Thursday, November 18, 2021

Next Economic, Financial "Crisis" Begins in 2022

The fuel for economic growth, particularly in a nation running gargantuan trade and budget deficits, is population growth. Not any population growth, but working age population growth. It is the growth of this cohort that drives potential employment growth, potential consumer growth, potential homeownership growth. Absent that growth, the means to continue "growing" is to substitute cheaper debt, more debt, more stimulus, etc. and claim those substitutes as real growth.

There is a natural level of "full employment" that has been established since the full inclusion of women in the labor force. This is to say there are only so many persons among the working age population willing, capable, and available to work. Once that cohort of available workers is employed...full employment is achieved and the fuel for further organic growth is spent. Absent further potential growth (because no more fuel exists, we call this a "recession").

Absent that working age population growth, the only means to create more potential "fuel" are massive job loss events (given names such as "sub-prime crisis" and "Corona-Virus crisis"). Then, in the wake of these mass layoff events, large "job gains" can be claimed via ZIRP, federal debt / stimulus, Federal Reserve QE. But they are not job gains...they are simply re-employing the same cohort.

So, due to the decelerating growth, and now declining working age population versus ever more aggressive means to re-employ those same persons...the crisis are coming faster and hitting more intensely due to the demographic reality we now face. These "full employment" moments where stimulative policy led to an exhaustion of potential employees have taken place in '89, '00, '07, '19, and now again in 2022.

I'll detail this impact first among the 25 to 54 year old population and then widen out the the broadest possible working age population of 15 to 74 year olds.

Below, 25 to 54 year old population, employees. Core population growth began decelerating end of the century and ceased as of 2007. Those employed among this age group have essentially stagnated since 2000...but the chart below shows an additional 2 million more employees than are currently employed which is likely to be achieved by early 2022.
Below, adding in federal funds rate (black dashed), marketable federal debt (red), and Federal Reserve balance sheet (QE, yellow line).
Below is the critical chart...with the addition of those 2 million more jobs (this cohort lost about 14 million jobs, has regained 12 million) against a total 25 to 54 year old population which has not grown...we are at full employment. Point is, by early to mid 2022, approximately 80.5%'ish employment/population ratio will be achieved...and that is typically the end of the line where the engine simply runs out of gas. Typically, "full employment" coincides with initiation of interest rate cutting cycles, federal deficit spending, and more recently large Federal Reserve balance sheet growth (yes, just as the Fed is initiating a QE tapering and discussing interest rate hikes and the federal government is reducing stimulus?!?). This combination of full employment versus tightening is almost sure to initiate deceleration and recession.
Below, looking at the largest possible working age population, 15 to 74 year olds and those employed among them. Note the large deviation from trend line in those employed versus population, This is the declining labor force participation of the only portion of this population that is growing...the 65+ aging population. The employed assumes 2 million more employees than are presently employed against little to no population growth.
Again, adding in federal funds rate, debt, and Federal Reserve balance sheet.
I save the most important for last. While the 25 to 54 year old population isn't growing, the "full employment" ratio is generally flat at about 80.5%. Conversely, the still growing 15 to 74 year old population (thanks entirely to the elderly portion of this population) is seeing a continual decline in what constitutes "full employment". Thanks to the participation levels among the 65+, full employment (and the end of economic "fuel") will only continue to decline regardless continued ZIRP (NIRP?), QE, federal debt/stimulus, MMT/UBI, etc.
Demographics simply are and care not what the Federal Reserve or Wall Street or the White House need to bridge the ever widening chasm of an economy serving a barely growing "We the People" versus an economy twisted/tortured to serve the needs of an infinitely "growing" financial system serving "the Few". This series of supposed financial crisis have been nothing of the sort...they are so obvious and predictable. 2022 is just the next demographic chapter where full employment is achieved. Regardless how it is cloaked via some ongoing or new version of "crisis", be prepared because this will almost surely be the launch of unimaginable debt, NIRP, QE, UBI, MMT, and acronyms not even in existence yet. Whether it is called the "great reset" or hyper-inflation or whatever...this is the end of one historic period and the beginning of another.

Tuesday, November 16, 2021

Housing, Employment, Inflation, and 2022

Some times saying less can say more. Given that, I'm going to offer four variables relating to housing and hopefully let them and their relationships do the talking.

1- US median home price versus total US employees. 1970 through 2021 (YE est.).

Since 2019:

---Home prices +28%

---Total Employees -1.9%

2- Year over year changes in median house prices versus YoY changes in total US employees. Worth noting the accelerating divergences between home price appreciation and employees highlighted in the four boxes below.
3- Same chart below, but inclusive of periods of Federal Reserve rate cutting cycles. Hmmm.
4- Time to add in one last variable, year over year changes in Federal Reserve holdings of MBS (mortgage backed securities). Hmmmm.
As the Federal Reserve embarks on its tapering (decelerating purchases) of MBS, as the growth in employment has begun its natural deceleration as "full employment" of the working age population nears (detailed below), and as inflationary pressures suggest the Fed should consider rate hikes...remember these charts and the impact on home prices.

Why US will reach full employment in 2022 and cease further employment growth...detailed below.

1- 15 to 64 year old US population versus those employed among that age group.
1.1- While many housing pundits discuss a housing shortage, I offer the same view of the working age versus total US housing units.
1.2- To ensure the "housing shortage" is shown in full, I show the full US population to total housing ratio...and rather than a shortage, the US is at an all time high of housing units per capita (back to the previous peak seen in 2008).
2- Year over year change in 15 to 64 year old population versus year over year changes in employment among them. Population growth is the natural governor to potential employment growth...regardless interest rate cuts, debt, QE.
3- Pulling together the variables, working age population / those employed among them versus the Federal Funds rate % (black), marketable US federal debt (red), and Federal Reserve balance sheet (yellow).  As population growth has decelerated, federal government and Federal Reserve have substituted cheaper debt, more debt, and QE to maintain artificially high consumption / "growth".
4- Lastly, the population to employment ratio is rapidly heading for "full employment" typically hit around 72% (that is, since women became fully integrated into the labor force). At that 72%'ish point, typically employment growth ends, economic growth ends, and the next round of interest rate cuts / federal debt / Fed balance sheet growth ensues.
So, just as the Federal Reserve is attempting to tame a housing bubble via undertaking tapering and discusses dot plot rate hikes in 2022, and inflation runs amok...the demographic / employment cycle is already nearly tapped out...typically the sign of impending Federal Reserve rate cuts / balance sheet expansion, and federal government debt fueled stimulus. Those concerned about impending hyper-monetization perhaps leading to hyper-inflation quickly followed by a hyper-deflationary depopulationary depression may not be as crazy as they seem?

Friday, October 8, 2021

Japan...Centrally Engineered Canary in the Coalmine

A quick backstory of Japan is too instructive and telling...not to tell. Because the story of Japan is really soon to be the story of nearly all the developed world. Know Japan; know thyself.

To begin, the rise, peak, and ongoing fall of Japan's working age population of 15-64 year olds and employment among them (below). Note the Bank of Japan (BoJ) interest rate policy went down as population growth decelerated and then hit zero when population growth (consumer demand) peaked...and rates have remained at zero ever since, going on twenty-five years now.

Importantly, a declining male population is mirrored  by decades of declining male employment...but the declining female population is offset by employment gains. Females have been the sole source offsetting what would have been far larger employment losses...likely until now.

Checking the percentage of employed Japanese 15 to 64 year old males and females is pretty instructive. There seem to be limits that even central bankers can't overcome. Only so much of a population can/will work.
Likely uncoincidentally, just as female participation begins it's secular surge...Japanese births begin their secular collapse. But it isn't just rising labor force participation, it's higher education, lower marriage rates, and a secularly declining childbearing population...all leading to the ongoing collapse in Japan's present and future population.
Be that as it may (that Japan is in indefinite decline), this is to discuss Japan's present. And Japan is likely to bump up against peak employment (as Japan did in 2019).
But what is not going down, since 2012, are Japanese asset prices. Below, looking at year over year change in the 15 to 64 year old population (blue), BoJ discount rate (black), Nikkei 225 (yellow), and BoJ assets (red). The three decades of declining Nikkei mirroring the decelerating and then declining working age population...until the BoJ went all-in on quantitative easing, in 2012.
Or look at the total working age population and Japanese residential housing prices. Housing prices and working age population moving in sync...up, peak, down...until 2012.
Adding in the BoJ's discount rate and quantitative easing. The end of "free markets" and beginning of central determined asset prices is in your face.
Just to leave no stone unturned, below residential asset starts (rising supply of housing) versus year over year changing working age population (demand).
Adding in the year over year changes in residential housing prices.
Finally, adding in year over year changes in BoJ's asset holdings. Again, the end of "free market" pricing and beginning of centrally determined asset prices.
Anyway, the point is, if demographically "endangered species" Japan can continue building out new housing against a secularly falling population and engineer stock and home price appreciation...then what is to stop any and all central banks from doing the same? Just don't expect free markets to make a return so long as central banks exist.

Thought I'd throw in a couple of extra credit charts...Japanese year over year change in working age (green columns) vs elderly (grey columns), discount interest rate (black), debt to GDP ratio (red line), BoJ assets held (blue line), and Nikkei 225 (yellow line). Essentially, debt didn't move markets...QE does.

PS - all this goes for the EU, US, and most advanced/developing economies...plus almost surely this will go for China.

Thursday, June 3, 2021

Declining Buyers/Renters, Increasing Housing Supply = Soaring Home Valuations (WTF???)

As the old adage goes, real estate is all about location, location, location. Given this, I wanted to offer a regional and state by state view of the situation, where declining total populations, large declines among those employed, and declining under 60 year old populations are taking place parallel to a resurgence in interest rate driven home valuations and building.

First, annual change in regional total populations. Growth in all four regions is decelerating but outright declines are now underway in the Northeast and Midwest.

Annual population change (millions), by region over the last decade. Decelerating growth and outright declines.
Northeast
Year over year change in total population, employees. Long decelerating population growth in the Northeast has turned to an outright declining population. The growth of the population is always a governor of the potential growth of those employed.
Year over year change in under versus over 60 year old population. On an annual basis, the Northeast under 60 year old population is now declining by about a half million, or equivalent to losing a city about the size of Baltimore annually. This working age depopulation reduces the quantity of potential employees, potential home buyers/renters while the quantity of elderly (potential home sellers) soars.
Northeast, putting it together.
  • declining total population
  • declining under 60 year old population (potential buyers) versus soaring elderly population (potential sellers)
  • large decline among employed (potential buyers/renters) and shrinking future quantity of potential employees
  • record low mortgage rates
  • accelerating building activity and rising number of total housing units
  • rising home prices
Midwest
Year over year change in total Midwest population, employees. Decades of decelerating growth have turned to what is likely to be decades of population declines.
Year over year change in Midwest under 60 versus over 60 year old population. Midwest under 60 year old population is declining by about 350 thousand annually, or equivalent to losing a city the size of Cleveland annually while the 60+ year old population grows by about the same.
Midwest putting it together...
  • declining total population
  • declining under 60 year old population (potential buyers) versus soaring elderly population (potential sellers)
  • large decline among employed (potential buyers/renters) and shrinking future quantity of potential employees
  • record low mortgage rates
  • accelerating building activity and rising total number of housing units
  • elevated but stable home prices over last decade
West
Year over year change in total population, employees. Accelerating deceleration of growth...and potential growth.
Year over year change in under 60 versus over 60 year old populations. Under 60 year old population now falling by about 200 thousand, or equivalent to losing a city the size of Tempe annually. Again, this accelerating deceleration is also an accelerating deceleration of potential future growth...or likelihood for outright declines among employees, consumers, homebuyers versus soaring quantities of elderly.
Pulling it together
  • decelerating total population growth
  • declining under 60 year old population (potential buyers) versus soaring elderly population (potential sellers)
  • large decline among employed (potential buyers/renters) and decline potential for future employment growth
  • record low mortgage rates
  • significantly accelerating building activity and rising total number of homes
  • soaring home prices
South
Year over year change in total population, employees. The South is the primary source of US population growth, although deceleration is also apparent here.
Year over year change in under 60 versus over 60 year olds. The decelerating growth of under 60 year olds means a significant deceleration of potential employment growth, even in the South.
Pulling it together
  • decelerating total population growth
  • decelerating under 60 year old population (potential buyers) versus soaring elderly population (potential sellers)
  • large decline among employed (potential buyers/renters) and decelerating potential for future employment growth
  • record low mortgage rates
  • significantly accelerating building activity and rising total number of homes
  • soaring home prices
State by State Basis
The number of  states experiencing outright depopulation is soaring....and the current 17 states depopulating as of 2020 are likely to be joined by another 13 states transitioning into depopulation by year end 2021.
States experiencing depopulation in 2020.
States with minimal population growth...likely moving to outright depopulation in 2021.
States still growing but with decelerating growth.
States with population growth in excess of 1%. Only Idaho and Arizona seeing accelerating growth at present.
However, by my quick calculations as of 2020, there are 38 states with declining under 60 year old populations...and only 12 states that continue to have increasing working age populations, potential buyers, and rising organic demand. But the number of state still persisting with working age population growth will be falling to single digits in the next couple of years.

Breaking these dynamics down, on a state by state basis.

California
Year over year change in total California population and employees. Decelerating population growth has turned to depopulation.
Year over year change in California under and over 60 year old population. The total population declines seen in 2020 shouldn't have been a surprise as the inverting demographic pyramid has long been underway in California. Clearly, the total population decline will be persistent and the potential for employment growth will be limited by the declining working age population.
Soaring California home prices and rising building activity (thanks to Federal Reserve driven consistent decline in mortgage rates) against the backdrop of secular depopulation. Experts explain that the rising housing price are due to a housing shortage rather than a speculative frenzy...but the data suggests otherwise.
Michigan
Year over year change in total population, employees.
Year over year change in under 60 versus over 60 year olds.
Michigan rising home prices and rising building activity versus declining total population, working age population, and employees.
West Virginia
Year over year change in total population, employees.
Year over year change in under 60 versus over 60 year old population.
West Virginia is experiencing rising building activity and consistently rising home values on falling numbers of employees, falling total populations, and falling working age populations. The term FUBAR seems appropriate here.
Illinois
Year over year change in total population and employees.
Year over year change in under 60 vs. over 60 year old population.
Illinois is a poster child for the Fed's impact on housing valuations against all organic fundamentals. Rather than the cost of shelter reflecting it's fair market value...it reflects what the Fed and banks need it to be...otherwise the Fed and banks holding these mortgages are sitting on worthless paper that likely should be marked to zero.
What is the Federal Reserve's role in pushing housing prices higher? The Fed sets the federal funds rate (overnight basis of lending) which is the basis for the rest of the interest rate curve. The Fed's ZIRP (zero interest rate policy) coupled with the Fed's purchasing of US Treasury's and mortgage backed securities has backstopped the housing market. What private entity would buy 30 year mortgages in places that are currently experiencing depopulation and will see large scale depopulation over the lifespan of that loan??? Despite the majority of America that is either seeing outright depopulation or depopulation among under 60 year old populations...demand for housing is soaring...just like the Fed's holdings of MBS and long Treasury bonds.
The soaring housing demand is real but for all the wrong reasons. It is not really an inadequate supply of housing but an oversupply of liquidity with a shortage of potential assets from which to earn a "safe" return. Prior to 2008, retirees and those approaching retirement would tilt their portfolios toward bonds to lessen the volatility of "riskier" stocks. But with the Fed's decade+ of ZIRP (artificially collapsing bond / CD rates), the soaring population of soon to be retired / those in retirement turned their gaze toward RE. Demand for 5%, 6%, 7% "safe" returns provided by being a landlord replaced bonds. Foreigners, speculators, flippers all followed the rising trend.

The Federal Reserve driven real estate wealth effect has homeowners believing they are sitting on real wealth as their home value soars and mortgage rates plummet. The Fed, just like Bernie Madoff, is running a Ponzi whereby homeowners believe themselves to be rich (think HELOC or reverse mortgage or MEW). The only difference between Madoff and the Fed is that the Fed can print all the dollars it wants (inflation be damned)...if/when need be, the Fed (or some tasked entity) is likely to begin buying up excess housing with money from its printing press (even if it's only to demolish it). This will likely begin in rural states/areas all over America where the depopulation is most severe.

But the worst impacted by this Fed Ponzi are young adults. They have little to no assets (rising with the Fed's flood of liquidity). They are drowning in soaring rents, predatory lending for education, costs of daycare, insurance, co-pays, and general inflation. They are getting more education, taking on more debt, and having less to show for it. This has resulted in a dramatic rise in the age of first marriages, collapsing fertility rates and births.
Essentially, the farther the Fed (and CB's worldwide) go with its asset inflation scheme (the basis of the domestic and global inflation spike alongside an global shutdown/restart of production), the lower the future population sinks...and the more impactful and powerful the Fed becomes.