Sunday, January 14, 2018

"We're gonna need a bigger boat..."

In the movie Jaws, upon seeing the massive size of the shark and inadequacy of the boat they have chosen to hunt the monster, one of the great understated lines of cinema is uttered, "we're gonna need a bigger boat".   This line has become as ubiquitous as "broken arrow" or "FUBAR" to detail impossible tasks or something broken beyond repair.  I think any of these is appropriate to keep in mind if you take a gander at the charts below.

Only two charts and four variables (plus a bonus chart):
  1. Annual change in the 0-55yr/old global population, excluding Africa (millions persons annually)
    1. Why excluding Africa?  Explained HERE.
    2. The chart below shows the UN medium estimate variant through 2035...which is likely far too optimistic about future birth rates...reality is likely somewhat less population growth than shown.
  2. Wilshire 5000 ($'s)
    1. The Wilshire represents all publicly traded US stocks and has grown in excess of 7% compounded annually since 1971.
    2. The estimate through 2035 maintains that same rate of compounded growth. 
    3. If pensions are to have any hope of making good on their promised payouts, they will need this 7% (and better) to make up for their colossal underfunding and underperforming bond portfolios.
  3. Global Debt ($'s)
    1. While different nations or regions have led the rise in global debt during different periods, the rate has been roughly consistent to that of the Wilshire, rising about 7% compounded annually.
  4. Federal Funds Rate (%)
    1. The Federal Reserve set rate of overnight lending to the largest of banks that ultimately attempts to set the foundation for all longer duration interest rates across the yield curve.
    2. The Fed believes this rate follows inflation but in truth, it simply mimics the change in the global child bearing population and the changing aggregate demand they represent (detailed HERE).  Thus Fed attempts to artificially create inflation are contrary to the natural state of deflation underway.  The Fed and CB actions will only continue to accelerate the growing imbalance between economic activity and asset prices likely setting up a calamity that will challenge the current financial, economic, and social order.
A quick peak at all four together.  Decelerating annual population growth and interest rates and accelerating debt and asset valuations.
If you'd like to see how this looks but from a US income versus asset valuation perspective...check the chart below.  The chart shows household net worth versus disposable income, as a %.  We have gone where no man has gone before.  If a decline were to start, historically speaking, a 20% to 30% decline in household net worth should be expected.  I expect nothing of the sort and fully believe free markets ceased to exist long ago...and the PTB will only further the disconnect between economic reality and asset prices.

The chart below has the same variables as the first chart but extends the current trends a mere seventeen years into the future.  The chart should overjoy asset holders and bring tears to whomever it is that is on the hook for all that debt (detailed HERE).  It is the imminent moment when assets and debt, which have been compounded annually for decades, plow into a global population of under 55 year olds (excluding Africa) that will almost surely be declining.  Multiplying components of growth by zero (let alone a negative number) will not be a positive experience.
The shrinking club of those in ownership of assets truly "will need a bigger boat(s)" to haul around all their increased wealth...and the rest will more likely need an ark to figure out how to shelter themselves from that debt deluge on a shrinking population of potential consumers, workers, and tax payers.  This imminent moment is likely worth a bit more consideration.