DB Warns 35-Year Economic Super Cycle Is Officially Ending

Tyler Durden's picture

Markets have become so ultra focused on the short-term that we often wonder whether anyone even remembers what happened last week much less what happened in the wake of the housing collapse in 2008 that nearly toppled global financial markets. 

In fact, auto sales, fueled by the latest subprime lending frenzy, are the perfect illustration of the lack of institutional memory.  Despite the brutal ramifications of lending to subprime real estate borrowers just 8 years ago, today we see billions of dollars flowing into subprime auto loans, with reckless abandon, as auto sales bubble over courtesy of $0 down, 0% APR, 70 month loans that would have been unimaginable just a short time ago (sound familiar to anyone?). 

Of course, the current subprime auto bubble is the direct result of reckless central banking policies that have forced trillions of dollars out of sovereign debt and into any asset with a reasonable term and a yield above 0%.  And who cares about the consequences of this misinformed investing strategy because every time it looks like the music might be ending, central banks just step in with more stimulus and the party keeps going. 

Alas, at least one analyst, Jim Reid of Deutsche Bank, has cautioned that now might not be such a bad time to take a step back and look at the longer term demographic and economic trends.  Reid argues that global demographic trends, including the addition of "1 billion cheap workers" from China and India and a wave of highly productive 35-54 year old workers, have created a 35-year super cycle that is just about ready to reverse.  Going forward, Reid warns that the "extrapolation of the last 35 years could be the most dangerous mistake made by investors, politicians and central bankers."

The genesis of the current economic era arrived towards the very end of the 1970s with China's re-emergence into the global economy, and this was further enhanced a decade later by the collapse of the Iron Curtain (1988-91) and maybe the economic liberalisation of India in 1991 following the IMF bailout.  In combination this has essentially added over a billion cheap workers to the global economy. This has coincided with a general surge in the global workforce population in absolute terms and also relative to the overall population, thus creating a perfect storm and an abundance of workers. Drilling down to more micro details, the most productive, highest earning and highest spending 35-54 year olds were at their smallest portion of the key global economic powerhouses around 1980. They then surged in numbers but have been peaking out and declining from this decade. This will likely reverse a number of the key global themes characteristic of the 1980-present day period.

DB

 

Reid argues that the multi-decade trend toward globalization has added a billion workers to the world economy that have enjoyed substantial real income growth over the past two decades.  That said, emerging market wage growth has come at the expense of middle-income earners in developed countries as manufacturing and other low-skilled jobs have been geographically redistributed to areas with cheaper labor.

Another related feature of the post 1980s landscape has been 'globalisation'.  Economic activity across the planet has become more integrated as the heavy protectionism that started in the inter-war period and the heavy financial repression/regulation following WWII were swept away. Globalisation has also caused great upheaval in many of the largest developed countries on the planet with many of these themes coming to a head in recent years. 

 

The top global 1% (point C; largely made up of higher income groups in rich DM countries) have seen their incomes grow but by no more than those in the middle of the global income distribution (point A; largely composed of the population in developing countries, particularly China and India).Worse hit have been those around the 80-85th percentile (point B; mostly the bottom half of the income scale in major developed countries) and surrounding areas where virtually no real income growth has been seen over the sample period.

 

So it appears that these lower income groups in developed countries have been the relative losers in the globalisation era as a consequence of the success of the masses in developing economies and the rich across the world. The mass global integration of developing country labour and a coincidental natural demographic surge in the size of the global work force has likely pushed down the price of labour (especially lower skilled) in the developing world. In addition, migration from the poorer to richer countries has emphasised the downward pressure on this unskilled labour in the developed world. The latter theme has been accentuated by the expansion of the EU and the free movement of labour that is associated with it.

DB

 

Therefore, Reid argues that, due to the combination of these global demographic trends, it is no wonder that global asset valuations have undergone a 35-year super cycle resulting in the most excessive bond and equity valuations in over 200 years.  

We don’t think it’s a coincidence that asset prices were historically very depressed in 1980 (see Figure 2) and arguably at all time lows in valuation terms. 35 years later and traditional asset valuations in major DM countries have never been higher due to the themes unique to the 1980-present day period.

 

Extraordinary central bank buying of assets post the global financial crisis has obviously contributed to high asset prices in recent years but the reasons they have had to intervene also stems from the trends originating around 1980 that will be further discussed in this report.

DB

 

Excessive valuations are even more apparent when looking at long-term sovereign debt yields on a standalone basis.

DB

DB

 

And so, as the Baby Boomer generation passes the baton to the Millennials, Reid predicts they're also passing a period of "prolonged low real growth and high (and largely increasing) overall debt levels."

With demographics deteriorating it seems highly unlikely that the next couple of decades (possibly longer) will see real growth rates returning close to their pre-crisis, pre-leverage era levels. Obviously if there is a sustainable exogenous boost to productivity then a more optimistic scenario (relative to the one below) can be painted. At this stage it is hard to see where such a boost comes from – and even if it does, time is running out for it to prevent economic and political regime change given the existing stresses in the system.

 

So we are likely stuck with the challenge of how to deal with prolonged low real growth and high (and largely increasing) overall debt levels. Although this will persist we do think that this current era is drawing to a close with a muddle through the least likely option due to various economic, political and social pressure points that have been reached.

Finally, we'll leave you with Reid's "optimistic" themes for the next 35 years:

  • Lower real GDP growth
  • Higher real wages
  • Higher inflation
  • Higher yields
  • Negative real returns in bonds
  • Lower corporate profits/GDP
  • Higher taxes for the wealthy and corporates
  • Less international trade
  • More controlled migration
  • More financial repression
  • Equities outpace bonds but lag long-term returns
  • Property under performs real wages and inflation
  • Lower than average defaults

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wildbad's picture

yes, they're tanking

Pinto Currency's picture

This article is bullshit.

They've been rigging the gold and bond markets since the late 1980s - it's a debt and fraud super-cycle that is ending.

And it will end with a bang.

http://www.safehaven.com/article/41072/moving-to-the-post-lbma-era-gold-price-reset-watch-out

froze25's picture

Harry Dent has been talking about this since the mid 90's

The Alarmist's picture

Yep ... and with the age of household formation creeping ever higher, any boom that might be had from the millenials coming of age is shuffling farther and farther down the road.

Not My Real Name's picture

From the article: "And so, as the Baby Boomer generation passes the baton to the Millennials."

What happened to Gen X?

bleu's picture

It's NOT the end of a cycle, but the power of the CURSE.
http://wp.me/p4OZ4v-3z

Slomotrainwreck's picture
DB Warns 35-Year Economic Super Cycle Is Officially Ending


DB Warns they are Officially Ending 35-Year Economic Super Cycle

 

FIFY

GUS100CORRINA's picture

With HUNDREDs of TRILLIONS IN DEBT, THE CBs HAVE DESTROYED THE FUTURE AS WE KNOW IT.

IT TRULY IS A ZERO-SUM GAME!!! 

IF ONE BELIEVES IN THE RAPTURE AND THE BOOK OF REVELATION, ALL THE PIECES ARE IN PLACE. EVENTS IN THE MIDDLEAST ARE LINING UP PERFECTLY.

auricle's picture

Liars, every central banker will attest to the fact that cycles do not exist. /s

auricle's picture

Besides, those bond yield charts have no lower bound. Anyone who can't see that is not a keynesian. 

RawPawg's picture

WHAT???!!!???
I didn't get that Memo

stant's picture

Kondrateiff revenge

SimpleJackBlack's picture
SimpleJackBlack (not verified) Sep 8, 2016 7:19 PM

Do i really want to listen to someone from Doucha Bank?

slicktroutman's picture

Do I care what DB criminal enterprise says?
F~~k NO

adanata's picture

 

Beside the fact I won't be here to analyze this thirty-five year projection, I'm betting we won't recognize this world in five years. Projections are theoretical questions providing theoretical "answers". I do believe we're getting ready to pop.

Winston Churchill's picture

S+P 666 if you're lucky.

ERoI at 1:5 is less than it takes for modern agriculture, let alone much more than middle ages serfdom..

If growth stops,everything implodes starting with our overshot world population.

Georgia Guidstones anybody ?

LetThemEatRand's picture

Either there is going to be helicopter money directly to the serfs to try to restart the economy, or the bankers will decide the time has come to cull the herd.  I think we're going to see the former before the latter, but I put it at 60/40 at most.  That's a 40% chance in my mind of world war.

Archive_file's picture

WWIII: "binding arbitration," "Scarborough shoal," "MIC."

Winston Churchill's picture

You're an optimist.

I'm planning on the worst, people rarely dissappoint me when I do.

I'd say 50/50 on WWIII before we get the half chat queer out of the WH.

LetThemEatRand's picture

I tend to think they want the pantsuit wearing Chairman Mao look-alike in office when they push the button, for greater dramatic effect. Then again, having a nobel peace prize winner ordering the destruction of most of humanity has a certain devious ring to it.

Escrava Isaura's picture

No way. It’s too soon for (Europe or Asia) WW.

Proxy wars, yes.

 

Escrava Isaura's picture

The only guarantee thing that’s come to the serfs is the final eugenics. War will be one of the eugenics.

Right now it’s just negative economic eugenics for the undesirable classes.

 

The Alarmist's picture

Funny, but I would flip those odds.  World War seems to be the only way to taper a global ponzi scheme.

parts's picture

Wouldn't they let  it deflate some? Any stimulus right now would be spunged in by the system and not generate real growth.

Japan had a taste in the late 90s with their US holdings, now please let me enjoy my Sweet and Sour chicken. xie xie

scintillator9's picture

Most likely the S&P is going to tank, then have a spectacular sucker's rally, THEN we will see the mother of all bears.

All I know is I am glad I spent the time I did with people who lived during the prior Depression to learn as much as I could about it, as to what to expect.

The main take away, to a person, was no one had any money. Period.

A 100+ year old person told me that he felt another one is coming, but everyone is used to easy living, and won't know what to do when it happens again.

JD59's picture

Learn how to fish, hunt, garden, and shoot.

nc551's picture

They nearly wiped out the buffalo in the 1800s.  The Oregon trail settlers killed all the deer in Oregon.  If the entire nation turns to hunting/fishing we are a month away from every animal on the continent being hunted to near oblivion.  There is no good chance of surviving a true supply chain interrupt unless you are prepared and hidden.

Jethro's picture

The deer and turkey didnt recover until the 70's and 80's.  I feel a little sorry for the people that think that they'll just drive to the country and somehow survive because they have a gun and fishing pole.  Or even worse are the people with emergency seeds and no gardening experience. Lordy...

slicktroutman's picture

So true. I learned that locally. We found a really productive bass fishing lake. One guy mentioned it in a local fishing blog. A week later I noticed a lot of new faces showing up at the lake with 5 gallon pails. Everything was pretty much catch and release, fishing was excellent. A month later the lake was fished out. The bucket brigade killed it in less than a month. Most of the newbies were Asian and Hispanic.who caught and kept the fish for food. The lake to this day never recovered.

Freedumb's picture

S&P 666 seasonally adjusted by BLS to 2400

LetThemEatRand's picture

The Central Banks have created a Tony Montana economy, including the cardinal sin of abusing their own product.

Tony Montana (Central Bankers): "Me, I want what's coming to me."

Manny (the 99.9% who ran the place before the central bankers came along): "Oh, well what's coming to you?"

Tony Montana (Central Bankers): "The world, chico, and everything in it."

We know how this ends, with us meeting the central bankers' little friend.

 

 

WTFUD's picture

Are DB like Goldman under the illusion that any reasonably minded bod give's a rats ring-piece about what they think?

mofreedom's picture

He said point C. I never dreamed of pointing that (C) n my lifetime.

Ick, and she knows it, clap your bag, splush, splursh.

No Rotten.

Lumberjack's picture

Tesla Gets $300 Million Credit Line From Deutsche Bank

http://fortune.com/2016/09/07/tesla-credit-deutsche-bank/

Father ¢hristmas's picture

Lmao, you gotta be kidding me.  No wonder these penis wrinkles are about to collapse.

Lumberjack's picture

Do one better:

EPA Gold King Mine disaster makes top of latest superfund list.

http://www.ecowatch.com/epa-superfund-1999928271.html

JRobby's picture

All because some EPA staffer did not want to be reassigned. At some point you have to euthenize these psychopaths

Father ¢hristmas's picture

Yeah, cause higher taxation is gonna help lol.

This is why you gotta never elect liberals ever again.  They have no idea wtf they're doing.  They can't even engage in graft correctly.

How do you control all media and still can't take an envelope without the entire world knowing?

These idiots have been working at destroying the family unit for a hundred years and now can't figure out why there's no goddamned economic growth.

Bitch, you rail against the very thing that builds an economy: Boy meets girl, marries her, fucks her, has a kid, needs to climb up the employment ladder to feed, clothe, and house his family.

These bozos got 30 year old guys sitting in their mother's basements in a bra jerking off to Hentai.

Freedumb's picture

I would not dream of having a kid right now because I have no idea how stable my employment is going to be even one year from now, nevermind for the 20 years minimum I'd be putting on the line to raise a single kid.

But really I think destruction of the family unit is not the result of socially liberal policies, but rather moreso the economic crippling of the current generation of child bearing age, which has to work many more hours (if they are lucky enough to have a job) for far less pay than in the past.

kev the bev's picture

Years ago families ie fathers and mothers had to stick together because there was no safety nets. Nowadays, people just split up after watching and believing too much crap on the TV and get free housing and child allowances by the state. If the state weren`t there to throw money at these people, they would have no alternative but to stick together and look after their kids together because they couldn`t afford to split up. That`s why marriage was invented to give some insurance to couples like a contract which was frowned upon if broken. Kids would then strengthen the family unit by working and bringing money into the house. That`s how it used to be and how it will be again in the not too distant future.

acetinker's picture

This guy's charts suck, and he thinks real wages will rise in this environment?  Shit, I guess I should have attended university so that I too could be as dumb (and rich) as this fucker.

JailBanksters's picture

Warns !

Warns the 35 year super cycle is going to end.

They're saying that like these were the Wonder Years, and now we're in for bad times.

If they were the Good Years, then the world really is F'cked from this point forward.

 

jcdenton's picture

Okay, let's pull out our calculators ..

 

For you math brains, probably not ..

 

2016 - 35 = x

 

What occurred on Dec. 4, x ?

 

I'm just going to make a guess here ..

 

Someone, say a small group of people ..

 

Did some forward thinking ..

 

It began between early Nov. '80 and culminated on .............. Dec. 4, x

 

Preparing for a rainy day?

 

http://eagleonetowanta.com/

 

https://youtu.be/29bkCJ81TOU?list=PL1yWdjkeR-5KSR11kvFZwmZBYf4wYf0Kh

 

I just don't believe in coincidences ..

 

People who plan to succeed ..

 

usually ..

 

DO!

 

Be of good cheer ..

Iconoclast421's picture

Even if the supercycle ended today, it would be 10+ years before it began to move in the other direction enough to see the change on a chart. These changes happen very slowly.