Demographics

"I find it so disturbingly illogical that we Americans are willing to die so that our political class can enjoy ill gotten riches and power yet we cower when it comes to defending our great nation against the political class, something our founding fathers pleaded for us to do.  The truth, which the political class legislates so hard for us to overlook, is that they are powerless without us.   It is us that fight their fights, fund their wars and enforce their laws that enslave us yet we bow down and call them Mr. President and Madame Secretary.  And so I ask each and everyone of you, when will we wake up and recognize that we are the power and the wealth and that the political class has only managed, through deception, to harness our strengths and pass them off as their own?  For until that day of awakening, we will continue to live as an oppressed people ruled by others for others."

When "the retirement of the baby boomers is expected to severely cut U.S. stock values in the near future," is the ominous initial sentence from no lesser maintainer-of-the-status-quo than the San Francisco Fed's research department, one begins to recognize the Federal Reserve's overall need to hyper-inflate asset prices at whatever cost for fear of the 'wealth' destruction looming. As the following study reports, projected declines in stock values - based on the latest demographic and valuation data - have become even more severe. Our current estimate suggests that the P/E ratio of the U.S. equity market could be halved by 2025 relative to its 2013 level.

Following the start of Abenomics in 2012, Japan moved back to the center of attention of global financial markets. After two and a half decades of economic stagnation, hopes were high that Japan would escape its long stagnation and deflation. Plenty of economists around the globe hoped that, in so doing, Japan would show the western world, mainly the Eurozone, the way to do the same and avoid a similar long period of low growth and stagnating incomes. Conversely, the failure of Abe’s plan for Japan’s recovery would not only be a disaster for the country of the rising sun. It would also be very bad news for central bankers and politicians in the west as well. It would prove that Keynesian policies don’t work in a world of too much debt and shrinking populations.

WWII is still reshaping our economic reality. The subsequent baby booms in the US and globally in Japan, Europe, and so many more locations which were affected by the war created a “pig in the python” moment. This unusually large wave of population growth from ’45-’55 was “pent up demand” from the war. But society and its leaders assumed this baby boom anomaly to be the new reality.  The “pig is passing” from the American and global workforce into retirement and now the wreckage and folly of such basic misnomers has come home to roost…and will get far worse.

Despite the authorities' best efforts to keep everything orderly, we know how this global Game of Geopolitical Tetris ends: "Players lose a typical game of Tetris when they can no longer keep up with the increasing speed, and the Tetriminos stack up to the top of the playing field. This is commonly referred to as topping out."

"I’m tired of being outraged!"

Around the world, unsustainable policies from the 20th century are beginning to fail in earnest. What will the future geopolitical landscape look like in their aftermath?

There are some signs of trouble in emerging markets. And the money at risk now is bigger than ever.

I realise that it is not normal to have a bearish risk view for December through to mid-January. Normally markets tend to ramp up in December and early January before selling off later in January. But this year I do think things are different. One look at the moves in core bond markets over 2014, when almost everyone I talked to had been bearish bonds, paints a stunning picture. I would entitle this picture ‘The Victory of Deflation’, or (as many folks now talk about (but still generally dismiss)) ‘The Japanification of the World’. I may end up eating my words in 2015 if the US consumer does come through, but if he or she does not, then we may well need QE4 from the Fed to battle the incredibly strong headwinds of deflation around the world. And I will revert on this subject, but to me the coming ECB QE and more BOJ QE are woefully inadequate substitutes for USD Fed QE.

“Can a debt crisis be cured with more debt?” it is difficult to envision a return to normalcy within my lifetime (shorter than it is for most of you). I suspect future generations will be asking current policymakers the same thing that many of us now ask about public smoking, or discrimination against gays, or any other wrong turn in the process of being righted. How could they? How could policymakers have allowed so much debt to be created in the first place, and then failed to regulate their own system accordingly? How could they have thought that money printing and debt creation could create wealth instead of just more and more debt? How could fiscal authorities have stood by and attempted to balance budgets as opposed to borrowing cheaply and investing the proceeds in infrastructure and innovation? It has been a nursery rhyme experience for sure, but more than likely without a fairytale ending.

"We all are in a Ponzi world right now. Hoping to be bailed out by the next person. The problem is that demographics alone have to tell us, that there are fewer people entering the scheme then leaving. More people get out than in. Which means, by definition, that the scheme is at an end. The Minsky moment is the crash. Like all crashes it is easier to explain it afterwards than to time it before. But I think it is obvious that the endgame is near."

"Today central banks give money to institutions, which are not solvent, against doubtful collateral for zero interest. This is not capitalism."

The decline in oil prices is a clear message that "something is awry" globally and investors should take heed that risks of a market decline have risen markedly. While I am not saying that the economy is about to slide off into a recession, previous declines in oil prices of the current magnitude have been associated with poor outcomes for investors. Caution is advised.

While the argument that declines in energy and gasoline prices should lead to stronger consumption sounds logical, the data suggests that this is not actually the case.

"You might think legions of retiring Baby Boomers are to blame, or perhaps the swelling ranks of laid-off workers who’ve grown discouraged about their re-employment prospects. While both of those groups doubtless are important (though just how important is debated by labor economists), our analysis of Bureau of Labor Statistics data suggests another key factor: Teens and young adults aren’t as interested in entering the work force as they used to be, a trend that predates the Great Recession." - Pew

Here is the BIS once again with its noble - and now thorughly 'Austrian' - public service announcement, this time warning about the implications of a global "debt trap" and how everything will end in tears (stop us when this becomes familiar). We have just one request. Next time, instead of sharing these profoundly Austrian observations with the general public, maybe you can just discuss them at the next BIS Board of Directors' meeting which consists of...