Sunday, February 26, 2017

Contemplations for a Sunday (unless you can't get around to it til Monday)

Some simple themes today...

Population growth, economic growth, and resultant energy consumption are inexorably slowing.  The Federal Reserve knows it can not stop this and is simply slowing the inevitable with interest rate cuts to incent greater consumption via skyrocketing credit/debt (particularly government debt....debt that is undertaken with no intent of ever repaying it and is really just pure monetization).

The chart below highlights that employment among 25-54yr/olds (orange line representing the foundation of US consumption) ceased growing in '00.  This makes sense as this population likewise ceased growing at the same time (details below).  Once employment among this group ceased growing, total US energy consumption (blue line) also ceased growing, and accelerating debt (red line) was substituted to maintain growth thanks to nearly 40 years of interest rate cuts (black line).  The chart also highlights the radically different changes, per period, in debt/jobs/energy consumption.
The impact of the declining rates and rising debt can be seen in the Wilshire 5000 (chart below).  The Wilshire (blue columns) represents all publicly traded US equities moving upward with surging US federal debt (red line) but inverse to US total energy consumption (yellow line), jobs creation, and economic activity since '00.
The driver of the Fed's federal funds rate was and continues to be the rate of population growth and the growing demand this population growth represents (chart below).  The adult population growth rate (blue columns w/ 2 period moving average blue line) peaked in '79 and the federal funds rate (black line) peaked in '80...rates plus population growth have been decelerating/declining together since against surging federal debt (red line).
The chart below showing total population growth (black columns) broken out by the 0-64yr/old population growth (red line) vs. 65+yr/old growth (blue line).  The demographic and population situation only continues to get worse.  In fact, it's highly unlikely the 0-64yr/old population growth will hit the already low estimates from 2017-->2030 due to the ongoing decline in birth rates and slowing immigration.
What about employment?  Chart below shows total full time jobs growth (blue columns) has slowed to a trickle (net basis from peak to peak) and total energy consumption growth (yellow line) likewise decelerating, peaking in '05, and now declining.  Federal funds rate moving inversely (black line), all the way to zero.  Finally, Public US Federal debt (red line, w/out Intra-governmental holdings included) skyrocketing.
All right, perhaps a different way of looking at this is net new full time jobs per period vs. new houses and new vehicles (generally hard to be a home owner without a full time, well apparently it's a far lower standard).
  • 1971-85 --> 1.4 net new jobs per new home, 0.17 new job per new car
  • 1986-00 --> 1.5 net new jobs per new home, 0.11 new job per new car
  • 2001-16 --> 0.7 net new jobs per new home, 0.04 new job per new car
Same variables below as above but breaking them down into two even durations over the most recent period...those who thought '00-->'08 was a bubble, perhaps you need to recalibrate your bubble meter for what is presently happening.

  • 1999-07 --> 1 new job per new home, 0.08 net new jobs per new car
  • 2008-16 --> 0.5 new job per new home, 0.02 net new jobs per new car

  • US Core Population
    I have made the case previously that the deceleration of the core  (25-54yr/old) US population was the cause of the '08 housing collapse and will reiterate this here.  First, to understand the importance of this segment of the population, the chart below shows the near 1:1 correlation of total US energy consumption to the size and employment of this group.
    For the charts below, I've added the population growth among the core population alongside the same variables as above.  Unfortunately, the data set for 25-54yr/old full time employees is fairly short, only going back to 2000 (btw- at year end 2016, there were essentially the same number of 25-54yr/old full time employees as there were in 2000 and over a million fewer than the peak in 2007).  Anyway, I'm using the far lower standard of employment (containing both full and part time workers) to see the longer term changes in the 25-54yr/old segment.  It's actually god-awful, economically speaking.

  • 1971-85 --> 1.5 new jobs per new home...0.18 per new car
  • 1986-00 --> 1.5 new jobs per new home, 0.11 per new car
  • 2001-16 --> 0.0 new jobs per new home, 0.0 per new car

  • 1999-07 --> 0.4 new jobs per new home, 0.04 per new car
  • 2008-16 --> <-0> new jobs per new home, <-0> per new carBack to my point that the slowing population growth and slowing employment among the core was the fuse that ignited the NINJA fueled subprime housing's pretty plain to see from 2000 onward, the system was still building homes but they'd run out of new people to sell them they collapsed the standards, did away with down payments, did away with credit worthiness, etc.  Finally, as you probably know, the subprime affair didn't turn out too well.  Luckily, the ever wise Federal Reserve had another plan to avoid a free market collapse in prices...crush the bond market (yields to essentially zero) to flush out all those nearing and in retirement and direct their trillions into rental real estate.  So retirees and foreigners (particularly Chinese, looking for a safe haven for all their newly minted trillions outside of China) saved the day for American real estate.

  • But this plan is even worse than the last, as demographics and population growth are only getting worse.  As this bubble blows (and it's high time as rents as a % of renters incomes are completely ludicrous and at unsustainable levels in nearly all bubble epicenters) retirees and investors are about to learn about the downside of being a landlord.  Property prices and rents are both set to decline, likely wiping out decades of savings (equity) and rental income in one fell sweep.  Short of the government directly nationalizing swaths of the housing market, financial and economic convulsions are dead ahead as housing prices collapse across America (and the RE collapse across rural America is likely to be total and complete while the urban bubble epicenters may rise once more...but more on that another day).  So many hard working, generally good people who tried to play by the rules are set to lose so much.  I only hope I'm terribly wrong and some better outcome awaits us...but I don't think so.

    The last chart shows the flood of federal debt apportioned per the stagnant, nearly 100 million US 25-54yr/old employees (red columns) vs. the non-growth in wages shown by the real median household income (green line).  America played credit card roulette and 25-54yr/olds, you lost so get ready, because the bill is coming and it's getting outrageously large...This article was US-centric...but the same dynamics are at work the world over.   Some more globally focused articles...HERE.  Or HERE.  Or HERE.