Thursday, February 6, 2020

Fiscal and Monetary Policy Insanity - Realized Depopulation Vs. Potential Pandemic

There is great concern (rightly) about the current Coronavirus and potential for a regional or global pandemic.  The loss of life and associated deceleration of economic activity have a fair number of folks pretty concerned and market riggers working overtime to avoid an asset "panic" (aka, free market price discovery).  However, how bad and widespread this may get is unknowable and speculative.
What is known before any pandemic is that the four regions of the world that make-up just 36% of global population but nearly 80% of global GDP (plus 70% of commodity / energy consumption) including East Asia (Japan, China, Taiwan, S/N Korea), Western Europe, Eastern Europe, and North America (US, Canada) all have declining under-60-year-old populations as of 2019.  As the chart below shows, all four regions are now in decline and the under 60 year-old declines are projected to worsen through 2040 in all but North America.  As for the US, the projections of a return to high rates of immigration and significant increases in fertility and births are unlikely to play out.  North America's under 60 year-old population is much more likely to hug the zero growth line through 2040 than return to growth.Just to make it clear what is happening (and the ludicrous nature of the central banks asset rigging programs), I include the total primary energy consumption of each of the four regions in the four charts below (total consumption in blue lines, year over year change in consumption shown in red columns)...and guess what, they all look to be in secular decline.  Total primary energy consumption (including all oil, coal, natural gas, nuclear, and renewable energy consumption) is the best possible proxy for real economic activity, shown from 1980 through 2017 (latest US Energy Information Administration data).  Consider...

Eastern Europe total energy consumption peaked in 1990 and energy consumption has been in decline ever since.  Since 1990, it has been a 19 quadrillion BTU decline, or -29% over 30 years.Western Europe total energy consumption peaked in 2006 and consumption has declined by 6 quadrillion BTU's, or -9% since 2006.As for North America, total primary energy consumption peaked in 2007, and over a dozen years later, US/Canadian consumption is still -2% below that peak.And then there is East Asia, 2013 through 2017 saw just a 2% increase in total energy consumption.  Decelerating growth will shortly turn to outright decline, following the regions demographics.  Despite all the ghost cities, bridges to nowhere, and mountains of unrepayable debt...eventually a declining population uses less energy and faces economic decline.
Many point to growing demand in the "developing" or third world as a source to offset the first world decelerations and declines.  However, this view is entirely misguided as it is the third world that is dependent on the first world growth for third world growth in the form of exported commodities and goods.  Absent first world growth, these demographically positive nations have little domestic earnings, savings, or access to credit to spur their own economies.
To make this point of third world dependency on first world global growth, I point to Latin America, Africa, and South Asia (India, Pakistan, Iran, Indonesia).
Latin America
The primary energy consumption of the top 12 Latin American economies, by GDP, is charted below (Brazil, Mexico, Argentina, Colombia, Chile, Peru, Ecuador, Venezuela, Dominican Republic, Guatemala, Panama, Costa Rica).  If the roll-over in the blue line of total primary energy consumption isn't clear enough, check the collapse in annual energy demand growth.  Note previous global recessions generally correspond with the periods of low growth and decline in Latin American energy demand...and 2016/2017 was unlike anything Latin America had ever seen, including 2009.Southern Asia
The primary energy consumption of the largest South Asian nations charted below (India, Pakistan, Iran, Indonesia).  Again, the first world weakness is visible in the decelerating growth in the columns showing annual change.Africa
The primary energy consumption of Africa's top 12 economies, by GDP, is charted below (Nigeria, South Africa, Egypt, Algeria, Morocco, Kenya, Angola, Ethiopia, Ghana, Tanzania, Cote d'Ivoire, Libya).  Again, the first world weakness is showing up in the decelerating annual growth as global demand for commodities/exports has slackened.Back to demographics, and what the change in under 60 year old population looks like on an annual change basis in millions of persons.  Noteworthy is 2009 was the gateway from centuries of secular growth to what is now decades or perhaps centuries of secular decline.  2020 is really the jumping off point, as a period of minor under 60yr/old population declines ends, and the downside speed accelerates in these four regions (particularly China in East Asia).
In 2020, the global population of consumers will decline by 5 million.  By 2030, the decline will be "at least" 17 million annually.  Why "at least"?  This data from the UN assumes birth rates and total births in these four regions far above what was observed in 2018 and 2019 and these UN assumptions of rising fertility and births is projected through 2040.  Since 2007, birth rates and total births are significantly breaking to the downside, particularly in 2019...and the difference in these four regions was over 2 million fewer births in 2019 alone and the delta is only growing over time.  The actual declines in the under 60 population will likely be in excess of 20 million by 2030.  In 2020, we are looking at a 0.2% to 0.3% annual decline in consumers with the jobs, income, savings, and/or access to credit to consume.  By 2030, the annual decline will be up to 0.7% to 0.8%.  It is very hard to grow when you are shrinking...and all the poor and third world nations are dependent on the demand growth among these four consumer regions for their growth.  You can see the problem (unless you are paid quite handsomely not to see it).
But what of the rest of the world?  The chart below shows the annual change in the rest of the world under 60 year-old population (excluding Western / Eastern Europe, North America, and East Asia).  Note a clear period of accelerating annual growth from 1950 until 1989, a two decade plateau of relatively no change to that annual growth (annually adding about 60 million under-60 year-olds), and now we are in the secular period of decelerating population growth among the under 60 year-old RoW.  Again, oongoing outright population declines among first world and decelerating growth among the rest of the world, progressively shifting from developing nations to the poorest of poor nations.
Strangely, the Federal Reserve and like central banks, in conjunction with federal governments, are making money ever cheaper with the aim of a continuation in global productive capacity...in the face of fast declining populations that do all the consuming.  We are officially in a farcical period of fiscal lunacy and monetary policy in the face of depopulation among the global consumer base.
Population data via UN World Population Prospects 2019, energy data via US EIA.


Tuesday, February 4, 2020

1919 vs. 2019...Last Time US Under 65 Year-Old Population Declined Was A Global Pandemic...And Now?

What is happening in China is really scary, both for those currently at risk and for the rest of us due to the lack of transparency.  Whether this is contained or metastasizes seems to really be in the balance, at this time.  The last time the world faced a global pandemic of epic proportions was the 1918/1919 Spanish flu.  While not of the Black Plague proportions, (which wiped out approx. 1/3rd of Europe's population in a five year span as well as much of Eurasia), the Spanish flu influenza outbreak was horrific.  Obviously, the world population was far smaller at the time (less than 2 billion) and the world was far less interconnected by high speed transportation and open borders, that now exist.  Still, approximately 500 million were infected with Spanish flu (a quarter of the worlds population) and somewhere between 50 to 100 million perished due to the illness (between 3% to 5% of earths population).

At present, if "just" 1% were to perish globally due to the Coronavirus, this would mean something like 75 million lost.  A similar outcome to that of the Spanish flu would mean something like the loss of 200 to 400 million persons...and a similar outcome to that of the Black Plague taking 1/3 of earths population is too macabre to even fathom.

This is dark stuff and hopefully nothing of previous pandemic proportions takes place, but seems important to roll-out the historical record to see how serious this could become.  Also very noteworthy of the Spanish flu, the bullseye of those killed was among the childbearing population, so the outsized impact on the under 65 year-old population was atypical.
Speaking of the Spanish flu, I wanted to show the impact that the 1918-1919 deaths had on US population growth and compare the inversely moving US debt to GDP ratio.  In the chart below, the yellow line is the annual growth of the US under 65 year-old population versus US debt to GDP (blue columns in periods of flat or declining debt to GDP, red columns in periods of rising debt to GDP).  The two are clearly inversely correlated...debt, once used for funding warfare, is now being substituted for decelerating population growth and declining potential for economic activity (absent more debt/lower interest rates).Looking at the annual US population growth, the deceleration from 1790 to present isn't hard to see, but the sharp collapse in growth due to influenza at the end of WWI takes a little closer look.  However, after the influenza was contained by 1920'ish, the under 65 year-old growth rate immediately recovered to trend growth before continuing its deceleration.

It just so happens that 2019 and 1918/1919 had something very important in common, they were the only years in US history with population decline among the under 65 year-old population.  As per the Census, (HERE), while the total US population grew by 1.55 million (0.48%) in 2019, all the net population growth came among the 65+ year-old population (which grew about 1.6 million). This means that in 2019, the under 65 year-old population declined by about 60 thousand.  The only time this ever occurred previously in US history was at the height of a global pandemic.  Yet, there was no pandemic in 2019...just a population unwilling to enter into parenthood at record proportions and immigration rates about half of what they were during the previous decade.  Of course, if a pandemic were to hit now with an under 65 year-old annual growth rate already below anything the US has ever experienced, the population declines would naturally be unlike anything the US has ever seen.
The cause for the continued declining fertility rates and births appears to be the continued growth of federal debt well in advance of economic activity.  The mounting $23+ trillion in federal debt (and quadruple that in unfunded liabilities) will never be repaid and can't honestly be serviced at anything but Federal Reserve dictated minimal interest rates.  Thus, the Fed continues to rig the interest rates, which rigs stocks and commodities...and the outcome is unnaturally high asset appreciation...which rewards elderly and institutional asset holders and punishes young, poor, and those absent assets.  Young and poor are suffering from costs of living rising far faster than incomes.  Marriage are being put off and the undertaking of childrearing is a choice that can simply be avoided with widely available birth control.  Simply put, it is the Federal Reserve coping mechanisms that are causing record low fertility rates as young adults are financially unable/unwilling to undertake children.  The Fed is preserving the present for the elderly and institutions at the expense of the young and poor present and future.
A pandemic at this point in time would send the US in deep depopulation and likely send the Fed into QE++++ to avoid a free market determining asset prices.  The result of pandemic, and Fed induced costs of living continuing to skyrocket above incomes, would surely have further downward impact on US births (already down 12% since 2007...detailed HERE).
What of the global picture and America's ability to import growth via immigration?  The chart below shows the annual change in the global under 40 year-old population (excluding Africa...I exclude Africa due to low relative rates of emigration, low rates of income/savings/credit, low rates of consumption).  Blue columns are annual change in millions and red line is annual change as a percentage of world population, X-Africa).  1986 was peak annual growth of +53 million under 40 year-olds (a 1.2% increase).
It just so happens that in 2020, the growth of the global population (x-Africa), those capable of childbearing in the present and future childbearing, has ceased.  Female fertility rates beyond 40 years-old plummet and females are sterile by 45 to 50 years-old.  From this point on, every year there will be fewer persons capable of childbearing and obviously fewer children indefinitely (both x-Africa).  To this point, global annual births, excluding Africa, have been declining since 1989 and are down at least 15% from that '89 peak...and perhaps as much as -20%, once all data for 2019 is available).While the worlds over 40 year-old population may be facing overpopulation, the global under 40 year-old population (x-Africa or the part of the world that consumes 97% of everything) has begun depopulation.  And all this prior to any loss of life due to a potential pandemic.
US and global population data from US Census and UN World Population Prospects 2019...

Friday, January 31, 2020

What Does Lowest Population Growth In US History Mean For Employment?

2019 saw US population growth at its lowest percentage level in US history aside from the pandemic years of 1918/1919 (when the Spanish flu took the lives of nearly 700,000 Americans). The 0.5% annual growth meant US population grew by approx. 1.55 million persons in 2019.
Today, I just wanted to focus on the implications of low population growth on US employment.  To set-up this article, I think it's important you see the raw population and employment data, by age groups.  No highly gamed unemployment percentages or in labor force or out of labor force.  Just raw population data and employment data.
25 to 54 Year-Old Population, 25 to 54 Year-Old Employees
First, the population and those employed among the largest and most influential segment of the US population, the 25 to 54 year old's.  They make up about 60% of the 15 to 64 year old population and 70 percent of those employed among the same group.  They are the engine that drives US consumption.  Their population added 59 million from 1966 through 2007 but since 2007, this segment has added just a half million.  Employment among them rose 54 million from 1966 through 2000...but has essentially stalled since 2000, adding just 3 million employees over the last two decades.
Below, the 25 to 54 year-old population (red line) and employees (blue columns) both on a year over year basis.  The growth of the population has always been a governor on the potential for employment growth.
15 to 24 Year-Old Population, 15 to 24 Year-Old Employees
To understand America, the chart below is so important.  You reap what you sow, and if your young adult population ceased growing four decades ago, you can only fake economic growth for so long.  The population of young adults has risen less than one million persons over four decades and those employed among them has declined by three million.  This population is busy attending university, at record proportions, and is once again likely at peak employment.
Below, the 15 to 24 year-old population (red line) and employees (blue columns) both on a year over year basis.  Note the current period of declining population versus rising employment.
55 to 64 Year-Old Population, 55 to 64 Year-Old Employees
It is the growth of the 55 to 64 year-old population and employment among them that has driven the US economy since the mid 1990's.  The population more than doubled from 1993 to present (21+ million) and those employed rose by 16 million.
However, looking at both the 55 to 64 year-old population (red line) and employees (blue columns) on a year over year basis, the end of growth is upon us.
Pulling it all together, the black line below is the annual growth of the 15 to 64 year-old population versus the columns representing annual employment change, by age groups (blue 25-54, yellow 15-24, red 55-64).  Three things to note here, (1) the decelerating 15-64 year-old population growth, (2) the shifting employment growth from the young adults to the 55-64 year-olds over the course of fifty years, and (3) it was the huge loss of employment in '08/'09 that provided the fuel for the current incredibly long period of employment growth despite the decelerating working age population growth.
Over the next decade, the annual working age population growth will be about 10% of what it was from 1970 through 2010.  So, to gauge potential employment growth or the fuel for employment growth...getting clear proportions of the population employed is pretty important.
I'm going to focus on the 25 to 64 year-old age segment, as they represent 87% of the employed among the 15-64 segment and they are the segment with the highest median incomes.  The chart below shows the periods of recession followed by employment growth (blue columns) above population growth (red columns).  This employment growth taking place faster than population growth has happened every time since 1970 until a ceiling, about 76%, is hit in the percentage of persons working.
Checking the proportion employed among the 25-64 population, that ceiling of potential employment appears to exist around 76%...which was hit in 1989, 1994 (but pushed through to 78% in 2000), 2007, and again in 2019.
How important is peak employment among the 25 to 64 year-olds?  Check the chart below showing the federal funds rate (black line) and the amazing correlation with the portion of 25 to 64 year-olds at work.  The pre-1981 employment peaks were considerably lower as this was before women had employment rates comparable to men...but the post-1981 period saw progressively higher integration of women into the workforce, eventually surpassing male participation rates.  So, the 76% ceiling appears to be the point of peak employable persons and the point at which growth in employment ceases, triggering the Federal Reserve to begin a new interest rate cut cycle as the recession is imminent.
But to be fully transparent, the chart below shows each age groups employment as a percentage of their population.  25 to 54 year-olds are essentially at peak employment, 55 to 64 year-olds are at record employment, and 15 to 24 year-olds regaining about half the ground they lost in the last great recession but still over 10% from all time highs.  However, due to structural reasons, this is probably about as high as the 15 to 24 year-olds will get.
All this is to say that the federal government and Federal Reserve have shot the works (tax cuts, deficit spending, QE, Not-QE?!?, etc. etc.) to get the economy well past a sustainable level...and now the lack of further potential growth among employees means a lack of growth among consumers.  The Fed has already begun the rate cuts and acknowledged there is no further fuel (population growth) to power any further economic growth.
Finally, just to offer a few more viewpoints on what has taken place...the chart below is the 15 to 54 year-old population, employees, federal funds rate, and federal debt.
Or, below, looking at declining annual US births (inclusive of all births to legal and/or illegal parents) versus surging federal debt.
Clearly, the only thing growing is debt.

Monday, January 27, 2020

What Does Lowest Population Growth In US History Mean For Housing?

2019 saw US population growth at its lowest percentage level in US history aside from the pandemic years of 1918/1919 (when the Spanish flu took the lives of nearly 700,000 Americans).  The 0.5% annual growth meant US population grew by approx. 1.55 million persons in 2019. 

Today, I just wanted to focus on the implications of low population growth on the largest sector of the US economy, housing, and in particular new housing starts.  The chart below shows annual total US population growth in millions (red line, million), the next line is the US population growth among the under 70 year old population (yellow line, million), then annual housing starts (blue line, million), and finally the Federal Reserve set federal funds rate driving interest rates (black line, %).
Really take a minute to understand these relationships... it's really important.

From 1960 to 2008, annual population growth (red line) varied from about 1.8 to 3.5 million a year and the vast majority of that growth came among the under 70 year old population (yellow line).  During this nearly five decades, housing starts (blue line) varied from about 1 to 2 million units annually, with sharp inverse swings based on the cost of money represented by the changes in the federal funds rate (black line).  

But starting in 2008, housing starts fell below 1 million units and would remain there through 2012 despite the cost of money (federal funds rate) sitting at zero for nearly a decade.  The NAR and others suggest there is a housing shortage due to this period of significantly below trend housing starts...but if you happen to look at the red line (decelerating total population growth) and the yellow line (collapsing population growth among the under 70 year old population), perhaps something else is happening.

70+ year-old elderly folks have the highest home ownership rates, are least likely to undertake new loans, and have the lowest labor force participation rates among the adult population at something like 1 in 10 working versus 8 in 10 among 50 year-olds.  In 2019, the 70+ population grew by about 1.3 million.  Point is, 70+ year-olds are not net-buyers but net-sellers as they pay down/pay off their mortgages, downsize, move to managed care, or pass away.

It is the annual growth of the under 70 year-old population that drives demand for new housing, that has high levels of employment, and the willingness to undertake long term mortgage debt.  In 2019, the under 70 year-old population grew by less than 300 thousand.  The 90%+ annual deceleration in the potential buyers versus a ten-fold rise in the annual growth of elderly has turned the housing market upside down.

But last year, nearly as many new homes were started as the total population increased...something that had not happened since 2005.  The chart below shows annual starts as a percentage of annual population growth moving inverse the federal funds rate.  The sharp increase in housing starts amid a population growth slowdown is definitely noteworthy.
While the total annual population growth is decelerating, all the deceleration is among the under 70 year-old population (declining births, declining immigration) while the 70+ year-old population growth is still accelerating.  The chart below details the annual housing starts as a ratio of annual under 70 year-old population growth from 1960 through 2015.  Nearly 40 years of interest rate cuts have mitigated the deceleration in housing starts as a percentage of under 70 year-old population growth, until...
That is until now...2018 and particularly 2019 saw new housing starts surge while population growth of the under 70 year old population took another leg down.  The result was more than four new housing starts per every new under 70 year-old in the US...aka, the hockey stick chart below.
Now, go back and look at the first chart again.  You will notice that for the whole of the 2020's, what projected population growth there is, is among the 70+ year-old population and, so long as the declining birth rates / total births and decelerating immigration continue, we should expect little to no growth among home buyers.  The idea that America needs more housing seems strange indeed.  Far more optimistic is that the 2020's will see a period of replacement level new housing rather than outright growth...more realistic might be surging existing housing inventory as elderly sellers swamp the market on their way out  and little to no new construction.

Of course, real estate is local.  On a micro level, there is likely to be a surge of rural inventory, and inversely, increasingly tight urban inventory in select cities.  This is due to a likely ongoing outflow of young adults from rural locales to select urban centers, in search of opportunity.  Either way, the net picture is unchanged or even worsened as urban fertility and birth rates are even lower than those seen in rural areas.  Or, then again, maybe the Federal Reserve can just print new buyers...or add residential real estate to its already bloated balance sheet so America can keep on building...ever more...for ever fewer?