This week, the Federal Reserve added another $6 billion to their Treasury holdings and maintained their MBS holdings.
Interestingly, Bank Excess Reserves held at the Federal Reserve continue to tumble, down by $25 billion this week.unmatched by balance sheet reductions.
Since QE ended, Bank Excess Reserves have fallen twice that of combined Fed Treasury and MBS holdings.this difference is direct monetization.
But all of these are just symptoms of a disease that is completely beyond central bankers; declining and decelerating growth among consumer populations that is incurable (but in truth, the disease is not the maturation of the world but our inability to accept it).
An update on the Fed's balance sheet (Treasuries and MBS plus bank excess reserves held at the Federal Reserve. Charted below from 2008 through this week, are Fed held Treasuries (blue line), Fed held MBS (red line), and Bank Excess Reserves held at the Federal Reserve (green line). As noted below, since QE ended, bank excess reserves held at the Fed have declined more than double the decline in the Fed's assets.
Federal Reserve held Treasuries (blue line) versus weekly change (black column) since September of 2017. The deceleration of QT, the pivot, and restart of Treasury purchasing is easy to see.
Federal Reserve held MBS (mortgage backed securities, red line) versus weekly change (black column) since September of 2017. The Fed has communicated that it will continue selling off MBS while purchasing Treasuries.
Banks excess reserves (green line) versus weekly change (black columns), since 2017. Will the bank excess reserves held at the Federal Reserve continue declining now that Quantitative Tightening is over? If so, that would be an ongoing flow of hot money.
At the onset of QE, there was an initial mismatch of growth in the Fed's balance sheet versus bank excess reserves held at the Federal Reserve of about $800 billion. This mismatch remained from '08 to the end of QE in late 2014. But since the end of QE, the excess reserves have fallen $700+ billion more than the Fed's balance sheet. These excess reserves have left the Federal Reserve and returned to banks as cash. If banks still do what banks do, this $700 billion since the end of QE would be levered anywhere from 2x to 10x in either loans or some sort of levered purchasing. This is effectively $1.4 to $7 trillion in conjured money flowing into the economy and/or (more likely) assets. The asset melt-up since the end of QE should not be a surprise.
A constant melt-up in asset prices flowing from ongoing monetization entering banks hands. And if the Fed continues cutting rates (as I suspect they will), the lower IEOR (interest paid on excess reserves) should continue to push the remaining $1.3 trillion excess reserves out of the Fed and into the market. So, the worse things get, the higher asset prices will go!?!
As long as this continues, it is hard to see how asset prices can do much but push higher...regardless the economy or main street or trade wars or whatever. But all this is just a symptom of a incurable disease. To see the disease, we have to look at the macro or macro...
The Disease...A Finite Population of Consumers Versus Economic / Financial System Premised on Infinite Growth
In our current system, the goal is growth. Growth on a quarter over quarter and year over year basis. The absence of growth is recession or depression. And this growth requires ever greater consumption (not just production) and consumption at prices that make the production of these things possible and profitable. The current economic, political, and social systems are dependent on this growth. But what if the basis of this growth has no basis? Or said more simply, the growth of the under 65 year old populations that does nearly all the work and nearly all the consumption are in secular decline.
The 0-65 year old population are the number by which credit and wage gains are multiplied...but when you have a negative numerator, funny things happen. And the decline is only gaining speed as the downward momentum is taking over.
For example, when trying to determine potential growth in consumption (not production, but consumption) the first number is how many more people will there be than the prior year...then how many more are employed, how much more did wages rise than real inflation, how much more debt did they undertake to achieve this consumption? For decades, centuries, and really millennia, that first number has been a significantly positive digit. But looking at all the charts below, annual under 65 year old population growth has massively decelerated and outright turned to decline among the nations that consume 75% of global energy (and likewise, global exports).
In 2019, global under 65 year old population change is as follows versus each regions total global energy consumption...
East Asia -0.2% (-3.5 million)...31% of global consumption
Europe / N. America -0.1% (-1.2 million)...43% of global consumption
Central / South America +0.6% (+3.7 million)...5% of global consumption
Asia (excluding East Asia) +0.9% (+27 million)...17% of global consumption
Africa +2.4% (+31 million)...4% of global consumption
Why the focus on under 65 year-olds? Income, spending, and labor force participation are a bell curve. Household income and expenditures more than double from early adulthood to peak earning, spending, labor force participation from age 45 to 54 years-old. From there, everything falls off and by age 75+, income and spending are nearly back to early adulthood levels but labor force participation falls to just 8%. The chart below details this in the US, and although the dollar amounts and participation rates vary, the dynamics are similar globally. (BTW - easiest to think of the 55 to 64 year-olds as the go-go retirement years, the 65-74 year-olds as the slow-go retirement years, and the 75+ year-olds entering the no-go retirement years...with commensurate spending).
East Asia (China, Japan, S+N Korea, Taiwan, Mongolia) has a total population of 1.67 billion and consumes about 31% of total global energy. In 2016, the under 65 year old population began declining and will decline by 0.2% in 2019. Through 2050, the East Asia under 65 year old population will continue shrinking by as much as 0.8% annually and is projected to decline by 280 million (almost a 20% decline in under 65 year-olds over the next three decades). Meanwhile 65+ year old growth (a net liability and responsibility of the under 65 year old population) will continue growing through 2050 and is projected to increase by 225 million (a 105% increase).
East Asia 65+ elderly population is anticipated to grow by 225 million through 2050, but nearly 170 million of that growth is anticipated to be among the 75+ population. Chart below is annual change (in millions) of "young-old" versus "old-old".
Europe / N. America
Asia's primary customers for their exports are Europe and N. America with a combined population of 1.1 billion (consuming 43% of global energy). The combined Europe / N. America under 65 year old population began declining in 2014 and will decline 0.1% in 2019 while the 65+ year old population will grow 0.4%. Europe / N. America's population trends will mirror East Asia's with persistent shrinkage of the under 65 year old population through 2050 (almost a decline of 75 million over the next three decades...and that assumes continued migrant inflows) versus persistent growth of the 65+ year old population (nearly 100 million more by 2050).
However, of the annual elderly population growth among Europe / N. America, over 75 million will be 75+ versus "just" 20 million more 65 to 75 year-olds. Population growth among the "no-go" (low consumption) older retirees will be the dominant feature among the consumer nations of the world through 2050.
Central / South America (plus Caribbean)
As for the 670 million who inhabit the remainder of the Western hemisphere (who consume 5% of global energy), growth of the under 65 year old population is rapidly decelerating and anticipated to end before 2040. Growth of the 65+ year-olds is anticipated to mildly accelerate.
Asia (excluding East Asia)
As for the nearly 3 billion inhabiting the remainder of Asia who consume 17% of global energy (excluding East Asia), the annual under 65 year-old population growth has decelerated from a 2.4% annual peak in 1982 to 0.9% in 2019. Annual under 65 year old growth is anticipated to turn negative prior to 2050 and 65+ year old annual growth to gently move higher.
Africa with a population of 1.3 billion consumes just 4% of total global energy (and likewise global exports). Because Africa is so relatively poor, consumes relatively so little, and provides relatively few migrants outside of Africa...the population growth there is non-consequential from a global economic standpoint. Economically speaking; the world impacts Africa, Africa doesn't impact the world.
When population growth among the consumer nations has turned to population decline, the consumers of 75% of total global energy (and likewise global exports) are turning to ZIRP, NIRP, and unrepayable debt loads to maintain an unreal, synthetically achieved rate of growth. As population growth (and organic demand growth) is either declining or decelerating everywhere, why would economic activity be expected to rise? Alas, the weaker the basis of economic activity, the greater the impetus to push interest rates into negative territory with the intent of mispricing bonds and asset prices in general. Bad is the new good and we will only get worse so asset prices will only get better...until bad is really bad.
All population data via UN World Population Prospects 2019 and Fed Treasury Holdings via St. Louis FRED.
The age segments that make up the working age population are at levels typically associated with full employment.
The primary source of workforce slack over the past 50 years, females, are now experiencing declining percentages of employment.
With minimal working age population growth, full employment, no further female labor force slack; there is little further potential for labor force growth or resultant economic growth.
The BLS employment data makes a very simple statistic into an enigma wrapped in a question mark. Being the simpleton I am, I'd prefer to see only two variables...the populations versus those employed. No qualms about who is or isn't looking for work...no unemployed or not in labor force statistics.
This article will simply show the quantity of three separate age groupings divided by employees per each age grouping. First, the young adult population versus employment among them (15 to 24 year-olds), then the same for the core (25 to 54 year-olds), and finishing up with those dreaming of retirement (55 to 64 year-olds).
Percentage of Total Populations Employed
The percentage of young adults employed (black line, below) peaks in 1973 and has been in secular decline since. The employed percentage of the core population (blue line) rose until peaking in 2000 but has never regained that peak since. The percentage of 55 to 64 year-olds (tan line) has essentially gone full circle, declining from the early '60's to a low in the mid '80's but rising since, presently at an all time high.
15 to 24 Year-Olds
The young adult population (tan line) and employed among them (blue line), rose sharply from the '50's until 1980, chart below. Since 1980, the young adult population has been flat for four decades but those employed among them has continued to secularly decline.
But the young adult employed population of males versus females has shifted dramatically
The percentage of employed young adult males peaked in 1979 and has been declining since, now down to just 52%.
The percentage of employed young adult females was roughly half that of males in the early '60's but peaked in 1989 and has now come to match the male population.
The total quantity and percentage of both young adult males and females continue to move lower during each economic cycle since the late '80's.
25 to 54 Year Olds
Shifting to the core population (25 to 54 year olds) that drives the economy. The core population, and employed among them, rose from the '60's until peaking in 2007...and since then the core population has risen less than a half million while those employed among them has fallen almost a half million.
Again, the core employed population of males versus females has shifted dramatically.
The percentage of core males employed peaked in the late '60's and has been declining since, now down to 86%.
The percentage of core females employed was less than half that of males in the early '60's but played catch-up for four decades, peaking in 2000.
Since 2000, the percentage of males and females employed has continued declining
The total quantity and percentage of both young adult males and females continue to move lower during each economic cycle since the late '80's.
55 to 64 Year Olds
From the '60's until mid '90's, the "soon to be retired" population was essentially flat and employment among them was even flatter. However, since 1993, both the 55 to 64 year old population and employment among them has more than doubled.
Again, the "soon to be retired" employed population of males versus females has shifted dramatically.
The percentage of 55 to 64 males employed peaked in the '60's, declined until 1994, but has been rising since, now down up to 70%.
The percentage of 55 to 64 females employed was about one third that of males in the early '60's but played catch-up for five decades, peaking in 2008.
Since 2008, the percentage of employed males has continued gently rising while the percentage of females has yet to regain the '08 peak.
Working Age Population Growth vs. Age Group Employment %'s
Below, from 1970 through 2009, the annual working age (15 to 64 year old) population growth (black line) vacillated from from +2.7 million to a low of 1.2 million. However, since 2009, working age population growth has decelerated to just a half million. This means once the millions of unemployed, thanks to the last great financial crisis, were re-employed there is only a maximum monthly increase of 40,000 new potential employees entering the workforce.
But the chart below shows the annual 15 to 64 year old population growth (black line) from 2019 through 2030 only continues decelerating...hitting a projected low in 2028 adding just 200 thousand annually (a maximum of just 17,000 potential new employees monthly). And this is premised on high immigration rates, absent this, the annual working age population change will be negative.
The point is, with minimal population growth among the working age population over the next decade, full employment among the working age population by age segments and gender, there is minimal potential for further employment gains or resultant economic growth. Further interest rate cuts and QE from the Federal Reserve plus federal government deficit spending are incapable of creating more potential persons to enter the workforce. While these policies may (or may not, who really knows?) be capable of avoiding a fall in asset prices...real consumer based growth will be dependent on ever fewer consuming ever more...and sooner or later, there is a limit.
Elon Musk continues to suggest a population collapse is in store within a few decades time...and he is 110% correct if you make two caveats...1) focus on the young and potential child bearing populations and 2) look at the world excluding a single continent...Africa.
To begin, note the collapsing populations of young (0 to 15 years old) and childbearing populations (15 to 40 years old) across broad swaths of the greatest consumer nations on earth. Absent broad die-offs from war, pandemics, famine, etc.; population collapses begin from the decline of births that eventually work their way into declining childbearing populations.
East Asia (China, Japan, N/S Korea, Taiwan, Mongolia) childbearing population (blue line) and young population (green line), below.
Young, peaked in 1976 - declined by 138 million (32% decline) so far, projected to decline 259 million (61% decline) by 2100. This is based on the assumption of rising fertility rates...if they remain flat or fall further, the reality is likely to be far lower!?!
Childbearing peaked in 2005, declined by 96 million (14% decline) so far, projected to decline 357 million (54% decline) by 2100.
Europe (including Russia and Eastern Europe) childbearing population (blue line) and young population (green line), below.
Young peaked in 1965, declined by 48 million (29% decline) so far, projected to decline 78 million (46% decline) by 2100. Again, this decline is based on the assumption that fertility rates will do the exact opposite of the current reality and suddenly rise?!? If not, far lower births and resultant populations should be expected.
Childbearing peaked in 1989, declined by 41 million (15% decline) so far, projected to decline 105 million (39% decline) by 2100.
Latin America plus Caribbean (everything in Western Hemisphere but US/Canada) childbearing population (blue line) and young population (green line), below.
Young peaked in 2001, declined by 11 million (7% decline) so far, projected to decline by 74 million (44% decline) by 2100.
Childbearing set to peak in 2025 and projected to decline by 87 million (33% decline) by 2100.
North America (US/Canada) childbearing population (blue line) and young population (green line), below.
Young peaked in 1965, zero growth since '65, projected to grow by 9 million (14% increase) by 2100. I have detailed repeatedly why given current fertility rates, trends, and immigration patterns, this growth is highly unlikely and continued flat to outright declines should be the base case. Since 2007, US fertility rates have been in freefall and in 2018, the US hit a record low fertility rate of 1.72 and is still falling fast...with Canada even lower at 1.56. There is no sign nor logical rationale to anticipate a rise in fertility rates in North America.
Childbearing projected to grow 13 million (11% increase) by 2100. Again, this is premised on unrealistically high fertility rates and immigration rates above the current reality...this is also highly unlikely and near zero growth should be the base case.
ASIA (excluding East Asia) childbearing population (blue line) and young population (green line), below.
Young peaked in 2018, projected to decline 275 million (34% decline) by 2100. This is India, Pakistan, Vietnam, Thailand, Indonesia, etc. plus all of Western Asia (Iraq, Iran, Turkey, Saudi Arabia, etc.).
Childbearing projected to peak in 2038 and decline by 240 million (20% decrease) by 2100.
Africa childbearing population (blue line) and young population (green line), below.
Young projected to rise 400 million and peak around 2090!?!
Childbearing population projected to grow nearly 1 billion through 2100.
Since 1980, Africa has grown from 11% to 17% of the worlds total population
Since 1980, Africa has grown from 17% to 30% of annual global births
In 1989, annual global births (excluding Africa) peaked and have declined 15% since (and still falling)
The 3+ decade decline in global births (excluding Africa) has nearly (but not quite) been offset by increasing births in Africa
By 2023, the worlds childbearing population (excluding Africa) will be in indefinite decline...and only Africa's childbearing population will continue growing
A declining childbearing population (excluding Africa) with deeply negative fertility rates (excluding Africa) is highly likely to see births fall at an accelerating rate (far more than the gradual decline predicted by the UN)
However, over the past five decades, African income per capita has risen just 240% compared to Upper Middle income nations (China, Brazil, Russia, etc.) rising 950% and high income nations 410%...Africa is clearly losing ground
By the best proxy for true economic activity, energy consumption, suggests Africa has grown from just 2.4% to 3.6% of global energy consumption...and the future there is not brightening.
Africa's economic growth is dependent on global growth (x-Africa)...but with declining global markets for exports and significant overcapacity, Africa's export driven growth potential is very low
Lastly, Africa (particularly Sub-Saharan Africa where most of the population growth is occurring) has one of the lowest emigration rates of any poor region.
By 2030, Africa will be 22% of the worlds population, be 200% of annual growth among the childbearing population, and be responsible for 38% of global births...but still just estimated to be 4.6% of global energy consumption.
In short, when excluding Africa, births have already collapsed and due to the imminent decline in childbearing population, far larger declines (also known as collapse) are imminent
That is to say, Africa is all the growth in the childbearing population and births...but with minimal increase anticipated in energy consumption or global economic impact. There is essentially no transfer mechanism from the first world wealth to the poor of the third world nor is there a strong avenue for emigration. The global economy will impact Africa but Africa is very unlikely to impact the global economy. And as the UN noted recently, the end of global population growth is now in sight and the global population is likely to peak around 2100, under 11 billion persons (detailed here, HERE). The collapse of populations in East Asia, Europe, and Eurasia is already a done deal.
The Big Picture
Annual global population change, excluding Africa, peaked in 1988 and growth has decelerated since. However, growth really decelerates from here and is projected to end entirely by 2055...and global depopulation (excluding Africa) is the primary global feature there-after.
But focusing on the 15 to 65 year old working age population (x-Africa) which drives the global economy and consumption, the halving of growth in millions (and 2/3rds decline in percentage) is already in the rearview mirror. By 2040, global working age population growth is estimated to end entirely and a persistent decline (depopulation) among potential employees/consumers persists indefinitely there-on.
Why point all this out? Because it is the annual growth in the global childbearing population (excluding Africa, blue columns below) that drives demand, inflation, and the Federal Funds interest rate (yellow line). From 1950 to 1980, it was the accelerating rise in the childbearing population of potential consumers (above and beyond existing capacity) that pushed prices upward (more demand than supply) just as the Fed was hiking the cost of servicing debt (reducing growth in potential capacity). Then from 1981 to present, the deceleration of growth among the same population coincided with decelerating inflation (decelerating demand with accelerating supply from lower interest rates). The imminent declines in the same population will coincide with outright deflation (declining demand against a flat to potentially rising capacity thanks to a return to ZIRP or even NIRP).
15 to 40 year old population growth (as a %) versus federal funds rate, below.
Looking at the global childbearing population (excluding Africa, blue line below) versus 0-15 year old young (x-Africa, red line), the divergence is plain to see below. The total size of the two population sets were essentially identical in the late 1960's. However, outside of Africa, the global population of young is clearly in decline...and soon, the global childbearing population (x-Africa) will follow.
Below, the annual change in the global childbearing population (x-Africa, blue columns) and annual change in the global population of young (x-Africa, red columns) versus the Federal Funds Rate (yellow line). The shape of the rate curve should make more sense when matched against the real world changing demand of potential consumers. The rationale for rate cuts, ZIRP, and sooner than later, NIRP should also be clear as we are at the end of population growth driven demand increases. The onset of secular declines among the nexus of economic activity is inevitable and imminent. From a growth perspective, the sky has truly fallen...and will only continue to fall faster.
Broadening out to view the global annual childbearing population growth, world (excluding Africa, blue columns) versus Africa (red columns, below). The 90% deceleration of the annual growth of the childbearing population (excluding Africa) versus the doubling of the childbearing population growth in Africa has not resulted in rising economic activity.
Below, global births annually (excluding Africa, blue line) versus births in Africa (red line). Global annual births (x-Africa) peaked in 1989 and have declined by 17 million (-15%). Over the same timespan, annual births in Africa have risen 18 million (+178%). Trading a poor soul for a relatively wealthy soul (essentially a 1:1 population trade but a 90%+ downgrade in purchasing power) ultimately means global consumption is in big trouble, as rate cuts and debt burdens have reached their full potential.
Africa consumes 3.6% of the total global primary energy supply. From 1980 through 2016, Africa's portion of global energy consumption has risen from 2.4% to 3.6%.
Below, 1980 through 2016, year over year change in global total primary energy consumption. World consumption (excluding Africa, blue columns) versus Africa (red columns). The deceleration of global annual growth with little to no offsetting demand growth from Africa is clear.
As growth ends among the world (x-Africa) and shifts solely to Africa, the differential and disparity of income per capita between the groups that make up the world versus that of Sub-Saharan Africa doom further economic growth. The population rise in poor Africans is only offsetting the declining population of the rest of the world. The chart below details that the average African can consume just 3% what a single high income nation resident would. The average African can consume just 18% what an upper middle nation resident (China, Mexico, Russia, Brazil, etc.) would...and only 70% what a lower income nation resident (India, Pakistan, etc.) would consume.
Total population among each age segment below, green line is the young (0-14yr/olds), blue line is the child bearing population (15-44yr/olds), and the grey line is the "post breeding stock" (45+yr/olds).
Noteworthy is the peak population of young (x-Africa) was hit over 2 decades ago, and the worlds population of young is in active decline. Prior to 2030, the global childbearing population (x-Africa) will likewise begin it's secular decline.
Looking at population growth (x-Africa) by age groups but on a year over year change basis, below.
Super noteworthy is the 90%+ deceleration of annual population growth among the childbearing population of the world (x-Africa). And by 2023, the childbearing population will begin declining. BTW - the annual growth of the childbearing population (x-Africa) is very closely mirrored by the Federal Funds Rate. The accelerating growth of this population drove demand above and beyond existing capacities, pushing organic inflation and the deceleration in growth of this population is the death of organic, demand based inflation (too much accelerating capacity thanks to automation, AI, robots, etc. versus decelerating demand growth). Inflation is now a synthetically engineered currency event, not demand based.
The impact of a shrinking population capable of childbearing with significantly negative fertility rates (x-Africa) will collide...likely producing a must sharper decline in young (x-Africa).
Next, Africa is nearly all the population growth, but little of the global immigration...
Sources of Global Migration
Since the source of population growth is pretty much solely Africa, the sources of migration should also be clear. The chart below shows the primary sources of migration, per five year periods (1950 through 2015), by global region. Some key takeaways:
Sub-Saharan Africa has been a relatively insignificant source of immigration since the 1980's...and even then it never rivaled the migrations from Latin America (primarily Mexico) or presently from S. Asia. Essentially, what happens in Sub-Saharan Africa stays in Sub-Saharan Africa.
Northern Africa has been a more significant source of migration since the 1990's but the regions birthrates (2.8 children per female) are falling more in-line with Europe than Sub-Saharan Africa (4.9 children per female).
Latin America was the primary source of migration but this has hugely decelerated, with Mexico experiencing a 10 fold decrease in immigration since 2005.
The S. Asia region, (primarily India, Pakistan, Bangladesh) are producing the bulk of the worlds migrants.
This whole scenario seems to suggest not just a global slowdown is imminent, but an outright collapse in demand, birthrates, and global populations is more likely than not.
Population data from UN World Population Prospects 2019, Migration data from UN 2017 International Migrant Stock; Primary energy data from EIA, GNI per capita via Atlas method, World Bank.