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Tuesday, March 15, 2016

The Truth is the Only Topic Off Limits in This Election...Reality is What Neither Candidates Nor Electorate Want to Hear!

As we proceed through a surreal presidential election campaign, perhaps we should discuss what the candidates will not.  Reality and the hard choices we face.

1 - Core Population Growth Rates and Federal Fund Rates are One and the Same

The chart below highlights the primary driver to US economic growth and likewise the primary driver of the Fed's federal funds rate policy.  The chart smooth's the 20-59yr/old core population growth (annual working age core population year over year change in millions) against the smoothed FFR (Federal Funds Rate).  They fit!?  Simply put, as the core population growth accelerated from 1950 until the early '80's peak; the core needed more of everything driving growth of everything from subdivisions & housing to cars to universities to consumer goods plus all the infrastructure to support it all.  Couple that with decades long military build-up and there was serious growth.  However, as the chart below shows, core population growth peaked in the early '80's and growth began decelerating.  The Fed interest rate cycles turned persistently lower right on cue and rate cuts have followed since to in greater consumption via cheaper debt.  The Fed and CB's worldwide chose to synthetically maintain a growth curve that was otherwise unsupportable.
The post world war II population bubble and subsequent bust was the most obvious and publicized economic challenge of our times.  And yet, the Fed reacted as if this was a temporary blip rather than the secular reset it is.  As if they didn't anticipate the decelerating population growth in the US and nearly worldwide (except Africa)?  The Fed's rate cuts coinciding with the peaking core population growth is obvious.  So is the Fed's intent (via interest rate cuts) to incent the substitution of private, corporate, and government debt. 

But what isn't obvious is how (as the US and world enter a low to potentially zero population growth environment) would rate cuts and the resultant debt bulge to replace the baby bust ever be repaid or serviced?  The chart below is annual global population growth (top black line is total annual growth vs. yellow line is under 45 (<45) population growth).  The <45 global population growth is further broken down by OECD, BRIICS, and the Rest of the World (RoW).

The chart above shows that all (100%+ net) <45 global population growth is taking place in the poor nations of the world absent income, savings, and/or access to credit...and the poorer developing nations are dependent on the slowing developed nations of the world to provide growing markets and demand so the poor nations may export their way out of poverty.  The under 45yr/old populations of the 34 wealthy OECD member nations and likewise the BRIICS (Brazil, Russia, India, Indonesia, China, S. Africa) are outright shrinking every year now and the shrinkage (declining demand) is accelerating.

OK - Back to the Fed...the Fed's plan to substitute lower rates and greater credit against the above secular population changes was short sighted to the point of blindness or outright stupidity?!?

However, according to the BLS the deceleration in US population peaked in '07/'08 (with outright declines) but now the BLS estimates gentle growth going forward...right??? 

2 - Bureau of Labor Statistics Big Miss - Why Growth Will Remain Anemic & NIRP Is Imminent

However, as of 2008, the BLS (Bureau of Labor Statistics) had suggested the economic driver of population growth was the US "ace in the hole".  The US had this demographic advantage over other nations facing zero growth or outright declines.  But a not so funny thing happened following the 2010 Census.  In 2012, the BLS acknowledged it was way off in its estimates.  In 2014, the BLS went even further in its population downgrades.  Population growth among immigrants and offspring of immigrants plus slowing "native" population birthrates were not "temporary" and instead the BLS acknowledged this was a secular change via its massive reductions to population growth estimates.

The chart below highlights the 76% BLS cut (2008 vs. 2014 BLS estimates) to the population growth among the younger American population from 2015 to 2050.  Rather than the estimated 32 million new young by 2050...there would be a little less than 8 million additional young Americans.  In fact, the population of young would fall from 2015 to 2020 and only begin hiking due to an expected hike in birth rates that would only come if economic conditions warranted higher family formations...something as yet wishful thinking.  So, the 2014 BLS estimates still seem too high and unsupported by the data.
The '08 to '14 downgrade of population growth among the working core population was also significant though not as dramatic as among the young.  The 27% decrease or 11 million fewer working age Americans (11 million fewer tax payers, consumers, etc.) still has massive implications. 

The one place the BLS nailed it's forecast...the growth of the 65+yr/old population.  The segment short on savings and long on unfunded programs to support their later years.  Ouch. 

So, the BLS has cut it's population numbers and is likely to continue to do so due to the hard reality of slowing birth rates and immigration.  The Federal Reserve's federal funds rate hikes and cuts have been driven by the economic activity of greater and lesser population growth.  The estimated population growth from 2016 forward (highlighted in the Chart #1) is likely overly optimistic and the implications to the Fed's (and CB's worldwide) interest rate policy should be obvious.  ZIRP and NIRP are simple minded attempts to substitute greater debt for slowing population and resultant slowing economic growth.

3 - What About Immigration & Job Growth?

Given the incredibly strong tie between slowing population growth and slowing economic activity...the current farcical debate to cut off immigration and or repatriate some or all of the estimated 11 million illegal immigrants really matters.  What I would give for a real debate of this topic given some simple facts:
  • Immigrants are taking a significant portion of net new jobs and are doing so at lower wages than the "native born" population.  This is effectively undercutting wages for native born workers whether white, black, Latino, or Asian...and this is depressing low and middle class wage growth and employment.
  • Simultaneously, the American story is a story of immigrants...each wave subsequently depressing "native" wage growth but simultaneously increasing overall economic activity.  A balancing act that was one step back and two ahead.  Immigrants are both workers and consumers of everything and their impact has been the dynamism of America.  However, the big change presently is continuing immigration absent net job growth, particularly full time job growth as the chart below highlights.  There are a hundred reasons for the slowing job growth but it's likely to get worse and not better. 
Perhaps in this light, a discussion of the present and future role of immigration is appropriate in an era when job creation is inadequate for even the existing population...let alone immigrants?

As the chart below shows (using the Fed's interest cycles), the continuing population growth is not being matched with full time job growth and worse off...ongoing declines in manufacturing employment.

The chart below highlights the federal funds cycles and the declining full time jobs growth despite rate cuts and the resultant ramping debt growth.  Somehow, this doesn't look like a "mission accomplished" moment and perhaps even outright failure?

4 - What is the Fed's Role & Who Runs US Economic Policy?
The chart below juxtaposes the absence in the net full time jobs growth over the past 8 years with the near doubling in the Russell 3000 (representing 98% of all investable US equities) seemingly driven by a quadrupling of the Fed's balance sheet (driving among other things corporate borrowing used in corporate buybacks, dividends, and corporate officer payouts)?  It seems the Fed has determined to utilize trickle down policies pushing the wealth effect and growth of a small minorities wages.  What wage growth there is among the top 20% but more truly among the top 3 to 5%.  Unfortunately, the Fed isn't up for re-election or available for oversight now or, well, ever.  The Fed is simply effectively beyond reproach...our founding fathers greatest fears realized!

Perhaps now would be a great time for the Donald and Hillary to discuss the realities the next president will encounter...but this is simply not going to happen.  Immigration policy, the Fed's proposed rate hikes (plus potential balance sheet, the Fed's trickle down economics, and the role of the Fed in their potential Presidency's (who will serve who?).  Roundly, a discussion of the potential impact of these topics on the US economy, wages, and jobs is off limits?!?  Prepare accordingly when truth is off limits and the likely winner is the candidate willing to tell the lies the electorate most want to hear.


  1. End game of QE and NIRP? Left or right? Deflation or inflation? Dollar outlasting others and strengthening or falling due to worldwide discontent? How low in interest rates can we go? How high can CB balance sheets go? How high can credit growth go before there is no material impact on growth? Will taxes go up or down? Will entitlements decrease or increase? Will regulations on business creation increase or decrease?

    There are a ton of unknown questions. Good arguments on both sides of the question. Interested to read your take on a few of them.

    Always appreciate reading your analysis. Hope all is well!

  2. Great work, as always, Chris. You are like the guy who tried to out Bernie Madoff as a fraud years before but nobody would listen to. I think your previous references to Fed's actions as being in the name of "national security" are quite appropriate. I believe their goal is to manage the deflation of the economy and contraction of the population in as orderly a fashion as possible. ZIRP, NIRP and QE are ways in which the economic deflation/contraction can be mitigated, without large-scale civil unrest, until such time as the 80 million-strong voting and consuming block of the population known as the 'baby boomers' recedes (aka dies off) to a point where the larger economy will then be allowed to rebalance. It appears to be shaping up like an actuarial, cost/benefit analysis akin to those we've heard about with regards to vehicle recalls--will it cost the auto manufacturer more to recall 10 million vehicles and fix the defective part or is it cheaper to ignore the defect and pay out the likely civil settlements? It appears as if the Fed and CB's around the world have decided to go with the option that will least disrupt the status quo, which is to say, NIRP and QE will artificially/synthetically maintain the boomers' inflated asset values until such time as most of them cease to exist, when they will be unable to vote or care much about their house and 401K values losing 50%+ in value. Then the millennials can figure out to restructure the debt via some large scale, international bankruptcy intervention.

    1. But to whom with my generation sell these inflated assets to? It's an absolute ponzi scheme today and the only time that this could have been dealt with universally was in the Clinton administration and the beginning of Bush the Second. That opportunity has passed and now we're on our own. Act accordingly.

  3. Love this. It is a mystery to me how you can shout from the rooftops but no one seems to hear. People like to be lied to.

  4. ¨The Fed is simply effectively beyond reproach..¨

    No, the Fed is beyond control, answering only to itś constituants, the too-big-to fail-or-jail banking industry.


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