Rich Dad’s Demographic Crash Thesis vs. Mish’s “Pain Trade” Thesis

Author and real estate mogul Robert Kiyosaki, better known as “Rich Dad“, is predicting a stock market crash starting in 2016.

by Mish

Unlike others who perpetually predict crashes, Kiyosaki made his crash claim in his 2002 book “Rich Dad’s Prophecy”.

Kiyosaki’s most recent prediction is based on demographics. He now says we are “right on schedule” for a 2016 crash.

In a writing career spanning decades, Kiyosaki wrote a series of books, and conducted countless promotions and seminars incorporating the name “Rich Dad”.

Fourteen years ago, the author of a series of popular personal-finance books predicted that 2016 would bring about the worst market crash in history, damaging the financial dreams of millions of baby boomers just as they started to depend on that money to fund retirement.
But Robert Kiyosaki — who made that 2016 forecast in the 2002 book “Rich Dad’s Prophecy” — says the meltdown is under way, and there’s little investors can do but buy gold or silverand hope the Federal Reserve slows the slide.
In 2002, Kiyosaki wrote that the stock market would crash in 2016 as the first wave of baby boomers began to hit 70 1/2 in 2016 and started taking required-by-law distributions from traditional individual retirement accounts.
He still believes that: “Demography is destiny.”
According to U.S. Census Bureau data, more than 76 million individuals were born between 1946 and 1964; researchers at the Population Reference Bureau determined in 2014 that 65 million of them were still living. After immigrants are added in, according to that 2014 report, the number of living U.S. baby boomers was back above 76 million.
“Interest income or cash flow on savings is virtually nonexistent, and capital-gains plays in the stock market are thwarted because stock prices are at record highs,” he said.
Whatever burden millions of boomers might put on the market, he said, the situation is being made worse by events overseas, where one big country is wielding the monkey wrench.
“China has been in a bubble for 20-something years,” said Kiyosaki. “It has propped up the U.S. economy falsely. When [China] stops importing, the world crashes with them.”
Kiyosaki, who has written or co-written more than two dozen books — including New York Times best seller “Rich Dad Poor Dad” — has built a fortune mostly on real estate and authorship, rather than the stock market. (His licensing company, Rich Global LLC, has filed for bankruptcy and is being sued by a seminar promoter in connection with that filing. A spokesman said Kiyosaki “has the money to withstand an adverse ruling” and expects the case to be settled this year.)
Forbes estimated Kiyosaki’s worth at $80 million in 2012, a figure he declined to address.
“The big question [whether] we do ‘QE4,’” said Kiyosaki. “If we do, the stock market will come roaring back, but it’s not rocket science. If we stop printing money, it crashes; if we print money, it goes up. But, eventually, it’s all going to come down.”
He thinks investors should own some gold or silver, based on the view that central banks will just have to print money to get out of the next crisis and precious metals are often deployed as a perceived hedge against inflation.

Demographics-Based Crash?

Is a demographics-based crash coming up?

Perhaps, perhaps not. It likely depend on how one defines “crash”.

Is 20% a crash?

A 20% downturn would likely would be viewed as a crash if it happened in 10 days. However, a 20% downturn over a year would be viewed as a “bear market” or a “correction”, not a crash.

What about a 40% decline?

If there was a 40% decline in a year, people certainly would call that a crash. But what about 8% this year, 10% next year, a rally of 5%, then two more 10% declines or so, totaling 40% over six or seven years?

I am not sure people would label that a “crash” even though that would be a far worse result.

As opposed to a “crash”, I believe a Japanese style slow bleed over many years, even a decade, is far more likely.

Over the course of two lost decades, the Japanese stock market actually had several 50% rallies and one 140% rally. Those rallies did not stop the Nikkei’s descent from over 38,000 to under 7,000.

No matter how many crashes you count, the end result was a decline of 81% over twenty years. That’s a crash!

An 80% downturn is not my prediction, nor do I think it is even likely. But it is possible.

S&P 500 1981-Present

Outcome Worse Than a Crash

A modest decline of 30% over the course of five years would likely not be considered a “crash”.

However, the effect on pension plans would be far worse than a crash followed by a quick financial recovery as we just witnessed.

The worst possible outcome for pension plans and retirees dependent on capital gains to sustain retirement would be a choppy but prolonged downturn over a prolonged period of time.

A decline of 30% over five years would take the S&P 500 to about 1500. That’s not “crash” material.

Time and Price

A slow bleed resolution to ridiculously priced equities seems more likely than another huge “crash” that quickly rebounds.

I envision a pullback steeper than 30% or a decline that takes longer than five years to play out, possibly both (but without a sudden plunge one might label a crash).

Pain Trade

The “pain trade” is a prolonged downturn of 30-40% with numerous intermittent sucker rallies as round after round of trained dip buyers get punished.

That outcome would crucify pension plans counting on 8.5% returns annually just as stock drawdowns from retiring pensioners accelerates.

There are lots of people predicting crashes now, far too many for my tastes.

Mike “Mish” Shedlock

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