medicare and Social Security.
- Ubiquitous high speed internet, device convergence and other technology advances let companies prosper with fewer employees and those employees they do have to work in more mobile/home office environments. Demand for commercial real estate, while stable, faces a long period of very slow growth as corporations shed unneeded office space. New office construction stays at a very low level.
- Learning from the economic successes of China and the mistakes of its own economic transition, Russia moves closer to the China planned economy model but with its own twist of exploiting its natural resource assets. These two countries decide they have more to gain through cooperation than rivalry and begin to work together much more closely on mutual economic and defense interests. This new alliance could seriously challenge the economic leadership of the U.S. and Europe in the coming decades.
© Essential Investment Partners, LLC 2011 All Rights Reserved