Tuesday, October 24, 2017

Economic Recovery - But for Whom?

How to judge the effectiveness of the economic recovery since 2008 is a challenge?  Many laud the Federal Reserve for its actions to stave off a possible depression.  The Federal Reserve's policies have certainly helped to promote new record valuations in financial assets across the spectrum.  These policies have resulted in a great rise in household net worth yet have created the fewest net new full time jobs and real income increases since WWII.  The chart below shows the discrepancy of fast rising household net worth (the combined valuation of all stock, real estate, bonds, etc.) as a percentage of long stagnant disposable income (what is left after paying taxes) and calls out the decelerating full time job creation.

But as Ray Dalio (head of Bridgewater Associates, one of the world's largest hedge funds) noted yesterday HERE, the recovery is only a recovery for the wealthy.  As the chart below from the Fed's own Survey of Consumer Finances shows, all the record growth in household net worth has gone to the top 20% of income earners since 2007 while the remainder have seen declining net worth.

One of the best and most unbiased of barometers to detail the impact of this lopsided recovery is the record low US fertility rate.  During each of the previous run-ups in HHNW, there was a parallel rise in the fertility rate as young adults felt more confident and capable of forming or expanding a family.  However, since 2007, the collapsing US fertility rate vs. surging HHNW puts the truth of who is recovering in stark contrast.

And below, again the US fertility rate but this time vs. all publicly traded US equities (represented by the Wilshire 5000 index).  Spikes in the fertility rate coincided with economic peaks in '91, '01, and '07.  Clearly, the current recovery is not a recovery for those of childbearing age but in fact an ongoing recession or outright depression.

The Federal Reserve is protecting, enabling, and rewarding a shrinking number simply for being asset holders while punishing the growing majority for having few or no assets...and ensuring the vast majority never will be asset owners as asset prices surge versus stagnant real wages.  This is all because a flawed economic model premised on perpetual population growth (turning into consumer growth) has now gone off the tracks as growth of the consumer class is collapsing.

The chart below shows annual yoy US 15+yr/old population growth broken down by age groups.  Dark green is growth in 15-24yr/olds, aqua blue 25-54yr/olds, yellow 55-64yr/olds, and red is the growth in 65+yr/olds.  The deceleration of growth among the 15-54yr/old segment in aqua blue from the late 1980's until growth ceased in 2007 should be pretty obvious.  However, both the quantity and quality of under 65yr/old population growth, particularly now among the 55-64yr/old cadre (in yellow) is thinning out...this is shifting all population growth coming from among the 65+ and 75+yr/old segments.  *BTW - Periodic spikes in chart are "one time" Census adjustments, not true population growth spikes.

The portion of the population growing is so important because average income and spending peak as the head of the household hits 45-54yrs/old and begins to really decelerate once the head of household hits 65yrs/old.  By the time the head reaches 75yr/olds, their average income and spending are halved and their willingness to use credit to amplify their consumption collapses (chart below).

Below, a close-up of the US 15+yr/old annual yoy population change since 2001.  Take a close look at the dynamics that led up to and culminated in the 2008 "great financial crisis" (first dashed circle).  Under 55yr/old population growth ceased, at least temporarily.  Compare that to the dynamics since '08 really intensifying now.  The unprecedented net outflow of illegal immigrants coupled with decades of low birth rates has the US staring at a long period of low or no growth (or potential depopulation) among the under 65yr/old US population.  I'm pretty sure the farce that is the present moon shot in asset prices (with central bank thumbs, elbows, and who knows what else helping to positively tip the scales) has everything to do with this.

Lastly, the collapse of the 20-65yr/old population growth across N. America (US/Canada) is only accelerating and most if not all population growth in the coming decades will be among the 65+yr/old population (chart below, data from US Census and UN).
While presidents and political parties have swept in and out of "power", the Fed hasn't changed a bit for decades.  The Fed's policies are protecting the wealthiest of Americans (though really it's more like the top 1% to 2% that are truly raking in the benefits).  Conversely, the Fed's policies are punishing the other 80% that hold minimal to no assets.  Unfortunately, an aging population will not allow America to grow her way out of this hole.  Only an outright, "revolutionary" change from the current paradigms and removal of "powers that be" can potentially save the bottom 80% from watching the American dream race ever further away.  But of course, better make sure any "new boss" isn't the same or even worse than the "old boss".