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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!)
As of yet, there is very little impetus in the money multiplier or money velocity even if they have stabilized at depressed levels; the Japanese charts look eerily similar.
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.
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www.hsdent.com has a video from July suggesting to for one, be out of stocks now and if aggressive, go short.
Ialways liked Dent. Forecasts are great, but market predictions .. not so great.
Paradox of thrift Bitchez!!!!!
I am 54. I did not work long enough in the private sector to even qualify for Social Security (I did work for .gov and as an entrepreneur). I am a semi-retired bearing buyer! That does not count as working for the purpose of being on the payroll long enough to qualify.
I truly do not expect to see any money for me from our government. Instead, I have had to pay far more in taxes than I will ever get from government "services".
I told my wife that we are clamping down on spending, and we are about to. No more trips to Europe. We will hang on to our cars longer. We may downsize to a smaller condo. I am actively trying to save (especially buying gold).
Fear not younger people! The Bearing will not mooch from you. I will not participate in taking money from our already bankrupt system.
Bearings, I am 32 and am glad someone in your age bracket is conscious of the realities of the economy. Most people your age (and other age brackets) just ignore reality and spend money they don't have preparing for their impoverished future. I commend your actions.
As a point of view from my bracket, we never had the house, the nice car, the vacations and etc. We hear about how your cohort has suffered without any regard for the fact your age group is one of the factors driving the bankruptcy. It also was not our choice our parent's group failed to have children (thank you the 60s decade).
What I am asking is tell others your age about reality, not about some overly optimistic future that will never exist.
i agree.
it seems manyl of these machinations follow the interests of the boomers... when they wanted opportunity they wanted deregulated markets, when it's time for houses they want a boom, when it's time to retire they want healthcare....
what's interesting is that the current panic yield chasing is also driven by this demographic; and what's more interesting is that mr. market is going to put them back in their place. the paper their living off of will be devaluated to what it's worth eventually and a whole generation will learn that distorting the system doesn't work out in the long term
anyone who thinks they're gonna live off of all this phony paper is in for a big surprise. you can't ignore reinvesting in the future generations and expect to get paid back.
the younger generation doesn't care about all this market stuff because they've never had a chance to store their work (or lack thereof) in phony paper. so the scheme breaks down because the young are not recycling their work output to the old.
Vampyro, actually because to a great degree friends self-select each other, most of my friends think like I do.
I will have to ask my (working) 2009 grad daughter (23) what her friends talk about. Alas, I do not think there are many savers in her bracket. I will just have to save for her.
When I was 23, I was a stingy little bastard... :>)
This older group is not as docile as you might think.
There was a lot more wilingness to protest against the system than I am seeing presently. There were many radical groups willing to get arrested in acts of civil disobedience in the 60's and early 70's.
You don't see too much of that today; though you think that you would considering the state of facsism that we live under.
I'm 58 and I have been to protests even recently.
Implicit, the last demonstration I went to was the April 15 Tea Party event here in my city.
The one before that was when I was in college...
I was at the Beantown Tea Party this year with a homemade sign that read:
End the Fed
Break up the Banks
Stop Fascism
People complain about the tea party, and I am not an active member, but at least it was a venue to express my dissent. I am a lot more radical than the typical tea party.
Inow have a sticker on my ar which reads
Clean house and clean the senate
My sign said:
Stop Spending Our Children's Money!
Both my wife and I carried the thing...
By the way, your avatar looks like the bearings in roller blades.
I once considered using them in a moveable joint that I was fabricating, but never got around to it.
If I were a boomer, who would I be selling my McMansion with 50% still unpaid principal to ? I see this as a huge headwind for the USA.
Most people I talk to that are in your age range all say about the same:
I worked for it my entire live, it's mine to get.
And when I try to explain that younger people aren't able to even buy a house that is descent or save money I mostly just get a smile or raising shoulders.
But to compaire generations I will compaire my father with myself:
My father was a sales rep. for IBM in the 80's selling network and personal computers. He made about 17.000$ a month. He didn't have a education that really mattered and learned the job as he started. He was about 30 when he got that job. A few years later, he build a house that is now valued to 850.000$
He just retired en has a nest egg of about 600K.
Now me: I'm 34, I work already 9 years, I'm a senior Marketing Manager for one of the largest retailers in Europe. If I compaire my function to my father, I'm miles higher on the ladder. But still I only make 9500$ a month brut. After taxes I get to keep 5700$
Compaired to friends, I make a pretty good living.
But I will NEVER, EVER EVER, be able to build a house worth 850K! And even when I would buy a house like that, I would NEVER, EVER EVER be able to put a nest egg aside of 600k.
Let's also not forget that when my father made 17K a month, that this was already in the 80's! After that he worked for Unisys and Cisco and made even more AS A SALES REP!
They may have worked for a compensation at their pension age but I DO TO! And it looks like I'll never get it. And that generation was able to save A LOT MORE MONEY then we do.
I bought a house that costed 400K. That takes 3400$ each month of my salary. My wife makes about 5000$ a month as a geo engineer for a dredging company. We both work our ass off but most months WE DON'T SAVE ANYTHING! ( and what we do save I lose in the stock market :) )
My mother never worked, and raised us proper. I grew up in a very peacefull family where everybody had time for each other. NOW I CAN'T DO THIS!
I have to send my scedule to my wife to organise ourselfes. It's like planning a meeting to get laid these days!
yeah, but according to the Fed and the economic daydreamers our standard of living is increasing.
what an f'in joke
Hyperinflation+ (negative)demographics= Tents+Ammo
hell, even Tony Robbins see's this
http://weaselzippers.us/2010/08/23/things-have-gotten-so-bad-even-motivational-speaker-tony-robbins-says-he-cant-make-us-feel-better/
actually his comments represent a total contrary indicator type of concept. Sell the Robbins rally?
http://www.hsdent.com/the-dent-method/#Predictable%20Spending%20Patterns
Look at the section called spending wave… you don’t need to read most of the pages mumbo jumbo, but if you think about the combination of immigration, and adjusting the spending patterns of the birth rate by 47.6 years, you get the spending wave… so the thing I noticed about the spending wave chart, (I think the corollary to the DOW is irrelevant) is the peak spending was hit already, and we will never have that level of spending in the next 50 years. Pull that together with the idea that people go into a lower level of consumption than previous years given the conspicuous growth of credit, and potentially the abstinence of credit, and you can push that remaining spending curve out a few years, possibly between 5 to 10, which would mean that we will never see spending like we did in the peak of 2007.
Sea-bond, bitchez...!
...and Geritol, bitchezzz.
Just have ex fed govenor Mishkin write a paper stating that there is no demographic decline. That would fix everything. http://jessescrossroadscafe.blogspot.com/search/label/pay%20for%20say
Charactor assasinated.
i'm sure he will... for a nominal fee.
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Look at any publicly traded healthcare company and odds are the number 1 reason cited for growth is demographics. If it isn't number 1, it is in the top 5. No doubt demand for artificial hips and heart pharmaceuticals are going to increase, but who is going to pay for it? Look at all the recent acquisitions by United Healthcare's subsidiary Ingenix. All are designed to put another layer between the payor (United) and the insured, to decrease the likelihood of payout. Payors will eventually push more and more of the cost to the government, furthering the stress on the economy.
Exactly Chris. The aging baby boomers are going to accentuate the the economic strees more than the decline in the largest spending group- 45-54 yr olds.
This larger demographic group will tap out Medicare, Medicaid and Social Security benefits before the next group can portend to partake at the same reinmbursement level.
It's not just negative demographics, but the low quality of the demographic transformation going forward.
Replacement immigration, where American workers are being replaced by third world peasants, is not the answer.
Updated S&P500 chart:
http://stockmarket618.wordpress.com
Thanks for such a great post and the review, I am totally impressed! Keep stuff like this coming!...
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