The Next Great Bubble Boom: How to Profit from the Greatest Boom in History: 2005-2009

The author of The Roaring 2000s examines the future of our economy, providing a comprehensive forecast that encompasses the next twenty years by comparing our current state to that of the crash of 1920-21, and features a wealth of valuable financial advice, from investment strategies to the essentia

Chapter 1: The Investment Opportunity of a Lifetime

Uncanny Parallels with the "Tech Wreck" of 1919-1922 and the Roaring Twenties "Bubble Boom" That Followed

The initial rebound in the stock market in 2003-2004 after the crash in October 2002 is a harbinger of the next great bull market in stocks and the last stage of the greatest boom in history. This should not be a surprising forecast to our past readers, given our long-standing forecasts that the massive baby-boom generation would drive an unprecedented boom into 2008 or 2009 with their predictable spending and productivity trends. But it is crucial to understand that this is your last chance to profit from this extraordinary bull market that has raised more people than ever into the status of millionaire and affluent households. And the extreme crash of 2000-2002 makes the next stage of investment opportunities even more compelling! We are predicting that from the lows in late 2002 into around late 2009, you as an investor are likely to achieve as high or higher average annual compound returns than you did in the unprecedented bull market of the 1990s. How many experts, economists, and investment strategists are predicting that?

This may sound astounding in light of the incredible crash in technology stocks and the terrorist attacks on September 11, 2001. You might ask, "After this incredible bubble and crash, how could we even think of seeing such returns in the coming decade?" Even Warren Buffett and Sir John Templeton, two of the most successful long-term investment gurus, are predicting much slower growth in the economy and in stock returns for many years to come! Buffett claims that you will, at best, see low-single-digit returns for this decade, and Templeton claims you would be lucky to break even in stocks during this time period.

But first remember that we stood almost alone in predicting the incredible boom of the 1990s in The Great Boom Ahead, published in late 1992 -- when most people were nearly as pessimistic as now. After all, Bankruptcy 1995 was at the top of the best-seller lists at the time. We had just seen the extreme 1987 crash, collapsing housing prices, the S&L crisis, the Persian Gulf War, the collapse of Japan's economic, stock, and real estate bubble, the greatest government deficit ever, and a similar recession from late 1990 into mid-1991. Who would have thought that the 1990s could have seen greater stock returns and economic growth than in the 1980s? The truth is that every decade of this unprecedented boom has started out weak. Remember the early 1980s? The early 1990s? Most decades start by consolidating the strong gains from the previous decade before moving on again, due to a recurring corporate planning cycle that we will cover in Chapter 3.

We forecasted then that the decline in Japan, of which we were warning in the late 1980s, would continue and that America would see the greatest boom in history. We forecasted that inflation would fall to near zero and that we would balance the government deficit by 1998 to 2000. We said to "get ready"! But most people didn't realize the significance of the 1990s boom until the latter 1990s, just as that incredible expansion was increasingly due for a necessary consolidation to prepare for the next and greatest decade to come, just as occurred in the early 1990s, after the great 1980s expansion. The good news is that the fundamental trends we track and forecast have not changed despite the crash of 2000-2002.

We didn't title our early 1998 book The Roaring 2000s for nothing. We have been and are continuing to predict that this coming decade will be the greatest in history and will closely parallel the Roaring Twenties -- the last time a major technology revolution moved fully mainstream while a new generation hit the peak of its spending and productivity cycle. That decade determined the leaders in most industries and technologies for many decades, into the 1970s and beyond! This time the generation is much larger and the technologies are even more powerful. So we are saying "get ready" again, as we did in late 1992 in The Great Boom Ahead, and we have much more evidence for why the economy and the technology revolution will continue to boom, including why we saw such a dramatic technology crash in 2000-2002. That was just the end of the first phase of the acceleration of new technologies into the mainstream of our economy. And the 1990s boom created the second bubble in stocks, concentrating largely in Internet and technology stocks, to follow the first bubble, which peaked in 1987.

The second stage of the technology revolution is coming. The same "tech wreck" scenario occurred eighty years ago, between late 1919 and early 1922, when automobiles and many other new technologies were growing rapidly and hit the same 50% penetration point of adoption by consumers. The incredible boom that followed that extreme and extended crash were indeed the infamous Roaring Twenties! In fact, we have identified a four-year cycle and a decade pattern of stock movements that have recurred regularly for more than fifty years. After another key four-year cycle hit in late 2002, there is only one more cycle due in mid- to late 2006. Otherwise, the coast appears to be clear for another strong decade of expansion.

Did you realize that almost every decade sees recessions, consolidations, and stock declines in its first few years and that most of the gains are made in the second half of the decade? In the next chapter we will look at why we are still predicting a Dow as high as 38,000 to 40,000. We will give you a more detailed road map for how the bull market will unfold over the rest of this decade, in large-cap stocks, small-cap stocks, bonds, real estate, and international markets. We will look at the sectors of the stock market that are being driven by the demographic trends and technology revolution. But expect the technology sectors to accelerate strongly again and lead the stock markets from late 2004 or 2005 into 2009 or early 2010, just as they did from 1995 through 1999 and early 2000. Hence, even if you missed the great buying opportunity in late 2002, the best of the bull market is still ahead!

If you had bought stocks, and in particular auto and new technology stocks, at the bottom of the "tech wreck" in late 1921-early 1922, you would have seen gains of six times in the Dow, twelve times in the auto index, and twenty-two times in General Motors in just eight years. That was after a 45% crash in the Dow, a 70% crash in the auto index, and a 75% crash in General Motors that closely paralleled the crash of early 2000-late 2002. In fact, we will show that Intel's stock chart from 1992 to 2000 looked almost identical to General Motors' from 1912 to 1919. In late 1921-early 1922 it looked just like the beginning of the Great Depression. Unemployment hit 12% in the United States and 18% in Great Britain. There was deflation in prices for the first time in decades. Germany was about to collapse even further from hyperinflation in 1922 and 1923.

There was even the first modern terrorist strike: a bomb exploded on Wall Street in late 1920. There was an incredible reaction to new immigrant and ethnic groups, including the explosion of the Ku Klux Klan's membership to 5 million, or almost 23% of households, by 1924. The 1920s became the anti-immigration decade. But despite such extreme economic, political, international, and social conflicts, the Roaring Twenties saw the greatest bull market and decade of economic productivity and progress in U.S. history -- that is, prior to the 1990s and until now!

Economists now say, despite the initial rebound of the markets in 2003, that we have seen a bubble in the stock market and that the markets, especially technology stocks, won't see new highs for perhaps decades. We couldn't disagree more. This boom has been a bubble boom due to the extreme demographic, globalization, and technological advances driving it. The first bubble occurred from 1985 to 1987, but that was not a technology bubble. The recent one was even greater, from 1995 to 1999, and concentrated largely in the Internet and technology sectors. We see the next and final bubble accelerating from 2005 into 2009 or early 2010. And it is likely to become the greatest intermediate bull market and technology bubble in the last two centuries. This final bubble will likely be followed by the greatest depression in history -- at a minimum, the greatest downturn since the Great Depression.

We've been the most bullish forecasters and investment strategists since the late 1980s when we discovered some very simple, but potent new tools for predicting economic trends -- tools that economists largely reject because they are too simple and everyday people can understand them. We deal in the basic fundamentals of when we earn and spend money, are most productive as workers, borrow the most, invest the most, and even create inflation due to the expense of raising and educating our youth until their entry into the workforce. These are new statistics that have emerged from the Information Revolution which are highly quantifiable and widely used in consumer marketing -- but not in economics. What could be more fundamental to our economy than these basic, easy to understand, highly projectable trends? We find consistently that people readily understand this human, demographic approach to forecasting. Why? Because we all experience similar life cycles as we age!

We're not bullish just because we are optimists by nature. My mother would never tell you that I am an optimistic person! In 1989, we forecasted that the United States would enter a two-year slowdown in 1990 and 1991. We forecasted Japan would then decline versus the United States and Europe for more than a decade. In fact, we thought the stock crash of late 1990 would be worse than what actually occurred. We were also initially forecasting a Dow of 10,000 by the early 2000s, and that was an understatement -- although everyone thought we were crazy at the time! In The Roaring 2000s, released in April 1998 with final edits in late 1997, we forecasted that the Dow would correct to 7200-7600 by mid- to late 1998 (page 292). The intraday bottom was right in the middle, at 7400. And that's the area we gave for our strongest buy signal again in late September-early October 2002.

In The Roaring 2000s Investor, released in October 1999, we forecasted that the Dow was about to hit the top end of our valuation channel by late 1999 to early 2000 and that a sharp correction was due (page 26). On February 1, 2000, we warned in our newsletter that the Internet stocks were approaching a major top. In the April 1, 2000, edition of our newsletter we advised subscribers to start allocating portfolios out of technology and Asia (ex-Japan), more into health care and financial services. Despite the extreme correction that followed, the Dow on September 21, 2001, tested the bottom of our valuation channel and rallied modestly into mid-2002. We gave our first strong buy signal there at 8000-8200 on the Dow. But the Dow Channel was later broken in early July 2002, which gave us targets back to the 1998 lows of around 7400. The Dow finally bottomed at 7286 on October 9. Similarly, we forecasted in late 2000 that the Nasdaq could test its long-term trend line around 2100, and if that broke the next target was the 1998 lows of 1350-1400. That level was also finally broken and we were similarly projecting lows in the 1100 to 1150 range, which occurred at 1114 on October 9, 2002. Hence, we aren't averse to being bearish when called for.

But in our October 1, 2002, newsletter we gave our strongest buy signal ever! The reason we are projecting continued economic and stock advances into 2009 or early 2010 is that our forecasts are based on highly quantifiable demographic and technology trends and they are still pointing very strongly upward. Given the extreme stock crash and political events of 2000-2002, it is amazing that the economy stayed as strong as it did. That was due to continued strong consumer spending while businesses cut back sharply, which only proves how strong demographic trends affect our economy. As Warren Buffett has said, "Markets go up, and they go down." We agree in the short term, and the recent bubble and crash prove that. But we have found that the markets move in very predictable ways over the long term because of these fundamental trends.

Since the beginning we have been forecasting that this great boom would be followed by an extended decline from around 2009 or 2010 into 2022 to 2023, like past bear markets following the peaks in past-generation spending cycles. This occurred from 1930 to 1942 and from 1969 to 1982 in the United States. In the short term, we fully recognize that the stock markets and economy can take strong swings, even in bull markets. Hence, we clearly aren't always bullish! In fact, in Chapter 3 we will demonstrate some cycles that have explained every substantial stock correction over the last four to five decades. And three cycles converged between 2000 and 2002.

The good news again is that the path is clear for stronger advances until mid- to late 2006 before the next minor cycle hits. We then will very likely see a peak in this bull market between late 2009 and early 2010. By 2010, all of our critical analysis suggests that we will almost certainly see the beginning of a serious, long-term economic and stock decline that will be worse than the 1970s in the United States or the 1990s in Japan and could rival or exceed the Great Depression in the 1930s. That is the bad news. It is perhaps the most important insight we can give you in this book. There are investing and living strategies that will allow you not only to largely avoid this inevitable calamity, but also to profit from it.

Today we have a very different forecast from Warren Buffett and most experts, as we have since the late 1980s. By the end of this decade we still see the Dow hitting 35,000 to 40,000 and the Nasdaq advancing to around 13,000, and potentially as high as 20,000. Despite the initial strong recovery in late 2003 and early 2004, we see the strongest gains coming between late 2004 and 2009, especially from late 2004 into mid-2006 and from late 2006 into late 2009. It's clearly not too late to fully participate in the next and greatest bull market in history!

Why do we call this time the investment opportunity of a lifetime? Because the crash and slowdown of 2000-2002 represented an extreme correction and a natural stage in the rapid emergence of new technologies during an ongoing economic boom, much like the extreme 1987 crash and the aftershock in 1990. But this most recent correction was much more like the crash of late 1919 to early 1922 that led into the Roaring Twenties boom and bull market. And that was the greatest investment opportunity of the last century.

Here is an important point we have always stressed for investors. Not every major crash in the stock market is a great buying opportunity, and holding stocks for the long run doesn't always work out in real life. If you had bought the most prominent blue-chip stocks in late 1929, you would have suffered an 87% loss in just t...