Monday, November 18, 2019

Indefensible Conclusions - Why Social Security is Far Worse Off Than Advertised

For a dozen plus years, the Census has incorrectly believed and projected that total US births were on the cusp of an upturn.  The chart below shows actual total births and Census projections since '00 through the most recent Census projection in 2017.  Each projection was lower than the last but still far too high.  Since 2007, there have been 5.5 million fewer births than the '00 and '08 Census projected.  And this delta in projected growth versus rapidly diving births and fertility rates is only continuing to widen, as detailed through Q1 of 2019 at CDC Fertility Data.
Social Security essentially gets its projections from the Census and makes forward based assumptions on the median Census projection.  In this case, the chart below shows actual US fertility rates since 1950 and Census projections (solid lines) versus UN projections (dashed lines).  According to Social Security projections (solid lines), fertility rates at present 1.72 (and still falling) are not possible and only higher fertility rates are to come.  Either fertility rates will rise to 2.2, 2, or 1.8...but the current reality and/or further decline is simply inconceivable.  Meanwhile, the situation isn't so inconceivable for the UN Population Projections (dashed lines) which offer a wide range of possibility from a low of 1.3, to high of 2.3, with a long term base case of 1.8.
And here is the decade plus of discrepancy between actual 0 to 20 year-old US population.  Census (Social Security, solid lines) versus United Nations projections (dashed lines).  Again, the Census nor SS can conceive of what has been happening for the last decade nor can the Census and therefor Social Security project anything but growth.  In fact, the Social Security low growth projection is even slightly higher than the UN medium (baseline) projection?!?  And the UN baseline is too high...which means the reality for Social Security is significantly worse than their most "bearish" scenario and miles away from their current baseline scenario.
But it isn't just the absence of population growth, it is how this translates to the lack of fuel for further employment growth.  Rather than use the BLS unemployment data, I simply divide the populations that make up the work force by the quantity of those employed among each age group (chart below)...and this reveals we are at historical levels of full employment.  In fact, only once (briefly in 2000) has the largest and most important group (25-54 year-olds) ever had a higher portion employed.  The 55-64 year-olds have never had such a high portion employed...and even the 15-24 year-olds have recovered much of the losses they suffered in the '09 great financial crisis (but even beyond X-Box, there are structural reasons this group is unlikely to see significantly higher employment %'s...detailed HERE).
Given we have full employment, the problem is we have precious little growth among the working age population over the next decades.  As the chart below details, the population growth over the next two decades shifts to the oldest among us with hardly any labor force participation among them.  The growth among 70-80 year-olds and 80+ year-olds will dominate.  And yes, the charted data is inclusive of both actual and the projected continuation of significant immigration (absent that, the working age declines are far more severe but the elder growth essentially unchanged).
And dividing the age groups by their participation rates gives us a clear idea of the potential fuel available for employment growth (aka, new home buyers, new car buyers, those likely to undertake loans, etc.).  For the coming two decades, I even likely over-estimate the 70-80 year-olds at 12% LFP and 5% LFP among 80+ year-olds versus a consistent 75% for 20-70 year-olds.  This means over the coming twenty years, the US is only capable of about 1/3rd the employment growth it was consistently capable of from 1960 through 2020.
Thanks to the 2019 OASDI Trustees Report, the Social Security situation is fairly plain.  The chart below shows the OASDI annual deficit plus low, medium, and high cost projections.  What I have detailed from this point forward is that given the unrealistic population growth projections and resultant unrealistic employment growth expectations, the worse case "high cost" estimate may be too optimistic. This will mean the Social Security so-called "trust fund" of $2.9 trillion will be burned through prior to 2035 and the politically charged issue of automatic "pay-as-you-go" 20% to 40% declines in benefits will be thrust upon the nation sooner rather than later.  For instance, of the 60+ million SS beneficiaries, the average beneficiary in 2019 pulls in $1461 monthly, and would be looking at an automatic $400 to $600 reduction in monthly benefits once the "trust fund" is depleted.  The worst-case OASDI cumulative scenario adds an additional $5 trillion in deficit spending through 2050 over the medium projection.
And just to round out the picture, the chart below details the combined OASDI and HI (Hospital Insurance) deficits.  Again, the redline worst case "high cost" projection is likely too optimistic.  Annual deficits absent population growth among the young and working and resultant minimal further employment growth...and the inevitable explosion of elderly...means a worse than "worse case" should be the base case.  And the combined worst case OASDI + HI cumulative projection adds another $12+ trillion to the projected debt pile above and beyond the medium projection.
Two final charts, below, detailing the annual change in the 20-40 year-old US childbearing population versus 70+ elderly and the movement of the Federal Funds Rate, plus the impact of the federal funds rate on incentivizing debt.
Below, annual population change (million persons) of the 20 to 40 year old US population versus annual change in 70+ year old US population, Federal Funds Rate (%), and public versus Intragovernmental debt outstanding (trillion $'s).
Below, annual population change (% of total population) of the childbearing versus elderly, Federal Funds Rate (%), and public versus Intragovernmental debt outstanding (trillion $'s).
Of course this doesn't show unfunded liabilities, corporate debt, student debt, auto loans, credit card debt...but the Federal debt gives a nice example of the impact of ZIRP on the undertaking of new debt when the money is essentially "free" (particularly for the Federal Government and Corporations...and when served to our young adults as predatory non-dischargeable lending to minors or "student loans").
Why is it important to break out the public vs. IG (Intragovernmental) debt?  IG trust fund surplus' are mandated by law to buy US Treasury debt while Primary Dealers (a select # of the largest banks) are likewise mandated to bid on government debt which they then typically resell to the public and foreigners.  As you can see, IG purchasing is slowing while nearly all the debt is now being resold to the public / foreigners / and Federal Reserve.  This trend will accelerate rapidly over the coming decades.  The surge in 70+ year-olds collecting their Social Security benefits and the minimal growth among new taxpayers will result in public debt soaring while the theoretical IG trust fund is depleted.

Perhaps a "come to Jesus" moment is likely sooner than later.

Sunday, November 10, 2019

"Not QE", Monetization, & "Definitely Asset Inflation"

Chart below shows the Federal Reserve holdings of Treasuries, a weekly change (black columns) and total holdings (red line) during QE1, QE2, Operation Twist, QE3, QT, and "Not QE".  Got it?!?  This current "Not QE" explosion in QE is like some kind of old time vaudeville act (like the old Abbott and Costello bit, "who's on first, what's on second, I don't know's on third").

But looking more widely, the chart below shows the total Federal Reserve balance sheet (blue shaded area), bank excess reserves (red line), and the delta between the Fed's balance sheet and excess reserves...also known as direct monetization.  As the Fed restarted "not QE" but did not go through the fa├žade of attempting to stock the new money away as "excess reserves", this new money is flowing straight into assets, like monetary heroine.

Below, a close up of the components above solely in 2019 (through November 6th).  Balance sheet soaring once again since the Fed's sudden pivot, excess reserves continue falling...and the difference in freshly digitized cash in the hands of banks and the like...ready to be levered up.

So, monetization (yellow line) versus the Wilshire 5000 (green line) from 2014 through last week.  For those not familiar, the Wilshire 5000 total market index, is a market-capitalization weighted index of the market value of all US stocks actively traded in the US.

And fascinatingly, since the beginning of 2018, the Wilshire 5000 and direct monetization are becoming more attuned to one another.  And in mock shock, the new record close in the Wilshire just happens to be accompanied by a new record in direct monetization!?!  Almost as if the addition of $320 billion in fresh digital cash since mid August Fed U-turn had something to do with the $2.2 trillion rise in US equities over the same period (a leverage ratio of about 7x).  Hmmm.

Then Fed head Bernanke was so adamant that this "direct monetization" was something the Fed would never do (clip HERE).  Ben said all the fresh digital cash would sit in the Federal Reserve as excess reserves and once the crisis was over, the Fed would reverse and the monetization would be avoided.  How the times change.  So, what should Americas new mantra be?  By hook or by crook, or maybe more apropos, fake it 'til you make it?!?  But for those curious in the why, I offer the following article outlining the simple changes in Demographics that are pushing such radical actions.

Wednesday, November 6, 2019

Organic Collapse In Money Supply Supplanted By Synthetic Growth = Centrally Directed Melt-Up

The demographic situation the world faces is unprecedented and unparalleled in modern history.  All the deaths of the past few centuries warfare were blips on the radar compared to what is taking place now.  Given the infinite growth economic model, the situation is beyond repair and no repair will be attempted.  The only goal is extension of the current model with its clear winners and losers.
To make my point, I roughly split the global population into equal halves.  The half of the world inhabiting consumer nations versus the other half in non-consumer nations (previously detailed HERE).  Consumer nations have per capita gross national incomes above $4,000 annually or an average of $16,000.  Non-consumer nations have gross national incomes below $4,000 annually or average incomes of $1,600 per capita.  Given the groups are 3.9 billion (consumers) and 3.8 billion (non-consumers) and the poor have incomes 1/10th that of consumer nations...the fact that the consumer nations consume 85% to 90% of global energy and exports shouldn't be a surprise.  Consumer nations have nearly all the income, savings, and access to credit.  From an economic standpoint, the non-consumer nations dominate and the non-consumer nations may as well be on Mars.

Two quick charts and then some themes...

Chart below are consumer nations annual change in 0 to 65 year-olds versus annual change in 65+ year-olds, plus the Federal Funds Rate.  Under 65 year-old population growth will cease by 2023 (if not sooner) and turn to large declines indefinitely thereafter.  The annual growth of 65+ year-olds has has been accelerating since 2008 and won't hit peak growth until around 2035.

Chart below are non-consumer nations annual change in under 65 versus 65+, and Federal Funds Rate.  Under 65 year-old annual population growth has ceased increasing and is in the process of rolling over to growth of "just" 35 million by 2050.  Non-consumer 65+ year-old population growth is rising and estimated to continue accelerating through 2050.

What is the point(s) - 

Under 65 year-olds in consumer nations have a high rate of credit consumption.  65+ year-olds are relatively credit averse and more likely to pay down or pay off existing loans than to undertake new loans.  Those elderly that do undertake new debt do so at relatively low levels.  Simply put, in our fractional reserve banking system, the bulk of "money" in the economy is lent into existence by a rising quantity of loans.  But the data is clear that those who undertake new loans (create new money) will be in indefinite decline, while roughly equally and oppositely, those that pay down or pay off existing loans (destroy existing money) will take their place.

During the current cycle, corporate debt, student loans, and vehicle loans have done much of the heavy lifting in new debt creation.  However, all three sources of new debt are already "over-utilized" and only new vehicles (plus credit card debt) is likely to grow among the elderly.  Where will further debt ("money supply" growth) come from as that the quantity of potential working age persons to undertake new credit, and thus organically grow the "money supply" (let alone consumption), has decelerated by over 90% and is set to begin declining very soon?

To paint the picture a little clearer, the two charts below show corporate debt and student loan debt versus the primary populations that consume that debt (US 25 to 54 year-olds and US 15 to 24 year-olds, respectively).  The substitution of surging debt versus flat to falling populations isn't hard to make out.

Thus, there are two options to continue growing debt (aka, "money").  Either encourage the continually fewer working age persons among consumer nations to take out ever more debt (via perversely paying borrowers with NIRP or similar to undertake new loans) and/or central banks conjure it from nowhere.  ZIRP, NIRP, QE, LTRO, and acronyms yet to be invented will all have the express purpose to destroy assets (purchasing bonds, stocks, etc. that are never to return to the market) and replace them with newly printed "money" which will chase the remaining assets higher.  This monetization is to avoid a free-market from pricing assets based upon a declining quantity of buyers and fast increasing quantity of sellers.
It is the progressive and degenerative fundamental weakness (slowing population growth and outright population declines among consumers) that is the premise for ever greater market interference that drives the observed economic and financial market "strength".  Of course, the policy of centrally directing asset appreciation has clear winners (a declining quantity of institutions, asset holders, federal governments) and losers (a fast growing quantity of young, poor, working class, and those with few or no assets).

Population data via UN World Population Prospects 2019

Saturday, November 2, 2019

Demographics, Credit Demand, & Money Creation...Why The Federal Reserve Monetization is Just Getting Warmed-Up

Today, the annual issuance of Treasury debt crossed the $1 trillion mark for the 2019 calendar year (likewise crossing over $23 trillion, with two months still to go).  Below, in red is surging public (marketable) debt versus in blue, the slowing intragovernmental (Social Security and other trust funds) debt, and the Federal Funds Rate.
The fact that all that Treasury issuance has come in the last three months should be noteworthy, but heck, the Treasury had some catching up to do after another debt ceiling impasse!?!  Still, over the same period, the Federal Reserve has cut interest rates by 35%.  Over that same period, the Fed has ceased QT, pivoted, and initiated some of the most aggressive QE we have yet seen.  This has increased the Fed's balance sheet over $260 billion in just over two months, since the Fed's pivot of late August.  Over the same period, the Fed has engaged in the most aggressive monetization of debt (decreasing bank held excess reserves against increasing Fed assets) we have seen since the depths of 2009?!?  Suffice it to say, these are not signs of strength or confidence but instead signs of panic.  But why???
For hundreds or even thousands of years, the study of demographics (statistical data relating to the population and groups within it) was a sleepy backwater somewhat akin to watching the grass grow.  So much so that economists no longer bothered themselves with the minutiae involved.  Economists built models (assuming demographics would forever remain static) on the idea that if ever more capital was freed, more supply would be created, and rising demand would consume ever more.  However at this point in time, if you don't understand demographics, then you won't likely understand what is happening and why previous economic theories no longer make sense.  To put it simply, certain populations (wealthier) and certain age groups (working age adults) do the vast majority of consuming and undertake the vast majority of new loans (debt) which pushes the quantity of "money" and consumer demand ever higher.  But today I detail that growth (where it counts) is at an end among the populations and age groups that drive demand.  The net result is the end of rising consumption, rising credit, and the rising growth in "money".

The end of growth in money is due to our fractional reserve system, where something like 10% of deposits are held back and 90% loaned out.  Thus, the vast majority of "money" is lent into existence via banks.  But again, not all customers are alike, as it is the working age adults that undertake the bulk of new loans for homes, cars, education, etc.  Conversely, elderly are generally credit averse and far more likely to pay down or pay off existing loans than to undertake new loans.  This makes sense since the labor force participation rate among elderly is about 10% compared to 80%+ among 25 to 54 year-olds.  Elderly live on fixed incomes and generally live within their means.  That isn't to say that credit isn't on the rise among the elderly, just nowhere near the levels it is utilized by the working age population.  In essence, elderly "destroy" money vs. young who "create" money.  In the right proportions...things lift upward, but in the present and coming proportions, money supply organically collapses.  Enter central banks monetization and synthetic creation of "money".

Global Picture
On a global basis, the chart below splits the global under 65 year-old population in half.  In blue, the under 65 population of nations that make above $4,000 annually per capita (or on average above $16,000 per capita) and those making less the $4,000 (or those averaging below $1,600 per capita annually).  Noteworthy is despite the large inflow of immigrants from poor nations, the global consumer population under 65 years-old will begin declining by 2023 and decline indefinitely thereafter.  All population growth from there on will be among the under 65 year-old non-consumers (or poor nations) and as the next chart below shows, among the non-credit wielding wealthy and poor elderly.Below, decelerating over 65 year-old population growth through 2050 before the wealthy elderly cease growing, leaving only the poor elderly to rise alone through 2100.
Or a single chart to detail the situation (below).  Despite an influx of immigration, the total births in the wealthier half of the world have declined over 7.5% since 1990 (yellow dashed line) versus the tripling of annual growth among the wealthier nations combined 65+ year-old population.  Simply put, nothing like this has happened in the last ten thousand years...and nothing like this is likely again for the next ten thousand.  Aka, "the demographic moment", the "inflexion point", or the moment where "shit hits the wall".
Shifting to the US
According to the Fed's Survey of Consumer Finances HERE, 75+ year-olds are half as likely to utilize credit as the working age population, and among the half of 75+ year-olds with debt, they have less than half as much debt as the middle aged.  Translated, 75+ year-olds create less than 25% the credit than that of the working age population.

So, what happens to credit creation (and growth of the money supply) when population growth slows and shifts to those least likely to undertake new loans or credit?  Que the Treasury, Federal Reserve, Congress-critters, and president.
Looking at the annual population growth of the US, by age segments, plus total annual births, below.  The large deceleration of growth among the working age population is plain (blue line) and the tripling of annual growth of the 70+ year-olds isn't hard to pick out (grey line).  The 14% decline in births since the '07 peak is also noteworthy (yellow dashed line).
From 2020 through 2030, total population growth slows 20%, and 75% of what population growth remains is among 70+ reversal from previous decades.  Below, looking specifically at the opposite end of the spectrum.  A 14% decline in births since 2007 (yellow line) versus a quadrupling of growth among the elderly population (grey line).  This is also known as an inverting pyramid.
Below, looking at housing starts (blue columns), federal funds rate (black dashed line), and the annual growth of the 0 to 70 year-old (green line) versus 70+ year-old (red line) populations.  The issue is minimal growth among the working age (coupled with full employment among this population) versus a deleveraging elderly population.  An economy primarily driven by new housing and all that orbits new housing (infrastructure, factories, manufacturing, durable goods, etc.) is set to endure little to no organic demand growth (but of course the US federal government and the Fed can follow the Japanese or Chinese models to continue creating "bridges to nowhere" and "ghost cities" to perpetuate the inevitable).
What does this mean?  This should mean that the growth of the money supply lags significantly or doesn't grow at all.  The population that typically utilizes credit is growing minimally and the population that sparsely uses credit (or net pays off debt) is growing rapidly in the US and among consumer nations.  The natural outcome would not be asset inflation and bull least not organically.

But in a system where the growth of credit ("money") is necessary simply to pay the interest, only if we look behind the veil could we see how this "bull market" is being made.  To follow through on this point of age based credit creation, I utilize the most recent Federal Reserve Survey of Consumer Finances ( ), detailing the changing situation from 1989 through 2016.  It juxtaposes the young adults (under 35 year-olds), prime aged adults (45 to 54 year-olds), and elderly (75+ year-olds).
Utilization of Debt (Any)
First, the percentage of families, by age of head of household, utilizing debt has been consistent aside for the increased reliance among the elderly.Mortgage Debt
Next, the percentage of families with mortgage debt has been declining for young and prime aged adults since 2007 while the reverse has been true among the elderly (below).  However, still less than one quarter of 75+ year-olds have outstanding mortgage debt versus over half of prime aged adults.Since 2007, median mortgage debt among those families carrying mortgages (percentages above) has decreased among the young, remained flat among the prime aged adults and elderly (below).  But again, less than half the number of elderly carry mortgage debt, and those that do carry less than half of the working age or young adult populations.Vehicle Debt
The percentage of families with vehicle debt is fairly consistent among young and prime aged adults, less than half among elderly despite gently rising.
Fairly consistent median vehicle debt among families with debt and fairly consistent across age groups.
Credit Card Debt
Below, the percentage of families w/ credit car debt, by age groups.  Elderly are almost half as likely to have outstanding credit card debt.
Below, median credit card debt is declining amid all segments except the elderly.Student Loan Debt
The percentage of young adults and prime aged adults carrying student loan debt continues to crank upward (below).  Of course, the percentage of 75+ year-olds with student loan debt is essentially zero.  Or said otherwise, the primary vehicle for credit creation (money growth) is entirely avoided by the population that is set to experience all the growth for the next two decades!?!Below, rising median student loan debt among students and their parents that carry student loans.  As for the only population that is set to grow in abundance over the next two decades, the elderly...not so much.Conclusion:
The very negative organic demographic outcome of a serious review of credit creation and money growth should be plain. But this is where so many have gone terribly wrong and lost gobs of a centrally controlled world, bad is good!  The "badder" the underlying fundamentals, the "gooder" the synthetically driven growth!!!  The worse the organic situation, the more the poor are hammered and the wealthy made wealthier.  The weaker the potential growth of demand, the stronger the rationale for the Fed, central banks, and federal governments to delay the inevitable.  And when I say delay the inevitable, I (nor the Fed or like actors) know if this is a year, a decade, or ???  It is simply an all-in bet with nothing to cover the eventual, inevitable losses.
All population data is via UN World Population Prospects 2019.