Since the 1970’s with the advent of free floating currencies and free market capitalism the global economy has progressed at unsafe speeds powered by a seductive credit machine that will gladly foster consumption today for payment tomorrow. A tomorrow that never comes!
Deep down we know that our ego has been writing checks our body can’t cash
We live beyond our sustainable standard of living by shifting debt burdens, printing money and manipulating sentiment to condone the pursuit of riches beyond our means.
Demographics are in the late innings of a secular debt cycle that condign the western world—and the globe—to a decade of moderate growth with bouts of weakness countered by Government and Central bank credit stimulation to retain just enough confidence that panics are controlled.
Without confidence our currency system is lost, but Bernanke/Yellen so far have played well the cards dealt by dysfunctional Governments that have no courage to deleverage when times are bountiful.
Concern over hyperinflation that many were wrongly worried about in 2009 when this snowball of Central Bank money creation blasted off will continue to be of small concern until some major countries decide not to play the game and when quantitative easing (QE) becomes so massive as to cause hoarding of hard assets in exchange for removing currency from the banking system.
There are no signs of such concern yet, in spite of China and Russia trying to replace the US Dollar, thus investors in stocks can continue to buy the dips without panicking and Gold Bugs remain forever waiting for The End.
Demographic influencing of the debt entitlement cycle certainly implies strongly that before the population cycles turn positive economically in the Western world in the early 2020’s there will be a monetary crisis that may be too large for Central banks to bail out their Government’s parabolic addiction to buying today what they will gladly pay for tomorrow.
Demographics – US Jobs and Wages
Median incomes have fallen since 2008 while job security remains weak with high real unemployment despite an official rate near 6%. Millions have been rehired since the crash yet too many underemployed or part time. Millions more have left the workforce to retire or stay in school longer until the economy improves. Companies can’t find enough skilled labor yet we have a surplus of unskilled workers. This highlights the recovery since 2009 where low wage entry level jobs have grown rapidly while high skilled jobs are in short supply. Liberals can claim we have low unemployment, a very healthy low level of “unemployment claims” and a record level of civilian employment. Conservatives can claim that inflation adjusted wages and income are terrible and the job market is weak with record levels of long term unemployed and underemployed.
What is the “Real” unemployment rate?
Based upon the unemployment methods that were used in previous decades Unemployment would still be in double digits which is horrendous. By eliminating discouraged and temporary workers official unemployment is a respectable 6%. Most of the jobs being created are low wage low skill. This is a major symptom of why wages/income have been a major failing grade for this administration.
Overall the long road back to full employment has actually proceeded at a similar pace as past robust recoveries, but while the old leave the workforce many of the younger demographic are also staying out of the workforce avoiding the unemployment label. Given the depth of job contraction that took place it will just take longer than normal before higher wage jobs grow faster in order to boost incomes.
This is by far the longest it has taken in modern history for employment to reach new all-time highs, but it is coming in 2014 and in fact including all civilian jobs vs the private sector we are already back to record levels of employment despite the lack of job market mobility and wage growth.
In 2013 housing and consumer credit finally shifted from a headwind to a modest tailwind as the Bernanke Billions continue to turn the tide of pessimism to increasing optimism. While interest rates must rise in any economic recovery as they now are, we expect more optimism, home building and consumption ahead as interest rates will remain low longer than most expect.
So far 2014 has yet to witness a resumption in housing and construction. The Harry Dent crowd continues to see an immediate collapse into deflation while tacitly acknowledging the economic success of monetary inflation as a counter-balance to underlying deflationary trends. We don’t see anything more than major housing corrections with the ever present risk of a voluntary recession.
Voluntary would be the unlikelihood of China allowing bad real estate loans to default out of control, the US Central Bank allowing sub 2% GDP growth without a commensurate addition of monetary reserves—QE, or Europe failing to adopt a new massive Qe while their economies spiraled into a recession. Hiccups maybe but a collapse near term seems quite unlikely.
Demographic look at jobs
We hear more and more about how the labor participation rate is falling. Keep in mind the labor participation rates have been falling long before the Great recession of 2008. Demographics of a large younger generation around the world growing up in the aftermath of WWII has driven our Global economy in recent decades and is a key driver today.
Baby Boomers gave us exceptional growth in the 1960’s through the 1990’s as above trend Family formation gave birth to maturing Baby Boomer demographics and excess consumption.
As the Boomers grew into their peak earning years in the 1990’s to early 2000’s the Western economies wealth, real estate and stock markets peaked. Now the entitlement phase from these aging boomers is causing havoc as consumption, earnings and even job demand experience downward momentum while entitlement by the trillions—saved or borrowed – is increasingly tapped to satisfy their needs later this decade and the 2030’s.
Exec Spec has shown that job participation rate by old folks is surging while at the same time seniors are leaving the workforce in record numbers. It may seem contradictory but realize there are so many Boomers both leaving the workforce and working longer that is swells both categories of retirees and active elderly workers.
Eventually this senility surge (we may have coined that) in the workforce will move into nursing homes. We can only hope that emerging markets and our new generation of higher income offspring moving into the sweet spot of the job cycle in the 2020’s and 2030’s will be able to support the coming imbalance.
Falling income was indiscriminate
In bad times the blame game is ubiquitous. It’s the 1%’ers, it’s whites discriminating against blacks, it’s men discriminating against women, it’s fat cat corporations discriminating against their worker bees… We don’t have time to address the realities, but few finger pointers portray a balanced viewpoint with the proper context.
Simple fact is companies didn’t suddenly start getting greedy since 2008 and paying their workers less. If you want rising wages create more demand for labor with a more rapidly growing economy and capacity expansion. If you want workers to garner higher incomes relative to their bosses then start a recession as that is when executives have larger pay cuts than workers as CEO bonuses rise faster in good times and fall faster in bad.
The worst rise in CEO to worker pay was in the 1990’s – a good era for all income groups. Every race including Asian Americans have seen average incomes decline since 2008 with the 1st ever income contraction on a 5 year basis.
Understandably recruiters still say the job market is weak and worker confidence in being able to quit their jobs to seek higher pay is improving, but still at recession levels
The 2009 New Normal
Forecasts of slow (~2%) GDP growth as far as the eye can see. For years PIMCO has been correct in expecting below normal GDP growth. This slow growth environment has been conducive for stocks and most investments as the New Normal has guaranteed Fiscal stimulus combined with historic monetary easing. Long term the Baby Boomers are now in their 50’s and 60’s and have been an impediment to resuming the old ways of consuming ourselves out of economic lethargy.
The need for big homes, college educations and extra cars are unlikely to regain their former glory of the past 2 decades. This secular Boomer spending decline has been milked with herculean effort by central banks providing aging consumers with artificially low interest rates, reducing business and individual cost of debt service to 20 year records and helping pile up Trillions in idle spending power.
Demographic Economic Status
Peak spending occurs around age 46 and gradually declines, thus the end of the Boomer generation plus 46 = 2007. Sure enough the stock market peaked in 2007. Unfortunately 26% of all Americans in the 46 to 64-year-old age bracket have no personal savings and American workers are $6.6 Trillion short of what they need to retire comfortably.
Many of those expecting to retire at 65 now say they will postpone leaving the workforce. In 2014 Americans will spend $2.8 Trillion on health care and it’s being projected that due to our aging population health care will rise to an amazing $4.5 Trillion before the end of the decade.
This century the U.S. government is facing $222 Trillion in unfunded liabilities. With the peak retirement phase for Boomers culminating in the 2020’s along with entitlements means liabilities will rise beyond the scope of earnings/taxation revenues and GDP economic growth potential. Excessive borrowing and then bankruptcy is the ultimate fear.
The US Dollar
While Cassandra’s on the right have been predicting the collapse of the Dollar for years since the Fed began printing money in 2008 on an order of magnitude never contemplated before, the Dollar remains stable inside a normal trading range.
$ is incapable of devaluation relative to other currencies as long as the money printing of excess trillions remains parked in Bank vaults with few customers in an abnormally slow growth environment with excess capacity. The US Dollar remains in the middle of its 7 year trading range with a bias to the upside as the US applies more aggressive monetary stimulus towards faster growth rates. The deflationary trend in commodities and Gold since 2011 is indicative of the relatively stronger US economy in a sluggish consumption world generating low levels of inflation and a stronger Dollar relative to our weaker trading partners. In 2015 this should start to change as the US growth accelerates more slowly than Europe which will soon switch from austerity to accommodation.
We expect the Dollar to stay in its historic trading range (70’s to 90’s) for a long time to come.