Monday, May 18, 2015

The Truth of The Great Financial Crisis...And the Truth Why the Worst is Yet to Come

In the search of "truth", start with the big numbers and work your way down.  The biggest number of all...people.  How many are there and the change over time.  Economists and Fed chiefs enjoy explaining the growth of the US population as a part and parcel of the US "exceptionalism" meme.  But the truth of our economic troubles (and OECD nations alike) lies in slowing population growth and the components of that slowdown.  The core populations are shrinking...the old are swelling...the young are barely growing.

In short, the world celebrated the end of WWII by getting laid with reckless abandon.  The greatest bubble was born...a population bubble greater than any before or since among most WWII participant nations which would be the foundation of so many coming economic bubbles.   This population bubble would see decades of hubris, leverage, debt, and eventually outright fraud and lies layered upon one another.

This is a simple explanation why housing and equities crashed in '08.  Why mortgage debt and total oil consumption peaked and has fallen since.  Look no further than annual growth of the young versus old.  An economic system premised on perpetual growth ran out of new customers.

First, the 25-54 year old segment of the US population vs. the 55+ segment.  The annual growth of the 55+ segment eclipsed the 25-54 segment as of '00.  And since '08 the 25-54 year old segment is outright shrinking while the 55+ is surging (below). 

Two caveats on the following numbers, one, they include all US residents whether legal residents or "otherwise", and two, nearly all US population growth through 2050 is anticipated to be Hispanic immigrants and their offspring but if low skill jobs creation doesn't turnaround...there won't likely be the economic draw to entice nearly as many as anticipated and some portion may even repatriate to their home nations.
This situation will continue for at least another decade before the situation begins to normalize (below).

Below, the 25-64 year old segment vs. the 65+ and you see the same demographic dynamics coming through with a decade delay.  The growth of the young...forming families, buying homes, seeing wage gains, saving for retirement has nearly come to a halt.  The surging 65+ segment is looking to curtail spending in retirement, downsize their living arrangements, and cut make due while living on fixed incomes.  Slowly but surely they are in forced liquidation.  The majority with social security as their primary, if not sole, income...not the consumer base America is looking for. 

The situation going forward is about to get much worse...after 2016 the 25-64 year old segment will begin outright shrinking while the 65+ year olds continues its surge (below).  This will go on for another decade before time catches up with the baby boom and a balance of young and old is re-established.

The below charts dramatically highlight the implications of what was always an inevitable population growth slowdown and the governmental response...debt.  Some charts for your consideration...

Below, the Fed's balance sheet growth (aka, St. Louis Monetary base) impact was intended to push bond yields down...but equally impacted were stocks and real estate (below).

But like all bubbles...a pop is inevitable.  But this pop is not likely to be a "market" event like 2000 or 2008-09.  Why?  In Dec '08, when President Bush explained he'd "abandoned free-market principles to save the free market system" lights and sirens should have been going off.  In March '09, when President Obama said "...buying stocks is a potentially good deal..." the governments involvement in markets to "save the system" via TALF, TARP, QE, and so many other acknowledged acronyms and unacknowledged means was set.  The Rubicon had been crossed and free-markets would not be allowed to return so long as the illusion of normalcy was to be maintained.  National and global economic mismanagement was one the costs of this illusion alongside inequality of asset bubbles minus the wage hikes to buy those assets

The implications of a flattening population across all advanced economies of the OECD should be very clear for national real estate but less clear for global commodities....and on and on.  But it isn't clear at all because central banks are attempting to devalue the currencies and simultaneously boost certain asset valuations while almost surely hindering other assets like precious metals.

Obama's March '09 assertion "that profit and earnings ratios are starting to get to the point where buying stocks is a potentially good deal" was not correct.  With declining core consumers resulting in a mismatch of excess capacity...a depression where excess capacity was cured should have been the markets answer to the decades of economic mismanagement.  But it wasn't allowed then and with demographics only getting more difficult...don't expect a re-emergence of markets anytime soon. 

A political resolution will be necessary to initiate the ultimate rebalancing of asset valuations with "market forces"...but unfortunately I doubt this political change will come via the ballot boxes or simply selecting new candidates.  Something a bit more radical seems the ultimate endgame.