Monday, May 8, 2017

The Great Misconception of a Return to "Normal"

Since 2009, there has been ongoing discussion of the size & composition of major central bank balance sheets (I'm focusing on the Federal Reserve Bank, European Central Bank, and the Bank of Japan) but little discussion of why these institutions felt (and continue to feel) compelled to "buy" assets.  The chart below highlights the ongoing collective explosion of these bank "assets" since 2009 after a previous period of relative stability.
These institutions clearly have the capability and willingness to digitally conjure "money" from nothing and have felt compelled to remove over $10 trillion worth of assets from the markets since 2009.  This swap of illiquid assets for liquid cash had (and continues to have) the effect of squeezing the prices of the remaining assets higher (more money chasing fewer assets=price appreciation).

A prime example of that squeeze, the US stock market total valuation (represented by the Wilshire 5000, below) is $10 trillion higher than the "bubble" peak of 2008...and $11 trillion higher than the 2001 "bubble" peak.  Likewise, US federal debt since 2008 has increased by...you guessed it, $10 trillion.
The narrative seems to be that 2009 was a one off event and that the central banks role was and still is to "stabilize" the situation until things "normalize".


But right there...that idea that 2009 was a "one-off" or "abnormal" couldn't be more wrong.  So what is "normal" growth, at least from a consumption standpoint?  Normal is never the same twice...it is ever changing and must be constantly rediscovered.  To determine "normal" growth in consumption, all we need do is figure the change in the quantity of consumers (annual population growth) and the quality of those consumers (their earnings, savings, and utilization of credit).  The chart below details the ever changing "normal" that is the annual change in the under 65yr/old global population broken down by wealthy consuming nations (blue line) and the rest of the (generally poor) world (red line).  The natural rate of growth in consumption has been declining ever since 1988 (persistently less growth in the population on a year over year basis)...but central banks and central governments have substituted interest rate cuts and un-repayable debt to maintain an unnaturally high consumption growth rate (those wondering what global population trends look like...HERE or population trends excluding Africa HERE).
Consider, the annual change of the 0-64yr/old global population (black columns) peaked at 85 million a year in 1988.  Since then, annual population growth among the under 65 set has fallen 33% to 57 million.  HOWEVER, the under 65yr/old population growth among the 35 OECD nations plus China, Brazil, & Russia (again, blue line) has collapsed by 95% from peak growth in 1972 to just 1.6 million this year.  The rest of the worlds 0-64yr/old population growth (primarily in Africa) has likewise peaked but is now just beginning it's deceleration (red line).


But the OECD/China/Russia/Brazil total combined population will grow by nearly 16 million this year...and as the chart below highlights, the growth will be almost entirely among the 65+yr/olds living longer than their predecessors.  In fact, from 2018 onward, all population growth among these nations will be the 65+yr/olds refusing to die versus depopulation among the under 65yr old populations.
And because so many believe the population changes are estimates of something projected that may or may not take place in the future...nah.  The chart below shows total births per five year periods for the combined OECD nations plus China, Russia, & Brazil.  The total number of births peaked from 1965 to 1970 at nearly 265 million births (ave. of 53 million annually)​ and have been steadily declining since, now down to 183 million (or ave. of 37 million annually)​.  In fact the UN medium estimate for births from 2015 through 2050 looks awfully optimistic (from a growth standpoint).  Regardless the larger total population and immigration, these nations continue to produce fewer children (aka, consumers).

Why the focus on the OECD+CRB?  They collectively consume over 70% of all global oil, even a greater % of imports, and generally are the nexus of global consumer growth.  This is the population with all the earnings, savings, and access to credit...and they will be shrinking significantly for decades to come.  In short, there will be fewer of them, appreciation in real wages has long been stagnant and isn't likely to support higher consumption, and ZIRP inspired interest rates can generally go only marginally lower.  This isn't even getting into the innovation, automation, and technological advancements that are replacing millions of jobs among these nations.


Another example of this normative thinking comes from the EIA (Energy Information Administration).  The chart below shows the combined change in adult populations (15-64yr/olds) per five years for the OECD, China, Russia, & Brazil vs. the global change in oil consumption.  Not shockingly, from '85 through '05...the synergy in the growth of the combined adult populations and growth in oil consumption.  The shock should be the "normative" thinking offered by the EIA forward looking estimates that whilst depopulation sets in among the global population that consumes over 70% of all oil that oil consumption will continue to rise...as if nothing had happened (not to mention fuel conserving technological advancements, growth among cleaner alternative energy, etc. etc.).  Full details HERE.
So let's again consider the "normal" growth the central banks are anticipating vs. the central banks balance sheets.  The chart below should be all you ever need to know why central banks are all in and will only continue to double down on a losing hand.  Plainly, growth is all that matters in our current system and the consumer base responsible for this growing consumption will be shrinking indefinitely (again under 65yr/old growth among these nations peaked nearly 5 decades ago & growth turns to demand destroying depopulation for the indefinite future).  All the decades of interest rate cuts and resultant debt since 1981 were only a substitute to artificially boost consumption of the waning annual growth of the consuming population.  The only thing you can count on presently are central bank balance sheets continuing to rocket higher in a vain attempt to maintain a false paradigm...one that assumes "normal" growth is just around the corner.
The misconception is that "normal" demand will return and allow central banks to cease purchasing assets and allow these quasi banks to sell these assets back to the market.  In our lifetimes, there will be no period of like growth in consumer demand than we saw over the past half century.  In fact, the declining quantity & quality of the combined populace of the OECD, China, Brazil, & Russia will likely negatively offset the meager consumption growth from among the rest of the world.  Simply put, the days of consumption driven economic growth are at an end...and asset appreciation is now entirely a collusion of federal governments and central banks to never again allow a free and unfettered market to determine asset prices.