Saturday, May 16, 2020

Food for Thought - US Population, Employment, Debt, NIRP, Monetization

In 2019, US population growth fell to +1.55m or +0.5%...this was due to a trifecta of declining births, lower immigration, and higher deaths than anticipated.  However, as with everything "2020", all three trends are only intensifying to blow away 2019.  Births are falling faster and further, deaths moving higher with Corona-virus and drug related overdoses, and immigration nearly non-existent.  Thus, US population growth will likely dip below 1 million or +0.3% this year.  And while I anticipate (or think it feasible) that immigration could return to 2019 levels eventually, births will almost surely continue falling and deaths rising more than anticipated.  The simple outcome of this is an ongoing collapse in US population growth which is far larger in scope than the current Corona-virus pandemic.
Census Population Estimates...Wildly Overstating Growth
The chart below shows the 2008, 2014, and 2017 Census US total population projections through 2050.  Some quick math shows that in 9 years time from '08 to '17, the Census downgraded US population growth through 2050 by 50 million persons.  But due to the factors mentioned above, the 2020 Census projection through 2050 will need another massive downgrade...I'd suggest something on the order of another 29 million person downgrade.
The most significant contributor to decelerating population growth is declining births.  This is true among the native population and true among immigrants.  On average, they are all having significantly fewer children than anticipated.  As the Census estimates from '00, '08, '12, '14, and '17 show...the Census models just can't fathom the fast declining births taking place in the US.  But each Census estimate is still far too high, and perhaps in '20 the Census will "fix" their models and portray reality (ok, not likely)...but I offer a more realistic picture below.
However, the downgrades in population are specifically among the younger populations.  Obviously, declining births and immigration means declining young.  The about face from '08 to '20 is stunning in the suggestion that the US truly is far more Japanese than immune to depopulation.
Supporting the decline of young is the flattening and eventual decline of the childbearing population.  Again, the ongoing declines in projections means that a flat childbearing population with declining fertility rate will continue having fewer children unless something intercedes.
One place that will not see significant downgrades in population growth are the elderly.  Despite Corona-virus, the elderly population is likely to continue swelling.
Below, the rising fertility and births amid "better" economic times and declining among "worse" economic times.  The clear insinuation is that the "recovery" since '07 has been no recovery for those young adults of childbearing age as their willingness / capability to undertake childbearing has continued to wane.
Below, annual births again but including the cost of money (FFR%), marketable federal debt, and the Federal Reserve Balance sheet (QE).  Again, the US only eclipsed the '57 peak births in '07 before births again began declining as interest rates went to zero and QE began in earnest (year end 2020 federal debt, Federal Res. BS, births are my estimates).
Simply dividing declining annual births against rocketing marketable Treasury debt through my 2020 estimate...and a very ugly reality emerges.  Take a gander at the marketable debt against those responsible (over their lifetimes) to repay (lol), service (not so much), but primarily endure the stagflationary QE/monetization.  These contradictory trends of declining births and surging debt mean ever fewer are responsible for bearing ever more.  Not a very nice shower gift.
US Employment Breakdown
Moving on to gauge population growth versus employment growth among the differing age age groups that make up nearly all the working age population.

25 to 54 Year-Olds
First, the 25 to 54 year-old population ceased growing in 2007 with predictable results for employment among the 25 to 54 year-olds.  The core of US economic activity and growth has been in neutral for well over a decade.
Year over year change in 25 to 54 population growth and employment...the population growth is always an eventual restrictor for potential employment growth.  Periods of employment growth above and beyond population growth eventually result in peak employment and the absence of further potential growth...and then resultant recession.  No matter the interest rate cuts, stimulus, QE...demographics eventually overrule.
And taking a peek at the two charts below, breaking down employment between 25 to 54 males and females, the chart suggests male and female peak employment is a signal of impending slowing economic activity...and we had seen that clear signal in 2019...well before Corona-virus.
Declining participation among males and peak employment among females...pretty clear trends.  Also clear is that it was females entering the workforce that drove the economy through 2000, and the lack of further potential growth since should not be surprising (hello Federal Reserve interest rate led bubbles, QE, etc. since in lieu of further potential growth).
15 to 24 Year-Olds
Looking at the youngest segment of adults, engaged in the culmination of high school, college, and/or initiating careers.  As for the younger population, it is emblematic of essentially no growth for 40 years.  But due to increasingly higher quantities going on to community college and/or college and the declining quality/quantity of jobs available for this population...the total number of those among them employed has been in decline for 40 years.  The virus related job losses cost almost 1/3 of all 15 to 24 year-olds their incomes.
Year over year change in population and employment, minimal population growth with ongoing net employment declines.
Importantly, 15 to 24 males and females are now essentially equal in the workforce though apparently significantly more females were laid off than males in the Corona-virus shut down?!?  Perhaps due to higher #'s of females employed in Corona-virus impacted shutdowns?  The disproportionate job losses among the young will almost certainly be seen in greater declines in birth rates and fertility...further sapping future economic activity.
15 to 24 year-old males realized peak participation back in 1979 and females in 1989, and since then both males and female participation continue to decline.  This segment of the population appears continually less apt to take part in the economy.
55 to 64 Year-Olds
As for the OTA 55 to 64 year-olds in the work force, this has been the segment driving working age population growth and employment for over a decade.
But looking at the year over year, the decelerating 55 to 64 population growth and employment with it is really hard not to see.
55 to 64 male and female participation doing all the heavy economic lifting for decades.
The rising female participation and declining male participation seems to end around 2008...and since then, a relative cap of participation among 55 to 64 year-olds has been established.
Stacking all three employment segments together versus total 15 to 64 population growth details that population growth is eventually the governor restricting further potential employment growth.
And so simply, once the employed portion of the 25 to 64 year old population hits the ceiling somewhere around 76% to 77%, little to no further employment or economic growth is possible.  Earlier periods had lower ceilings due to the lower participation of females.
The chart below illustrates the rising participation of the 55 to 64 year-old segment and demotion of the 15 to 24 year-old segment.  The ceiling in employment for the 25 to 54 year old segment (and signal of imminent deceleration/decline) is very clearly defined at anything above 80% (something the Fed would do well to remember when attempting to play god with IR and QE policies).

Bonus - 65 to 74 year-old Population, Employment
65 to 74 year-olds make up a little more than 5% of the total employees in the US, have a participation rate of about 22%, but represent the majority of net population growth among the workforce.
Breakdown of employment of 65 to 74 year-olds, by sex.  Despite females of this age group outnumbering males by over 2 million, males still represent the majority of employees.
Percentage of 65 to 74 year-old males and females that are employed.

Federal Funds Rate, GDP, Federal Debt, Federal Reserve Balance Sheet
Four decades of declining interest rate policy (FFR%), to incent higher debt utilization at lower cost, to artificially boost consumption (and asset prices), and once this was inadequate the introduction of wholesale QE via the Fed's balance sheet.  Again, 2020 year end #'s are my best guestimates.
Same as above but viewing the impact of the Federal Reserve set FFR in driving the quarterly (YoY) utilization of federal deficit spending, relatively low impact on GDP, but the increasingly higher QE substitution (to avoid market set interest rates on all that debt).
No red team/blue team debate here nor debating what Obama 1 or Trump 1 faced in GFC/Corona-virus, respectively...just the change in GDP, federal debt, and Federal Reserve balance sheet per presidency (again, this is inclusive of my year end 2020 estimates).  Regardless we give or take a trillion in debt, there appears to be a trend here (in the face of decelerating population or consumer growth, (ab)use IR policy to lower the cost of "money" to incent the substitution of debt and QE to avoid the appearance of decline).
Below, looking out through 2025...again the impact of declining (soon to be NIRP) federal funds rate on incenting Congress to spend beyond what they are willing to tax, and the rising role of using the Federal Reserve balance sheet to monetize all the new debt.  And yes, I'm quite confident negative interest rates are imminent.
Below, a guestimate of where things are heading through 2025...unless the system breaks earlier (probably 50-50 odds).
Federal Funds Rate - 1981 to Present
The Federal Reserve set FFR, so critical in benchmarking the cost of money.  For 40 years, interest rates moving lower for longer...and this time they will almost surely move negative.
How the Fed will achieve NIRP?
Consider that the Fed is now the buyer of last resort at anything near these interest rates.  Of the four potential classes of Treasury buyers, it is the Fed alone that is doing all the heavy lifting with a wink from the BLICS+UK...(BLICS+UK=Belgium, Luxembourg, Ireland, Cayman Isl., Switzerland,+UK).

Fed's Treasury holdings & Impacts on Relevant Interest Rates
Consider that the Fed is now the buyer of last resort at anything near these interest rates.  Gander at the Fed's Treasury holdings and impacts on relevant interest rates.
Fed held Treasuries less than one year in duration and the impact on the three month rate...all these charts have gone "split eagle".
Fed held Treasuries one to five years in duration and the impact on the 3 year rate.
Fed held Treasuries five to ten years in duration and the impact on the 10 year rate.  Note that the Fed began "Not-QE" just after the 10 year rate exceeded 3% in 2019 and that in this "not-QE" the Fed had already driven the rate down under 2% prior to QE Corona-virus.  I think it is safe to say if we ever see 3% rates on the 10 year again, the US can bend over and kiss its interest rate sensitive ass goodbye.
Fed held Treasuries more than ten years in duration and the impact on the 30 year rate.
Market Implications of Federal Reserve Balance Sheet Expansion
As the Federal Reserve balance sheet explodes, and given the current and future 0.1% interest paid on excess reserves...banks, hedge funds, etc. will take the monetization and put it to work.  The Fed knows banks will follow the money, and the absence of IOER's communicates that the Fed wants those freshly created dollars to move into the financial system (why else would the Fed only offer banks 0.1% annually to not lend money?).
So, the Federal Reserve creates money and subsequently buys assets, removing those assets from the market.  Those assets are thrown into a black hole as the Fed will maintain them on its balance sheet indefinitely.  On the flip side, the newly created dollars can either be held as excess reserves (for 0.1% interest on excess reserves annually) or become liquid.  Of the Fed's nearly $7 trillion balance sheet, $3.2 trillion are currently held as excess reserves while $3.8 trillion have moved directly into the financial system.
Although I've nothing to do with investing, the simple act of "monetizing the debt" alongside 0.1% IOER's is hugely inflationary for assets...and if the Federal Reserve continues removing assets from the market and replacing them with freshly created dollars...and the dollars primarily move into assets (with anywhere from 2x to 10x leverage)...a "bull market" can theoretically be sustained regardless the underlying economic conditions.  This is an inorganic, monetary short squeeze to infinity rewarding a shrinking class of asset holders and harming a growing class of young/poor that own little to no "monetary inflationary" assets.  Go back and check the fertility/birth statistics since ZIRP/QE began to see the impacts on young adults.
IR's, Debt, and Demographics
Wrapping this up, an overview of declining federal funds rate, incenting rising annual federal debt (split between public marketable debt vs. intragovernmental buying (SS trust fund, etc.)), while the demographic reality of a surging elderly population suffocates the now declining under 60 year-old population.  This is only going to get significantly worse until something (everything?) breaks.
Sort of a grotesque finish...assuming the US runs a $7T 2020 deficit to finance the CARES and HEROES acts plus any and every other bailout they can think of, US debt to GDP will blast to an inconceivable record while annual population growth among the under 65 year-old population hugs the zero line.
Ever more debt to be repaid/serviced/monetized by ever fewer...what could go wrong?

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?!?)