Friday, March 20, 2020

US Debt To GDP Will Hit New All-Time High In 2020

Summary
Coronavirus is no plague or Spanish-flu, but we aren't who we once were either.  So the end result may be the same?!?
The young (representing the future) cannot cover the rapidly growing debt...and the policies to avoid dealing with the debt are ultimately destroying future economic activity.
The US is going bankrupt in half measures but double time.  Global depression is now unavoidable and imminent.
Some thoughts on Coronavirus...
1- The Coronavirus ain't no black plague or Spanish-flu.  Those were true killers that wiped out young and old without regard for the strength or age of the afflicted.  In fact, Spanish-flu was attracted to the young adults above all else.
2- However, Coronavirus has come along when the 1st world is at its most vulnerable.  Never have more elderly been artificially kept alive beyond their natural expiration dates by drugs and our 1st world medical system promoting quantity over quality.  Never has the 1st world been more obese and suffered from more "lifestyle" diseases than now.  Hypertension, Type-2 diabetes, heart disease, smoking / vaping lung related issues, drug abuse, etc.  The 1st world has the best medicine in world history but capacity is limited and the vulnerable hordes will overwhelm our hospitals.  BTW - one of the most vulnerable of populations are the truckers responsible for maintaining transportation...this weak link should be very worrisome.
3- In the end, I suggest a rather middling grade virus will likely hunt the unprecedented number of weak, infirm, and vulnerable and kill on par with real killers of the past.  Meanwhile, the strong and healthy will likely find this like a very bad flu year...but due to the overwhelming #'s requiring the medical system, even many of the strong that would have survived with available care may perish.  While the 2nd and 3rd world aren't nearly as old, overweight, and vulnerable as the 1st world...unfortunately they don't have the medical systems to cope with this and the result will likely be very bad.
And what of the federal response to this pandemic?  It appears disjointed, half-hearted, and entirely left up to every state, city, county, company, and ultimately the individual as to how to appropriately respond...The only sure thing is Congress and the President willing to throw good money after bad.
In 2020, the federal government will spend like drunken sailors...borrowing from our future selves to pay our present selves.  The chart below details the rising public vs. Intragovernmental debt (SS, etc.) against the inverse instigator of debt, the Federal Funds rate.
Put in context, below the annual change in the under 60 year-old population (green line) and over 60 year-old population (yellow line) contrasted with the Federal funds rate (black dashed line), and public debt (red columns) vs. Intragovernmental debt (blue columns).  Not so hard to see this is a demographic issue at its core.  Obviously, I'm estimating the 2020 federal deficit to end up around $2.8 trillion of which likely 100%+ will be public debt (little to no IG net purchasing).
And what will the next five years look like?  The demographics will slightly shift as the growth of the elderly population decelerates but the projection for the under 60 year-old population is a gentle upturn.  But this upturn is highly unlikely as it assumes rising births (births continue declining) and high rates of immigration will return (2019 saw a huge deceleration in immigration due to border enforcement...and now with Coronavirus, immigration may be a net zero) and ongoing strong economic activity (lol).  So, the under 60 year-old population declines will likely accelerate rather than return to growth.  Of course, federal debt will be surging to cover unfunded liabilities, unemployment, bailouts, etc. etc. while Intragovermental funds turn to a net seller.
Anyway, this signifies that 2020 will likely be the year that federal debt to GDP surpasses the previous peak set in WWII.  This coincides with the decline in the consumer (and base of credit creation) that is the working age population.
But unfortunately, the debt will continue to blow out against even any modest GDP growth.  The chart below assumes 1.5% GDP growth through 2025 versus constant $2 trillion annual deficits after the 2020 $2.8 trillion blowout.  While the under 65-year old population was projected to return to minimal growth, the Coronavirus is likely to turn that projected growth to decline and further decelerating potential economic activity.
And just to put this debt in context, below I show the relatively constant of under 20 year-old US population (the future that is responsible for servicing the debt) versus the rapidly growing federal debt.
Finally, putting the debt into personal terms against America's future.  While this population is not yet old enough to vote, they are sure to feel the full impact of the debt.  Of course, over the course of their lives, they can never repay the debt nor can they even honestly service the interest payments.  Instead they continue to see Federal Reserve policies rewarding the banks, large institutions, the asset holders, and the elderly.  But this is only federal debt...if we added the soaring unfunded liabilities, you can likely quintuple those per-capita dollar amounts.
This debt is like an ever heavier weight spread across a population that isn't growing...and eventually the policies of avoidance will crush whatever is under it.

And just one more means to gauge the growth of federal debt against the future, annual US births.  Of course this is inclusive of all births regardless the parents legal or illegal status.
And dividing the debt (present and future liability) against those responsible for this debt (the future adults)...if you don't see the issue here, it's only because you don't want to see it (and this doesn't include the unfunded liabilities that are something like 4x's the size of the national debt and growing just as fast).
Global Outlook
Putting this into the global picture...the chart below is exempt Africa but looking at the annual global change in under 40 year-old females (red columns), over 40 year-old females (blue columns), annual global births (black line), and federal funds rate (yellow line).  Births (x-Africa) have been declining since 1998 and are now down 18 million annually from that peak.  But in 2020, the female global childbearing population (x-Africa) begins declining...and significantly faster declines in births should be anticipated (although they are not).  And all this was before Coronavirus...obviously, the situation will be more acute post Coronavirus.
The chart below of UN population data shows that before the Coronavirus, it just so happens that 2020 was year when the 1st world working age population was set to begin its secular decline.  The population that consumes 70% of all commodities, 75% of all exports, and 80% of all the income/savings/access to credit begins a secular decline.  Africa and Asia (excluding East Asia that is part of the 1st world) are reliant on the growth of the 1st world for their own growth...without 1st world growth, the 2nd and 3rd world economies are set to fall hard.
Post-Coronavirus, the situation will be 2x or 5x or 10x worse.  Global depression is imminent and will continue for an indefinite period as depopulation, deleveraging, and decline are the natural state of things.  Cast off the lifeboats...the Titanic is going down and we'll be in small boats on very rough seas from here on.  This was going to happen eventually, Coronavirus has just accelerated the timeline.

The global demographics behind this, the impact on energy consumption, the interest rates, and why this is inescapable is detailed from UN data (HERE).  I am not saying we don't still have choices, just no happy choices.  We can take actions to avoid worst case scenarios, prioritize the critical over desirable, and prepare for a new and different future...or we can just continue fighting the last war.
Invest accordingly (WTF?!?)

Sunday, March 8, 2020

Era of Growth, Corona-Virus, Era of Decline. Discuss.

I'm going to suggest that the Corona-virus is more a window or a marker that separates what will be seen as the end of an era and the beginning of another.  Corona-virus is serious, global, and appears it will cause significant death and disruption.  There is likely to be 9 to 18 months of global pandemic with a potential of high infection and significant loss of life.  But after the pandemic, things are more likely to return to "normal".  Corona-virus itself isn't the problem (no more than Spanish Flu was in 1918/1919).  And it's the discussion of what is the "normal" we have seen over the past 7 decades versus the current and coming decades that I hope to spur.

To begin, the chart below shows the annual change in the under 60 year old US population (green line) versus annual change in 60+ year old US population (yellow line).  Also shown is annual US federal deficit split between public debt (red columns) and Intragovernmental (IG...blue columns representing Social Security, etc.), and lastly the federal funds rate (black line).  Simply, as population growth of the working age population slowed, first large scale legal and illegal immigration was utilized to maintain economic and financial growth.  However, since 2008, working age population growth has rapidly decelerated and immigration slowed...and in their place have come interest rate cuts to zero and accompanying massive debt (I show federal debt below, but corporate debt has also binged of the nearly free money to buy their own stock and pay dividends).  2019 was the first year in US history the working-age population declined...and of course all net US population growth now comes among the elderly.  The elderly who, on average, earn/spend half as much as during their peak years, are highly credit averse, and prefer to pay down existing mortgages and debt.  Oh, and 2020 births and immigration are trending even lower while Federal debt creation has the potentially to surpass the '08/'09 levels as Trump pushes for further tax cuts / infrastructure, etc. spending.

Consider the relationships.Changing gears but still moving tangentially, the weekly change in Federal Reserve holdings of US Treasury bonds (yellow columns), Federal Funds Rate (black line), and the impact of that purchasing on the Wilshire 5000 (red line representing all publicly traded US equities).  Look again at the chart above of the fast decelerating growth of potential employees, potential consumers, potential stock purchasers among the working-age.  Consider the mandatory selling of the elderly...and then...
Consider the rationale and relationship of the above chart for the Fed's "activism" below and the impact of Fed purchasing / selling has on the asset pricing.Broadening out to show the weekly change in Federal Reserve held mortgage backed securities (MBS...blue columns), Treasuries (yellow columns), Federal Funds Rate, and again the Wilshire 5000 (red line).

Again, consider the Fed's motivation and the relationship of Fed buying on asset prices.  Assets sky-rocket during periods of purchasing and are either highly volatile or show outright declines during periods of Federal Reserve asset sales.Perhaps also worthy of some discussion is the Fed's experiment to control interest rates via interest paid on excess reserves (IOER).  Just a reminder, prior to '08, banks collectively held literally a few billion in excess reserves but in the '09 GFC, the Fed stuffed them with excess reserves.  The excess reserves peaked just prior to the end of QE and began precipitously declining years prior to any balance sheet reductions by the Fed.  However, during that intermediate period while the Fed was raising the Federal Funds Rate, the Fed also raised the interest paid to the largest banks on those trillions in excess reserves.  Despite the fast rising, Fed sponsored, risk-free returns for lending no money, excess reserves plummeted.  What is so fascinating is that when the Fed felt compelled to begin cutting the FFR (and the IOER's), reducing the returns on those excess reserves...the Fed also restarted QE (or "Not-QE") and magically bank excess reserves ceased declining and began rising!?!  An increase in excess of $400 billion in Fed held Treasuries has coincided with a nearly $250 billion increase in excess reserves?!?

However, despite the $1.5 trillion in excess reserves, banks (and others) are oversubscribing Fed repo auctions at record levels in a liquidity crisis (like the ancient tale of mariners stuck in the doldrums; "water, water every where, but not a drop to drink")...perhaps this is worthy of some discussion?Next, consider the Fed's holdings of US Treasuries by durations and the resultant impact on the spread of the 10 year Treasury minus the 2 year Treasury.  Prior to the GFC, the Fed conducted their policy rather banker like, in a rather boring fashion.  However, since the GFC, the Fed is spastically dumping one duration while pouring into another attempting to control the Frankenstein they created.
And a focus on the Fed's holdings of short term US Treasury bills versus the yield on the 3 month Treasury bill.  Check out the action on the far right...and perhaps this is discussion worthy?  The Fed is currently buying every duration, but more than anything, is sucking up bills at an unprecedented rate?!?  It appears the Fed is aggressively swapping conjured cash for bills in an attempt to "liquify" credit and simultaneously pushing the yields on the short end down to avoid significant inversion?!?  But why remove the most liquid assets rather than the least, as they did previously?Global Annual Working-Age Population Growth
But now widen out and put all this into a global scope.  If we look at annual global working-age population growth (black dashed line below) split among the 1st world (blue line), Asia (excluding East Asia), and Africa (red line)...the picture of what is happening in the US makes a little more sense.  The working-age population of the 1st world begins a secular decline as of 2020.  For those curious, the 1st world below is collectively including all of the Western Hemisphere, Europe, Oceania, Russia and Eastern Europe, plus East Asia (China, Japan, S/N Korea)).  The 1st world consumes 75% of all commodities, has over 80% of the income, and consumes even more of the global exports...this is the population that takes out over 90% of the credit.  And as for Africa and Asia (excluding East Asia), they are totally reliant on the first world growth to export their cheap labor, cheap commodities, and finished goods.  Without growth in the first world consumer base, these 2nd and 3rd world nations haven't an oar in the water.  BTW - the population growth estimates below are inclusive of present rates of immigration from 2nd/3rd world to 1st world...as borders are locked down for political or pandemic reasons, the declines in the 1st world will likely be significantly larger.
And all this was before any inclusion of a likely pandemic (as detailed HERE).  Now, disruption and dislocation is likely on top of 1st world working age depopulation.  Discuss.

All Population data from UN World Population Prospects, 2019 report.