On The Ever Stronger Demographic Headwinds Before The US Economy
Ten days ago we posted extended thoughts on the upcoming US demographic crunch, paraphrasing observations by Goldman Sachs, which speculated that with ever more individuals leaving the "prime-savers" demographic bracket, those aged 35-69, the (already meager) temptation to save in the US will decrease substantially going forward. Goldman was primarily focused on the implications this phase shift implies for future US Current Account deficits. Today David Rosenberg begins to tackle the US demographic issues from his own perspective, with his preliminary conclusions, as expected, not validating any optimistic perspectives before the US economy: "starting next year, this key age cohort for both the economy and the markets will begin to decline — according to official forecasts, each and every year to 2021. The last time we saw sustained declines in this part of the population was from 1975-83, which was an awful time for both the economy (except for that very last year when the negative growth rate in this age segment was drawing to a close) as the S&P 500, in real terms, was as flat as pancake and real per capita income barely expanded."
More from David:
Harry Dent is one of the world’s most widely read demographers and market commentators and we saw something in one of his publications that really caught our eye. A focus on one particular part of the Baby Boom population — notably the one that really drives spending, wealth gains and income. It’s the 45-54 year old cohort.
Indeed, we back checked through the assertion by sifting through the Fed’s database (mainly the survey of consumer finances) and found that this cohort does indeed have the lowest savings propensity, the highest earnings level and the greatest increase in net worth compared to other age categories.
From 1984 to 2010, this cohort rose each and every year. That didn’t prevent business cycles from occurring or the odd vicious bear market, but over that period, the stock market, in constant dollar terms, advanced 240%. But starting next year, this key age cohort for both the economy and the markets will begin to decline — according to official forecasts, each and every year to 2021. The last time we saw sustained declines in this part of the population was from 1975-83, which was an awful time for both the economy (except for that very last year when the negative growth rate in this age segment was drawing to a close) as the S&P 500, in real terms, was as flat as pancake and real per capita income barely expanded.
In other words, unless the US finds a way to "refill" this critical bracket, the endogenous headwinds within the economy will continue to strengthen, which is purely a function of the aging US society. And this does not even begin to consider the implications on the various underfunded Trust Funds (like the SSTF) as they begin to see increasingly more use until their official depletion some time in the next 20 years.
And here are some other tangential and as usual, critical, big picture observation from Rosenberg.
Let’s look at what the banks are actually doing, and what we see is that in the August 11th week, they reduced their aggregate loan books by $12.5 billion, the third net reduction in the past three weeks. If they are lending to anyone, it is to Uncle Sam — the banks continue to play the yield curve, belatedly, and were net buyers of government securities to the tune of $15 billion last week on top of the $8 billion net investment the week before. Moreover, the banks are sitting on even more cash, up $35 billion last week, to $1.3 trillion, so there is lots of buying power to take these long-term Treasury yields even lower in the same bull-flattener game the banks played so profitably back during the credit-healing days of 1992 and 1993, which, as long-standing bond bulls, we remember all too well, and quite fondly too.
Investors’ thirst for yield (and duration!) is so intense that there is growing talk of 100-year bonds coming to the fore — see Rethinking the ‘Long’ Bond on page C1 of the WSJ. Everyone focuses on the risks of a renewed uptrend in bond yields. We will likely face recurring spasms; however, it is difficult to see where the cyclical risks are going to come from regarding our ‘safety and income at a reasonable price’ theme — especially since there seems to be another post-Labour day round of job cuts coming (see Hiring Spree Gets Long in the Tooth on page C1 of today’s meaty WSJ). There are still plenty of opportunities out there in the fixed-income universe, which is why the article on page B9 of the WSJ really caught our eye today (Thornburg Seeks ‘Worthy’ Risks in Muni-Bond Market).
If there is a quote of the day, it must surely go the Lex column on page 12 of today’s FT: “For investors, the only thing worse than a low-yielding world is denying that it exists.”
Yes, demand for cash is extremely high, and when this happens, when the cost of capital is as low as it is today, then that must tell you a thing or two about perceived returns on invested capital. But, by definition, they are very low, and the government has run out of traditional policy bullets and the next moves by Bernanke et al, as per his “what if” speech of 2002, will involve more experiments as the Fed chairman probes the outer limits of monetary policy.
Look at the charts below. Despite the most aggressive government efforts in the modern era to kick-start the economic cycle, what we still have on our hands is a broken financial system. We hope this is not lost on the perma-bulls among us, but the pool of credit under the umbrella of private label asset-backed consumer and mortgage asset loans has collapsed by over $5 trillion, or by 60% (!), over the past two years. The private market for securitized credit is back to where it was in 2000 when the economy was two-thirds the size it is today. What few people realize is that 100% of the increase in GDP during that wonderful, though obviously artificial, economic recovery coming out of the tech wreck from 2002 to 2007 was funded by the explosion in the securitized credit market. This market is now, for all intents and purposes, defunct and replaced by Uncle Sam’s family (Fannie, Freddie, Sallie … and the FHA too).
At the same time, who wants to be a lender today — despite the most aggressive intervention efforts ever (and ongoing threats of cramdowns). Whatever improvement we are seeing in default and delinquency rates have actually been rather marginal and in some cases, especially in the home loan market, have not improved at all. (However, people are making sure they are staying current on their cherished credit card — no strategic defaults here!)
The last charts below illustrate how focused households, businesses and banks are in terms of maintaining historically high levels of liquidity despite the fact that interest rates are at microscopic levels. This says something about the desire on the part of economic agents to maintain very high levels of precautionary balances, ostensibly because they understand that recession risks are high and that means an emphasis on survival kits.
But when everyone is building their liquid assets at the cost of not putting the funds to work in the real economy, then what we get is the infamous paradox of thrift. The government is there to help counteract these deflationary excessive savings trends in the private sector, but the problem now is one of high and rising structural deficits and a debt-to-GDP ratio that is a year away from breaking above 90%, which is the Rogoff-Reinhart threshold for when fiscal policy does more harm than good for the broader economy.
There are no quick fixes to a post-bubble credit collapse. Time and shared sacrifice are the only viable solutions and people on this side of the ocean should probably go and ask the folks that endured the Asian collapse and depression back in the late 1990s what it took beyond intestinal fortitude to get to where these “emerged” markets are today (ie, radical economic, financial and political reforms). By letting failed companies and banks survive with the help of government intervention, what the U.S. government decided to do was to avoid further pain after Lehman collapsed — and what you pay for by putting an artificial floor under the “levels” of output, spending, credit etc, is that it becomes difficult to achieve any meaningful “growth rates”. There may be something to be said to rebuild the system from the rubble, which is what Japan never did but what the other Asian countries managed to accomplish as social contacts were rewritten and sacred cows laid to rest. Why is America sending troops into harms way and at the same time finding different ways to subsidize delinquent mortgage borrowers?
One final note before we move on — it is a mystery as to how folks can get away with some of the things they say. For one, we see this article on page B1 of today’s Globe and Mail titled Bumpy Economic Road? Truck Drivers Don’t Think So. But the article shows a chart of the Ceridian-UCLA Pulse of Commerce Index which measures trucking activity. Ed Leamer, one of the architects of the index, is quoted as saying “I don’t think that a double-dip is in the cards.”
The problem is that when you see the chart, two things jump out. First, it looks to be a perfectly coincident index. Actually, it looks to have peaked in early 2008, after the recession actually began. Second, although this index did recover in July, it looks to have already turned in a classic double top.
There’s also a column on page B7 of the Globe and Mail that poses the question: “How can we be entering a double-dip recession if commodities are peaking?” Yet, we see that the CRB Futures index actually already peaked in April at 280 right around the same time the equity market has turned in its highs — and is sitting at 267 today.