Friday, October 5, 2018

Most Bearish of Economic Charts Are Reason To Be Most Bullish on Financial Assets

In the land of the blind (economics), the one eyed man is king.  So, forget everything you know (or don't know) about economics and follow some very simple math that economists (and financiers, Fed chiefs, and administration after administration) are unwilling to publicly acknowledge.  Disregard theories about ever greater production equating to economic growth...all that truly matters is the ability to consume that production (otherwise production turns into excess inventories).

Simply put, every person on earth is a unit of consumption multiplied by their income, savings, and access to and/or utilization of credit (even if it is government provided via social programs).  Thus, it is the annual change in the population (multiplied by these levers) which is the primary driver for the annual change in consumption.  But population growth among the nations with the income, savings, and access to credit has fallen in half since peaking decades ago...and growth among the all important work force is facing imminent and ongoing decline.

Thus to maintain consumptive growth, a series of stop-gap steps have been undertaken, each more drastic than the last.  First, unfunded governmental social programs alongside interest rate cuts were used to entice higher consumption absent higher income or savings.  Once this broke down, governments and central banks took over debt creation and asset eradication in an attempt to maintain still higher consumption without the concomitant rise in income/savings.

However, these policies and actions to maintain consumptive growth (enabling higher production) are about to become far more difficult if not impossible.  The lack of population growth among the consumer nations coupled with the negative distribution of that growth (almost solely among the elderly) is set to slow growth to a crawl or cause outright declines.  Why?

As the chart below details, household income and expenditures are a bell curve generally following the labor force participation rates.  On average, labor force participation rates, income, and spending rise from entry into the working age population and peak at about 50 years old.  By the time the head of household is 75+ years old, labor force participation has fallen to a scant 8% and income and spending fallen in half.  Couple this collapse in spending with the credit averse nature of 75+ year olds, and the relatively minimal economic activity of this age segment compared to the younger population should be apparent.Decelerating US Population Growth
The chart below details annual US population growth broken down by age segment for select years from 1951 through 2028.  Economically speaking, growth among the young (green columns) is good, 65 to 74 year olds cautionary (yellow columns), 75+ year old population growth (red columns) is bad.  In fact, the growth rate among 65 to 74 year olds peaks in 2018 and will be decelerating from here on.  The majority of US population growth for decades to come will be among the 75+ year olds (red columns) with minimal labor force participation, fixed incomes, and minimal utilization of credit...or said otherwise, minimal multiplier and relatively minimal economic activity.

The chart below details full US population growth (%) versus US GDP growth (%).  The '98 peak in population growth and deceleration since is clear.  But given the low labor force participation rate among 65 to 74 year olds and just 8% labor force participation rate among 75+ year olds...a fresh look at the population growth is necessary.  Those who claim the US need create 225 thousand jobs monthly to keep up with population growth are totally off base given the changes in US demographics.  The present reality is that the US need only create about 40 thousand jobs monthly, as this is the actual monthly growth in the labor force!

For those curious to see the change in the segments isolated.  The large decelerations of growth among the 0-64 year olds prior to the last two recessions and now the decelerating growth among the 65 to 74 year olds is disconcerting.  But the imminent shift to the majority of growth among 75+ year olds is an obvious and forseeable economic catastrophe.

The chart below details the annual change in the potential work force, and given the bulk of population growth presently among 65+ and 75+ year olds, why the potential labor force growth won't budge (while the "not in labor force" will swell with 75+ year olds).  Multiplying the annual population growth by each age groups labor force participation rate, a fast decelerating population growth rate alongside the decelerating GDP growth rate is even more evident.  And it's pretty simple math to see why elevated targets of present and future GDP growth are not possible absent significantly lower rates and significantly greater debt creation.

The chart below details what happens as the US core population growth decelerates and elderly population growth increases...and one can only surmise what happens over the next decades as both trends become more acute while public (marketable) debt creation will necessarily need go vertical in order to foolishly attempt to maintain artificially elevated rates of economic growth.
Decelerating Population Growth Among Global Consumer Nations
The chart below details the same phenomenon throughout the high and upper middle income nations of the world (nations with per capita income above $4000 annually, comprising nearly 50% of the worlds population but 90% of the income and consuming 90% of the global energy / commodities).  Breakdown of the high and upper middle income nations detailed (HERE).
Annual population growth of the consumer nations broken down by the change of in each age segment.  Global growth in the population (but more importantly the 0 to 64 year old population) double peaked in '69 and '88.  Total annual population growth among these nations has slowed by 50% since but growth among the all important core of 0 to 64 year olds has fallen 87% and will turn negative in the next decade.  A declining core that makes up all the potential employees and does the vast majority of consuming in secular decline.The correlation of the annual population growth (multiplied by labor force participation rates among the differing age groups) within the nations that do 90% of the global consuming and drive 90% of global GDP (%, black line) plus linear trend line (dashed black line, chart below).  Economically, this trend "ain't yer friend"...but from an "investor" standpoint, BTFD as the powers that be will digitally and literally continue to go all in.
This is the unwinnable battle governments and central banks are fighting (infinite economic and financial growth amid a very finite population of potential consumers).  And although it is ultimately impossible to succeed, they will break any and every rule necessary, do "whatever it takes", extend and pretend, all just to kick the can one more time.  Of course, currencies, income earners, and savers will pay the price while asset holders will be made wildly wealthy...until suddenly and inexplicably (LOL), it all falls apart.

All population data for this article comes from the UN; World Population Prospects, 2017 Revision.  All forward looking estimates are the from the UN's median variant (which I believe has and continues to significantly overstate future population growth).