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Here is a glass of water. You’re holding it.

How heavy is it?

The answer is: the actual weight probably doesn’t matter. It’s just a glass of water. What matters is how long you hold it.

Hold it for a minute, it’s no problem. An hour and your arm will ache. A day and your arm will feel paralysed.

The weight doesn’t change but the longer you hold it the heavier it becomes and the greater the probability you finally just have to put it down or risk dropping it altogether.

Now, take a look at this graphic which I nicked from Hugo Salinas:

How Heavy Is This?

Betting against the ability of governments and their central banks to keep holding the proverbial glass of water has been a losing proposition for a looooong time.

Now, simple math tells us that although this debt growth is pretty damned fantastic it needn’t be a problem if income growth has kept up with it. Income, after all, services debt.

Since income growth hasn’t kept up clearly that’s not the case. So what is it?

The answer lies in this chart which shows the cost of capital across the major economies of the US, the EU, the UK, and Japan.

When the cost of debt servicing is low or zero, then the size of debt really doesn’t matter much. It’s as if the glass of water has no weight at all.

Now here’s something worth pondering…

On an historical timeframe we’re at the tail end of the long term debt-cycle… a cycle that typically lasts between 50 and 75 years.

Today, bonds are more sensitive to price movements than at any other time in history and the yield achieved on them so low that it doesn’t take all that much for a positive return (just) to turn into a loss.

Now take a look at this:

…click on the above link to read the rest of the article…

Harry Dent: Stocks Will Fall 70-90% Within 3 Years

February 1, 2017

Harry Dent: Stocks Will Fall 70-90% Within 3 Years

Creating the buying opportunity of a lifetime

Economist and cycle trend forecaster Harry Dent sees crushing deflation ahead for nearly every financial asset class. We are at the nexus of a concurrent series of downtrends in the four most important predictive trends he tracks.

Laying out the thesis of his new book The Sale Of A Lifetime, Dent sees punishing losses ahead for investors who do not position themselves for safety beforehand. On the positive side, he predicts those that do will have a once-in-a-generation opportunity to buy assets at incredible bargain prices once the carnage ends (and yes, for those of you wondering, he also addresses his outlook for gold):

All four of the cycles I track point down now. One after the next has peaked in the last several years. All four point down into early 2020 or so. That’s only happened in the early to mid-’70s when we had the worst stock crashes back then, the OPEC embargo, etc — the worst set of crises since the 1930s.

Of course, in the early ’30s we had this same configuration of all four of these fundamental cycles, cycles that have taken me 30 years to hone and say “these are the four that matter”.

The next three years are likely to be the worst we see in our lifetimes. It will be more like the early 1930s when stocks hit a debt bubble and financial asset bubbles crashed, which they only do once in a lifetime such as the early 1930s. Stocks will be down 70, 80, 90% — that’s to be as expected in this stage of the cycle after such a bubble.

I went from being the most bullish economist in the ’80s and ’90s to now being of the most bearish because what goes up goes down. That’s what cycles do. At heart, I’m a cycle guy.

…click on the above link to read the rest of the article…

The end of the “population problem”? Another Seneca cliff in our future

June 23, 2016

The end of the “population problem”? Another Seneca cliff in our future

Image from “National Geographic”

If the demographic projections by the United Nations will turn out to be true, the world population should reach over 11 billion people by 2100. Some think that it will be a disaster, others see it as a good thing as it would bring more economic growth. But is it really possible to reach such numbers? Can we really think that women would be so stupid to continue making children even in the midst of the crisis caused by declining natural resources and worsening ecosystem disruption? (unless the Pope himself were to tell them to stop)?

Yet, some models tell us the human population could keep increasing even after the collapse of the world’s economy. There exists something called the “demographic transition” and it is a historical observation that may be extrapolated into the future. The data show a sort of “U-shaped fertility curve” that makes the poor and the very rich to be more fertile than those who are in the middle. When applied to the scenarios of “The Limits to Growth” of 1972, this idea generated a curious behavior, with the impoverishment of the population causing an increase in the birthrate that causes the population to continue increasing for a few decades after the collapse.

But, as it is always the case, extrapolating past trends into the future is extremely dangerous. In particular, it is at least improbable that the post-collapse world will be like running the same movie in reverse. The demographic transition has been observed to occur in growing economies, it won’t simply change sign and reverse itself in contracting economies. To see how it works we can look at the demographic trends in Russia.

…click on the above link to read the rest of the article…

Obama’s Latest Whopper—-Let’s Raise Social Security Benefits!

June 4, 2016

Obama’s Latest Whopper—-Let’s Raise Social Security Benefits!

The U.S. has approximately $80 trillion of unfunded liabilities for social security, medicare and other entitlements sitting atop a work force that is rapidly aging and an economy that is lapsing into stasis. Yet in the midst of a campaign diatribe about Donald Trump’s alleged lack of preparation for the highest office in the land, the current White House occupant proved that in nearly eight years he has learned exactly nothing about the nation’s abysmal fiscal plight.

“And not only do we need to strengthen its long-term health, it’s time we finally made Social Security more generous and increased its benefits so that today’s retirees and future generations get the dignified retirement that they’ve earned,” Obama said in an economic call to arms in Elkhart, Indiana.

Don’t bother to say he must be kidding. After all, our President also claims the disaster known as Obamacare is a roaring success; and that he has created 14 million jobs—-when, in fact, there are fewer full-time, full-pay “breadwinner jobs” in America today than when Bill Clinton scuttled out of the White House 16 years ago.

Still, your don’t have to be even a know nothing about baby-boom demographics to recognize that the words “increase” and “social security benefits” will never again inhabit the same universe. To wit, there are about 50 million persons 65 or over at present, but this number will rise to 80 million by around 2040 and nearly 100 million a decade or two thereafter.

Moreover, as we keeping insisting, there is nothing in the OASDI trust funds except intergovernmental accounting confetti. Every dime that was ever collected from the social insurance taxes, which bring in more than $1 trillion per year in revenue, has already been spent on education grants, Federal salaries, aircraft carriers, cotton subsidies, windmill farms and thousands of other Washington boondoggles.

…click on the above link to read the rest of the article…

If Geography and Demographics Are Destiny, Who Will Be the Winners and Losers in 2025?

May 16, 2016

If Geography and Demographics Are Destiny, Who Will Be the Winners and Losers in 2025?

Owning any asset in poorly positioned nations is an inherently risky bet going forward.

The dictum “demographics is destiny” proposes that all the complexities of finance, society and politics are ultimately guided by demographics: the relative size of each generation, birth rates, death rates, etc.

For example, an oversized generation of retirees and an undersized generation of workers to support them has far-reaching consequences that can’t be legislated away.

The influence of demographics isn’t limited to pension costs. Some analysts have made the case that oversized generations of young men align all too well with the launching of wars.

The point is that birth/death rates—low and high–have consequences that impact national destinies for decades.

Another school holds that geography is destiny: if a nation’s geography is favorable, the barriers to prosperity and stability are low, while the barrier is high for nations with unfavorable geography.

Peter Zeihan, author of the 2014 book, The Accidental Superpower: The Next Generation of American Preeminence and the Coming Global Disorder, lists the core geographic attributes that are either favorable or unfavorable in ways that influence a nation’s long-term prosperity and built-in geopolitical challenges.

What does geography have to do with prosperity, stability and geopolitical risks?

Navigable rivers that reach deep into productive interior regions lower costs of transport dramatically, while natural harbors enable low-cost access to international markets via ships.

Natural barriers to invasion such as oceans, deserts and mountain ranges dictate whether a nation must spend heavily on military defense of the homeland or whether the cost of defense is lightened by favorable geography.

Zeihan extends geography into the political realm, noting that nations with difficult-to-defend borders require a strong central government to organize taxation and defense, while nations with few contiguous threats (for example, the U.S.) can be governed in a more decentralized fashion.

…click on the above link to read the rest of the article…

Which Countries Will Be Tomorrow’s Winners & Losers?

May 14, 2016

Cienpies Design/Shutterstock

Which Countries Will Be Tomorrow’s Winners & Losers?

Resources, capital flows & demographics will be key

The dictum “demographics is destiny” proposes that all the complexities of finance, society and politics are ultimately guided by demographics: the relative size of each generation, birth rates, death rates, etc.

For example, an oversized generation of retirees and an undersized generation of workers to support them has far-reaching consequences that can’t be legislated away.

The influence of demographics isn’t limited to pension costs. Some analysts have made the case that oversized generations of young men align all too well with the launching of wars.

The point is that birth/death rates—low and high–have consequences that impact national destinies for decades.

Another school holds that geography is destiny: if a nation’s geography is favorable, the barriers to prosperity and stability are low, while the barrier is high for nations with unfavorable geography.

Peter Zeihan, author of the 2014 book, The Accidental Superpower: The Next Generation of American Preeminence and the Coming Global Disorder, lists the core geographic attributes that are either favorable or unfavorable in ways that influence a nation’s long-term prosperity and built-in geopolitical challenges.

What does geography have to do with prosperity, stability and geopolitical risks?

Navigable rivers that reach deep into productive interior regions lower costs of transport dramatically, while natural harbors enable low-cost access to international markets via ships.

…click on the above link to read the rest of the article…

According To Deutsche Bank, The “Worst Kind Of Recession” May Have Already Started

May 8, 2016

According To Deutsche Bank, The “Worst Kind Of Recession” May Have Already Started

One week ago, Deutsche Bank’s Dominic Konstam unveiled, whether he likes it or not, what the next all too likely step will be as central bankers scramble to preserve order in a world in which monetary policy has all but lost effectiveness: “It is becoming increasingly clear to us that the level of yields at which credit expansion in Europe and Japan will pick up in earnest is probably negative, and substantially so. Therefore, the ECB and BoJ should move more strongly toward penalizing savings via negative retail deposit rates or perhaps wealth taxes.”

Many were not happy, although in reality the only reason why the DB strategist proposed this disturbing idea is because this is precisely what the central banks will end up doing.

Today, he follows up with an explanation just why the central bankers will engage in such lunatic measures: quite simply, he thinks that economic contraction is now practically assured – and may have already begun – for a simple reason: contrary to popular belief, this particular “expansion” will die of old age after all, and won’t even need the Fed’s intervention to unleash the next recession (if not depression).

There is an old saying amongst market watchers that economic expansions do not die of old age. Rather, during the course of the business cycle dynamics emerge that threaten to become unacceptable from a policy perspective. In the context of economic expansion, that dynamic has been inflation. The conventional pattern has been that as expansions mature, demand for labor outstrips the available supply, creating upward pressure on wages. In the presence of pricing power, higher wages are passed along to end consumers through higher prices.

…click on the above link to read the rest of the article…

Former IMF Chief Economist Admits Japan’s “Endgame” Scenario Is Now In Play

April 11, 2016

Former IMF Chief Economist Admits Japan’s “Endgame” Scenario Is Now In Play

Back in October 2014, just after the BOJ drastically expanded its QE operation, we warned that the biggest risk facing the BOJ (and the ECB, and the Fed, and all other central banks actively soaking up securities from the open market) was a lack of monetizable supply. We cited Takuji Okubo, chief economist at Japan Macro Advisors in Tokyo, who said that at the scale of its current debt monetization, the BOJ could end up owning half of the JGB market by as early as in 2018. He added that “The BOJ is basically declaring that Japan will need to fix its long-term problems by 2018, or risk becoming a failed nation.”

Which is why 17 months ago we predicted that, contrary to expectations of even more QE from Kuroda, we said “the BOJ will not boost QE, and if anything will have no choice but to start tapering it down – just like the Fed did when its interventions created the current illiquidity in the US govt market – especially since liquidity in the Japanese government market is now non-existent and getting worse by the day.”

As part of our conclusion, we said we do not “expect the media to grasp the profound implications of this analysis not only for the BOJ but for all other central banks: we expect this to be summer of 2016’s business.”

Since then, the forecast has panned out largely as expected: both the ECB and BOJ, finding themselves collateral constrained, were forced to expand into other, even more unconventional methods of easing, whether it be NIRP in the case of the BOJ, or the outright purchases of corporate bonds as the ECB did a month ago.

…click on the above link to read the rest of the article…

How Stupid Do You Have To Be To Let This Happen?

March 28, 2016

How Stupid Do You Have To Be To Let This Happen?

So how do we explain this: After World War II most European countries set up generous entitlement systems including government pensions designed to offer dignified retirements to citizens who had worked hard and paid taxes and obeyed the rules for a lifetime. BUT they didn’t bother putting anything aside for the inevitable — and mathematically predictable — retirement of the immense baby boomer generation. Here’s an excerpt from a recent Wall Street Journal article outlining the problem:

Europe Faces Pension Predicament

State-funded pensions are at the heart of Europe’s social-welfare model, insulating people from extreme poverty in old age. Most European countries have set aside almost nothing to pay these benefits, simply funding them each year out of tax revenue. Now, European countries face a demographic tsunami, in the form of a growing mismatch between low birthrates and high longevity, for which few are prepared.Europe’s population of pensioners, already the largest in the world, continues to grow. Looking at Europeans 65 or older who aren’t working, there are 42 for every 100 workers, and this will rise to 65 per 100 by 2060, the European Union’s data agency says. By comparison, the U.S. has 24 nonworking people 65 or over per 100 workers.

“Western European governments are close to bankruptcy because of the pension time bomb,” said Roy Stockell, head of asset management at Ernst & Young. “We have so many baby boomers moving into retirement [with] the expectation that the government will provide.”

…click on the above link to read the rest of the article…

Japan Hits Demographic Tipping Point With First Official Population Decline In History

February 27, 2016

Japan Hits Demographic Tipping Point With First Official Population Decline In History

As troubling as Japan’s deflationary, and now negative interest rate, economic quagmire is, the biggest threat facing Japan has little to do with its balance sheet and everything to do with its demographics, for the simple reason that not only is Japan’s population the oldest it has ever been, as well as the oldest on average in the entire world, but is now also officially shrinking.

According to data released yesterday by the Ministry of Internal Affairs and Communications, in the latest 5 year census, Japan’s population declined last year for the first time in nearly a century.

The Internal Affairs and Communications Ministry said the latest census shows that Japan’s population as of Oct. 1, 2015, was 127,110,047 – a decline of 947,305, or 0.7 percent, since the last census conducted in 2010.

The number of Japanese dropped to 127.1 million in a national census for 2015, down 0.7 percent compared with five years earlier, and was the first recorded decline since the 5-year census started in 1920. As the Shimbun adds, in the 2015 census, men accounted for 61,829,237 of the population, and women 65,280,810.

The population of Fukushima Prefecture, where many residents are still being forced to live away from home due to damage caused to their hometowns by the 2011 Fukushima nuclear power plant disaster, saw the biggest decrease, or 115,458, a 5.7 percent decline from the last census. The two other prefectures hit hardest by the disaster — Iwate and Miyagi — also saw population declines.

To be sure, this is not exactly a surprise: Japan’s ministry had estimated that the nation’s population had been declining for four straight years since 2011, but the latest results are the first official confirmation via a census that the national population has gone down since the government began conducting them.

…click on the above link to read the rest of the article…

Population Decline in Industrial Countries Requires Immigration?

November 27, 2015

Population Decline in Industrial Countries Requires Immigration?

The United Nations projects that over the next 50 years, the population in the industrialized world (US-Europe-Japan) will DECLINE, not expand. The population is suffering from growing old and the youth are so burdened with taxes they are not getting married (marriages off by 50%) and are not having children. The decline in birth ratesand the migration of people from the outer regions into the old core is typical.

The UN is now supporting immigration to keep the pension funds alive. They have stated that immigration now “require[s] comprehensive reassessments of many established policies and programmes, including those relating to international migration.”

Four Ticking Global Time-Bombs Few Even Hear

October 19, 2015

Four Ticking Global Time-Bombs Few Even Hear

A few charts help us grasp the magnitude of the four global time-bombs.

The geopolitical and financial risks facing the global economy are well-known.Hot wars and currency meltdowns garner headlines around the world.

But few even hear, much less discuss, four ticking global time-bombs:

1. The demographic time-bomb.

2. The public health time-bomb.

3. The food/water/soil time-bomb.

4. The oil-export time-bomb.

Each is largely self-explanatory:

1. The demographic time-bomb: as the global economy melts down, the realization that the pensions and healthcare promised to hundreds of millions of elderly cannot be funded out of tax revenues will upend the social contract in countries rich and poor.

As the chart below depicts, as the population of elderly rise, so do the non-communicable lifestyle diseases of aging. The costs of treating these lifestyle diseases (metabolic syndrome, heart disease, high blood pressure, etc.) soar as the population and incidence of these diseases both rise.

Global Aging 2010: An Irreversible Truth:

This Standard & Poor’s study warns that “no other force is likely to shape the future of national economic health, public finances, and policymaking as the irreversible rate at which the world’s population is aging… The cost of caring for [the elderly] will profoundly affect growth prospects and dominate public finance policy debates worldwide.”

2. The public health time-bomb: 100 million diabetics and 500 million pre-diabetics in China, 80 million diabetics and hundreds of millions more pre-diabetics in India, and another 100 million diabetics in the developed world will overwhelm a global healthcare system that is already struggling to provide care for an aging population.

Diabetes Is a Major Public-Health Crisis in China

No Answers in Sight for India’s Diabetes Crisis

The Global Diabetes Epidemic (New York Times)

…click on the above link to read the rest of the article…

What Keeps Neil Howe Up At Night: An Interview With The Author Of “The Fourth Turning”

October 14, 2015

What Keeps Neil Howe Up At Night: An Interview With The Author Of “The Fourth Turning”

“Underproduction, undercapacity, deflation, currency wars, demographics, falling birth rates” – those are the biggest fears which Fourth Turning author, and head of Saeculum Research Neil Howe, lays out in this interview excerpt courtesy of RealVision TV.

While Howe goes on an interesting tangent on the one topic that will surely be absent from all presidential debates, namely the fact that migration into the US is “actually in huge decline“, and that the largest immigrant group into the US is Asian (after all someone has to buy those luxury NYC condos), what is more interesting are Howe’s parallels of the current economic situation to the Great Depression: “whole areas of the world no longer having a global superpower, no longer having global institutions that enforce orders so you have these huge areas of failed states and power vacuums and regional authoritarian governments – that’s exactly what people saw in the 1930s and we’re seeing it now in Russia, China, Iran doing whatever they want.”

He continues:

“Another interesting economic parallel is the crisis of overvaluation: in the 1930s it was the gold standard, for southern Europe it’s the Euro, and for China they have a fixed rate regime that they’re attending to too little too late. It’s the nature of an authoritarian regime to always to do too little and too late. Everyone is too timid to tell the person in power “this is what you need to do.” I think China faces an absolute choice between a huge devaluation to restimulate its economy, because becoming competitive I think the carry trade is going to go and I think even domestic savings are going to flee. If they don’t do that they have very few options left at this point. They have $3.5 trillion of reserves – you’ll be amazed how quickly that goes. So that’s another parallel.

…click on the above link to read the rest of the article…

Demographics and Major Financial and Economic Trends

September 20, 2015

Demographics and Major Financial and Economic Trends

Demographics Driving Declines in Oil Consumption, Mounting Debt, & Central Bank Mismanagement

Sometimes, the simplest answer really is best. I contend the primary and simplest factor that need be watched to gauge present and future economic activity are the changes in core populations (15-64 year old segment of the larger population) for any nation or grouping.

The core’s declining growth and outright shrinkage appear to be the trigger for declining oil consumption*. In turn, this slowing activity drives central bank reactionary interest rate cuts intended to incentivize credit creation and leverage…all to get more (raise consumption) from less (a declining population set).

*Oil is generally irreplaceable by other sources and offers a good barometer of a nation’s general economic activity.

people Photo credit: fmh

The chart below highlights the Bank of Japan’s (BOJ) interest rate reactions to the changing demographic nature of the Japanese population. As Japan’s core population began declining, the BOJ pushed rates lower to incentivize more credit (consumption) from a declining number of consumers.

Chart-1, Japan core vs Old Japan’s core population vs. BoJ interest rates

And the Fed, faced with similar though less dire US demographic circumstances, emulated the BOJ’s actions despite the BOJ’s utter lack of success (below).

US interest rates, federal debt and core population trend – click to enlarge.

Central banks around the world, at best, are blinded by their formulas and hubris to the inevitable and certain demographic and population headwinds now very much upon us. These central banks are reacting to the least surprising, most reliable, and most important data in existence. Central banks, entrusted with economic stewardship of nations, have acted out of greed or the stupidity only academics can talk themselves into.

They have sailed downwind with all sheets available to make the good times fantastically better, but left nothing for the entirely predictable changing conditions we now face…negative demographics and population trends coupled with exhausted interest rate policy, over-indebtedness, and massive overcapacity for declining core populations.

…click on the above link to read the rest of the article…

Are You Ready for the Coming Debt Revolution?

May 16, 2015

Are You Ready for the Coming Debt Revolution?

Gualfin (“End of the Road”), Argentina

Dear Diary,

There is a specter haunting America… and all the developed nations of the world.

It is the specter of a debt revolution.

We left off yesterday talking about how the economy of the last 30 years – and especially that of the last six years – has favored the old over the young.

“Rise up, ye young’uns,” we as much as said, “you have nothing to lose but your parents’ debts.”

We showed how the value of U.S. corporate equity, mainly held by older people, had multiplied by 28 times since 1981.

That was no honest bull market in stocks; it was a market sent soaring by an explosion of credit.

But what did it do for young people whose only assets are their time and their youthful energy?

Alas, the real economy has increased by only five times over the same period.

A Grim and Menacing Specter

And when you look more closely at work and wages, the specter grows grimmer and more menacing.

Average hourly wages have barely budged in the last 30 years. And average household incomes have fallen – from $57,000 to $52,000 – in the 21st century.

But as our fingers came to rest yesterday, there was one question hanging in the air, like the smoke from an exploded hand grenade: Why?

Was this huge shift – of trillions of dollars of wealth from young working people to old asset holders – an accident?

Was it just the maturing of a market economy in the electronic age?

Was it because China took the capitalist road in 1979?

Or because robots were competing with young people for jobs?

Nope… on all three counts.

First, old people, not young people, control government.

…click on the above link to read the rest of the article…

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