If you look solely at the demographics, you will see something startling that is occurring throughout the world. Virtually all the developed nations have a similar problem with an aging population. With Japan in the forefront of this greying population, the repercussions of World War II ripple through many of that war’s participants in a fashion that ‘created’ baby booms in their following generations. Like much of the developed nations’ populations, the U.S.

birthing boom constituted a bubble of 73 million individuals (1/3 the population) that, as they worked their way through the life cycle, placed enormous strains on the domestic infrastructure. So, as we are recovering from the worst recession in decades, the U.S. economy is facing the prospect of dealing with 10,000 retirees per day for the next 19 years. With a reduction in the labor force and a swing in the Social Security System from a contributor to GDP to a detractor (which occurred in 2010), we can expect an intrinsically slower growing economy for some period to come in much of the Western nations.

Consistent with this aging of the population, there is a greater cost to be borne by the younger generations. The burden of health care and retirement income of the non-working class will be carried by the declining numbers of workers. As has been widely quoted, the ratio of retirees to workers has altered dramatically and will continue to impact the 'cost of carry' in the domestic economy.

It is heartening to note, however, that, while the developed nations are experiencing declining labor force growth rates, many of the 'growth' nations have population expansions that more than compensate for Europe, Japan and the U.S. In addition, not only is that growth significant, it is an expansion that is primarily middle class.

In looking at graph three, note the virtual absence of the recession that was noted in the West, as depicted in the world GDP growth. This is a direct reflection of graph four which indicates the worst recession since the Great Depression, the impact upon the world economy doesn't even show a dip.

It is possible, therefore to deduce the probability that the world's consumption and production will be altering to reflect both the favorable demographics of the growth nations and more sluggish consumer growth in the developed countries. The United States is barely two centuries old and has really only become a world power in the past 70 years.

During that period, the U.S.'s remarkable growth created the world's largest economy and one of the highest standards of living on the planet. As Great Britain became a world power due to colonialism, the U.S.'s great power came from consumerism. With heavy debt and demographic changes the consumer of America may trade hands with the consumers of the growth nations. Indeed, it has been estimated that 'emerging' economic nations will grow from 6.5 billion people in 2005 to 8 billion by 2030 and that the middle class will reach 50% of the global population by that time. Surely, a New Abnormal.

Also, this economic expansion is different in the fact that we have never faced so many financial and moral obligations. With the recent downgrade of U. S. Treasury debt, the fiscal responsibility of the government has come into question. Certainly, of the 13 nations that hold AAA ratings, the U.S's debt to GDP was, by a wide margin, the worst. Without any cohesive plan to reduce debt and the extensive Social Security and Medicare obligations yet to come, the spending binges of prior years by Washington have left a legacy of austerity for the future. This debt will have to be carried by future taxpayers and will be, most assuredly, a source of continued weakness and reduction of alternative economic policies. If interest rates increase (which is inevitable) the cost of carrying this burden will soak up even more of taxpayer contributions.

There is an old economic rule of thumb that you can determine the intrinsic growth rate of a nation by simply adding the labor force growth rate together with its productivity. With a slowing growing population and the impact of the law of diminishing returns on productivity, it is likely that the GDP of the U.S. will be more contained than in prior periods. Indeed, if you look at the current recovery as compared with prior expansions, you note the muted nature of recent GDP growth.

Part of that is a function of the crossover of Social Security payments exceeding receipts in 2010 (for the first time ever and, now, forever more) and the fact that we have such an inventory of excess housing. Recessions invariably occur as a result of excesses in the system. Traditionally, they are an excess of business inventories, excesses in inflation or high levels of interest rates. Obviously, the recession that marked 2008 was absent of any of those standard flaws. What we did have, was an excess of vacant houses. This confounds economists because we have never experienced an economic overhang that is so difficult to liquidate, with such a lead time and with so many regulatory policies. Again, this is a testimonial to the New Abnormal.

In a kneejerk reaction to the CDO, CDS, housing and financial crisis of 2008, a number of regulatory initiatives have been perpetuated from Washington bureaucrats. George Washington University estimated that there are over 100 new regulatory statutes, each of which, carries at least a $100 million price tag. Concurrent with these policy initiatives, the economy has been subject to a series of monetary expansion programs that were designed to reduce interest rates, stimulate the economy and ratchet down the pervasive unemployment rate. This author would submit that Washington has failed to recognize the changing nature of the domestic economy. Certainly lower rates will stimulate a MANUFACTURING based economy to hire, carry inventories and build plant and equipment. Unfortunately, we are no longer an economy whose primary structure is within the manufacturing sector. We exist, today, in a service-based economy, under which, lower interest rates have limited simulative effect. Unfortunately, many of the recent policy regulations have an adverse impact upon service sector, most significantly in the financial industry that has been the prior fastest growing segment of the services sector. Indeed, small business is reticent to hire because of the opaque nature of many new regulations that come with cost uncertainties.

In most past cycles, the need for capital to fuel the recovery has pushed interest rates upward. Consistent with that corporate need to build inventories and plant and equipment expansions to satisfy consumer demands, frequently governmental financial needs ‘crowd out’ other borrowers, placing a wider spread between corporate to government yields. Not so this cycle, instead, Fed purchases of government debt is ‘crowding out’ bond buyers, driving rates artificially lower.

This has caused a shift in the traditional efficient frontier for investment risk returns and altered the logic behind the basis of asset allocation. Since 1997, a mapping of the risk reward ratio of stocks to bonds shows fixed returns exceeding that of stocks yet at one third the risk. As can be imagined, historical relationships all across the efficient frontier have been artificially altered to a level that make extrapolation meaningless. Another New Abnormal has thus been introduced to confound market expectations.

So, how do we interpret the New Abnormal such that we can best invest in this changing economic and demographic landscape. Certainly there will be a need to play both offense and defense as the opportunities and vulnerabilities of the New Abnormal are exposed. If growth appears to be best provided by the emerging nations’ favorable demographics and debt structures, it would appear those companies that satisfy the demands of that growth would tend to benefit. Those would include ‘home grown’ companies that have first-hand knowledge of the region in which they operate. Knowledge of culturalmores with internal distribution lines and established consumer recognition would propel those consumer companies in tapping the middle class growth market. In addition, it would be important to recognize those businesses that satisfy the demands not easily obtained through imports. Infrastructure inputs such as cement, heavy materials and engineering concerns would be of significant demand. Certainly, however, there will be enormous opportunities for U.S. domestic corporations that can export those goods and services that will meet the needs of world growth areas. Heavy machinery manufacturers, agricultural produce and equipment, natural gas, consumer products, technical and technology producers, automobile manufacturers, financial services, telecommunication expertise and pharmaceuticals will all experience significant demand that can be met by certain U.S. companies. Also, as noted in the New Abnormal, domestic demand patterns will likely change. More dependency upon healthcare will further enhance the ‘service’ nature of our economy. However, with technological leaps, we have reinvented our manufacturing sector such that ‘clean’ production can be managed in concert with EPA restrictions. That will be important in meeting our export opportunities. There is also ope that new energy sources and superior extraction of fossil fuels could domestically satisfy demands with prospects of the U.S. becoming an exporter of energy other than coal. On the downside, with rising taxes and other financial burdens, consumer behavior will likely be less robust than in prior decades. This will likely be felt most heavily in durable goods and consumer discretionary items. Say hello to the Grinch in future Christmases.

Also, as noted in the New Abnormal, domestic demand patterns will likely change. More dependency upon healthcare will further enhance the 'service' nature of our economy. However, with technological leaps, we have reinvented our manufacturing sector such that 'clean' production can be managed in concert with EPA restrictions. That will be important in meeting our export opportunities. There is also hope that new energy sources and superior extraction of fossil fuels could domestically satisfy demands with prospects of the U.S. becoming an exporter of energy other than coal. On the downside, with rising taxes and other financial burdens, consumer behavior will likely be less robust than in prior decades. This will likely be felt most heavily in durable goods and consumer discretionary items. Say hello to the Grinch in future Christmases.