Tuesday, December 27, 2016

When This Bubble Pops...Don't Expect to See Markets Collapse (More Likely Free Markets Will Cease to Exist)

The Wilshire 5000 Total Market Index, or more simply the Wilshire 5000, is a market-capitalization-weighted index of the market value of all stocks actively traded in the US (it is highlighted in blue below against the 10yr Treasury yield, in red).  The acknowledged previous bubbles in '01 and '08 are highlighted as well as the current unacknowledged bubble.
But how can it be a bubble with unemployment at historically low levels?  That's interesting considering the US hasn't added a single job (net) among the 25-54yr/old US population since 2000 despite the growth of that population (chart below).  What should be obvious is that all full time job gains have come among the 55+yr/old population.  This means the foundation for a sound economy, the 25-54yr/old population, is suffering both a quantitative demise in jobs and a qualitative decline in earnings.
But GDP has grown, right?  Well, yes and no.  If you look at GDP in isolation (& assume 2.5% Q4 GDP growth), the economy in $ terms grew slightly less than during Bush's term but slightly more than Clinton's term.  Of course, when you add in federal debt incurred to achieve that growth...things don't look so rosy.
A simple chart below showing GDP growth minus the growth in federal debt, by president.  When you consider the new debt is counted as part of the GDP growth, on a net basis, economic activity is collapsing absent the creation of massive new debt.
The US 0-64yr/old change in population / demographics against federal debt and GDP (chart below, in 5yr increments).  The huge deceleration in 0-64yr old population growth is the cause of declining demand offset with rate cuts and surging federal debt...but the population growth only continues decelerating from here.
So What's Really Going On?
The reason this present bubble is not like '00 or '08 is plain in the chart below...the foundation of economic growth, a growing core population among the nations with all the income, savings, and access to credit ceases growing in 2017.  This is 20 million fewer than were added in 2001 and 10 million fewer than 2008.  If federal governments and central banks allowed markets to work now with net declining demand, the result would be traumatic.  Why?  As the chart below highlights, the combined 35 OECD nations plus China, Brazil, and Russia adult populations cease growing in 2017.  What was a flood of new 15-64yr/old population growth translating into a flood of new workers & new consumers (as many as 29 million more adults in 1981 and 26 million as recently as 2003)...is now done growing.  This population, after flatlining for the next 5 years, will decline for the remainder of our lives.
This is not news to the Fed.  Consider the Federal Reserves FFR % peaked coincident with the peak growth in this population.  The 35 years of decelerating population growth and 35 years of interest rate cuts were no coincidence.  The lower rates were intended to incent the decelerating growth among the population to incur greater indebtedness, artificially maintaining GDP growth rates.

If you prefer to see the change in population growth by %, instead of persons (chart below).Growth in oil consumption is a good proxy for general economic growth.  The chart below shows the decline among the OECD nations since 2000 and the anticipated continued declines through 2030 among the OECD.  The surprise should be the anticipated growth in oil consumption among China, Russia, and Brazil.  How these nations with a significantly contracting (net) core population coupled with rising fuel standards and energy innovation will grow their consumption (either domestically or internationally into a declining base of importers) is truly a mystery.Finally, Japan was able to remain afloat via exports for decades due to a robust export market but this avenue is no longer viable as China's core population turns negative in 2017.  The chart below shows the 0-64yr/old population growth among the OECD+CRB and when nations 0-64yr/old domestic populations began contracting.
The above data is simple fact and best available estimates.  The data point to a demographic and population growth deceleration which has been underway for decades and has been offset via interest rate cuts and massive growth in debt.  However, now the global core population with all the income, savings, and access to credit ends decelerating growth and begins outright contracting... and will contract for the rest of our lives.  Fewer homebuyers, fewer consumers, coupled with contracting jobs as automation and innovation replace millions of low skill jobs around the world.

I personally don't expect a market based crash or collapse...the central banks and federal governments have already made it clear they no longer believe in free markets (ie, allowing transactions between willing & buyers/sellers that would result in collapsing asset prices).  Instead, I believe they will literally do whatever they deem necessary to maintain the incredibly unsustainable present.  Anticipating that they will move from partial market support to total support (or outright market closures) is not hard to see.  Of course, it's nearly impossible to imagine how this central control doesn't end terribly but all I can do at this point is hope, against all odds, for the best.