Friday, June 9, 2017

A Half Century of Bubbles...Because the Fed Doesn't Believe in "Free Markets"

Asset prices have risen much faster than disposable income...and a mean reversion is coming sooner than later.  In regards to disposable income, about as simple as it gets; how much money do Americans have left to drive consumption (the economy) &/or savings after they pay Uncle Sam their taxes.  So if we take the value of all assets in America (record levels of Household Net Worth, as provided by the Federal Reserve) as a % of US disposable income...we get the bubbly chart below.

But why the bubbles?  Did bankers get greedier?  Did the Fed and central banks become more reckless?  Ever so simply, population growth began decelerating and the Fed wasn't willing to accept the decelerating consumer growth the "market" was capable of providing.  The basis for the expanding pie began decelerating (and is now set to cease entirely)...but the Fed didn't want to live with smaller slices.  The Federal Reserve chose to extend growth rates beyond what was otherwise fundamentally possible or sustainable.  The Fed wanted the same rate of growth regardless the implications.  Via decades of interest rate cuts, dubious banking rules changes, and ultimately directly monetizing assets...the Fed achieved the asset appreciation it sought.  And if you understand the Fed hasn't believed in a "free market" for decades (if ever?), then you'll understand why the Fed really doesn't believe in a "free market" outcome now.

The chart below shows the US 25-54yr/old population change (yoy on quarterly basis) against the same data as above.  Population growth, which drives somewhere from 50% to 75% of all GDP growth, began decelerating in 1986, turned negative in 2008, bounced but has again fallen to zero as of Q1 2017 (rationale for the deceleration is discussed HERE).

And if we broaden out to the annual growth of the much larger 15-64yr/old US population...its growth has decelerated to perhaps the slowest in the last century.  And against the lack of growth, household net worth as a % of disposable income hits a new record high.  The Fed is using its policy "tools" to falsely engineer financially what is not there fundamentally.

And if we broaden out to view the 35 OECD nations (US, Canada, Mexico, Chile, most of Europe, Israel, Japan, S. Korea, Australia, New Zealand) plus China, Brazil, Russia...the picture is the same.  These nations consume over 70% of all oil globally and are responsible for importing perhaps 80% of all global exports.  They drive the global growth of the economy.  The chart below highlights the annual 0-64yr/old population growth of these combined nations peaking in 1968 and annual growth decelerating since.  The chart also calls out when the notable nations 0-64yr/old population growth turned negative...and the impending declines of China (and very likely the US) in 2018.  Yes, as of 2018 the global 0-64yr/old population with all the income, savings, and access to credit begins declining.  This is why central bankers have gone wild and about to go far wilder...pushing asset valuations even further into the (fundamentally unsupported) stratosphere.  The Fed and central bankers have feared and subverted the slowing "free market" for decades and now are rightly freaked out by what would ensue if a "free market" were allowed to set prices.And below, the same chart of annual 0-64yr/old population change as above but from 1970 of the OECD+CRB vs. the primary central banks balance sheets.  As population growth turns to outright depopulation, will there be any asset that central bankers won't ultimately buy?
If you aren't afraid of what comes next as the sources of nearly all global growth go in reverse, I don't think you "get it".  This is why I think something is amiss with the Treasury market (HERE), the stock market (HERE), the oil market (HERE)...and those wondering if those markets are skewed, what about gold or silver (HERE and HERE).

Last chance, the chart below shows global population growth per five year periods according to age groupings (0-40, 40-65, 65+), just excluding Africa (rationale explained HERE).  Growth among the under 40yr/old global population is at an end, excluding Africa, and is moving to outright depopulation (the global childbearing population excluding Africa is going into outright decline and the rate of fertility among them is collapsing...think about what that means for a moment).  Meanwhile, nearly all population "growth" moves to the 65+yr/old global population living decades longer than the generation before them.
For those looking to see why global population growth is slowing rapidly...HERE.  And why it won't help us grow...HERE.  And bringing it all together...HERE.