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Seeds of Market Collapse in the Federal Reserve’s “Autopilot” Balance Sheet Normalization

Seeds of Market Collapse in the Federal Reserve’s “Autopilot” Balance Sheet Normalization

A lot of talk last week centered around the potential for the Federal Reserve to revise their planned “normalization” of holdings on their balance sheet. In particular in the post FOMC press conference, Powell said, “I think that the runoff of the balance sheet has been smooth and has served its purpose and I don’t see us changing that,”…and then “The amount of runoff that we have had so far is pretty small and if you just run the quantitative easing models in reverse, you would get a pretty small adjustment in economic growth, and real outcomes.”

Trouble is, the correlation of changes in the Fed’s balance sheet to changes in asset prices are unambiguous that Powell is either unwittingly wrong or, more likely, knowingly collapsing an asset bubble that was in large part created by the Federal Reserve itself.

Fed Held Treasury’s
To set the table, the chart below shows the total Federal Reserve holdings of US Treasury’s (blue line) and weekly changes (yellow columns) from 2003 to present.  The August ’07 through January ’09 period is noteworthy as the only period with a like Treasury holding drawdown to what we are presently witnessing.  The subsequent highlighted areas show the periods of no growth in Treasury holdings, or most recently the outright declines.  The most recent period represents just $230 billion reduction of a proposed $1 trillion total “normalization” in Treasury holdings.
Perhaps the reason equities tanked when Powell suggested that the Fed’s plan to normalize its balance sheet was on “auto-pilot” can be seen in the chart below.  Red line is the Wilshire 5000 (representing all publicly traded US equities) and yellow columns are the weekly change in the Federal Reserve’s holdings of Treasury’s.  On the five occasions (highlighted again) since 2007 that the Fed has ceased buying or outright sold Treasury’s, the Wilshire has gone into convulsions or outright cracked lower.

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

Global Economy On Precipice of Secular Decline…Detailed via Shifting Population, Demographics, Income, and Consumption

Global Economy On Precipice of Secular Decline…Detailed via Shifting Population, Demographics, Income, and Consumption

Many look at global population growth as a given to greater consumption…and looking at the chart below of total global population set to hit 7.8 billion by 2020, one might be forgiven for this viewpoint.  However, the reality, when one looks into the numbers, is that growth in global consumption has ended, as I recently detailed, Investing for the “Long Run”? You May Want to Consider This.  This article explains why this population growth will no longer equate to economic or consumptive growth.

0 to 64 year old Global Population
The 0 to 64 year old global population is about 7 billion persons, as of 2018.  The chart below shows the distribution and changing size of that population from 1950 through 2050 by high income (black line…$12,000+ income per capita including the US/Canada, most of Europe, Japan, Aus/NZ, etc.), upper middle (yellow line…$12,000 to $4,000 per capita income including China, Russia, Brazil, Turkey, Mexico, Thailand, Columbia, etc.), lower middle (red line…$4,000 to $1,000 per capita income including India, Indonesia, Pakistan, Bangladesh, Ukraine, Philippines, Egypt, etc.), and low income nations (blue line…less than $1,000 in per capita income including most of sub-Saharan Africa, Afghanistan, Haiti, etc.).  The simple takeaway should be that the 0 to 64 year old populations among the high and upper middle income countries have ceased growing and will now be shrinking, indefinitely.  All 0-64 year old population growth from now forward will be among the lower middle and low income nations of the world.  So what?

Income by Age of Head of Household
Why the focus on 0 to 64 year old populations?  Average income and expenditures vary greatly by the age of the head of household.

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

No Seller, Let Alone China, Can Disrupt US via Selling US Treasury’s…But the “Why” Ain’t Good

No Seller, Let Alone China, Can Disrupt US via Selling US Treasury’s…But the “Why” Ain’t Good

I often read that China may retaliate against US trade sanctions by further decreasing their US Treasury holdings, sending Treasury yields significantly higher, thus blowing out US deficit spending on interest payments.  Trouble is, Chinese Treasury holdings peaked in 2014 (on an annualized basis) and have been declining since.  The Chinese have not only ceased accumulating US Treasury debt, despite continued record trade surplus’ with the US resulting in significant dollar surplus’, but have been decreasing their holdings.  All this, according to the Treasury International Capital (TIC) system.

But this postulation that the Chinese could wound the US via selling a portion (or all) of its Treasury holdings (as Russia recently did) is submarined by the recent actions of the Federal Reserve.  I say this based on the magnitudes greater accumulation and subsequent dumping of specific maturities of US Treasury debt done by the Federal Reserve.

The Federal Reserve accumulated almost $800 billion in 7 to 10 year US Treasury debt (red line, chart below) from 2009 to 2013, and then subsequently dumped $600 billion from early 2014 through the most present August 2018 data.  And the impact on the 10 year yield (blue shaded area, chart below)…essentially zero.  Yes, while the Fed rolled off and/or sold off 7 to 10 year holdings, they were busy buying short term debt.  But this still meant someone had to step up in duration and buy all that longer duration debt the Fed no longer wanted.

To put the relative size of China’s 7 to 10 year holdings in perspective to the Fed’s like holdings, the chart above estimates that a third of Chinese Treasury holdings (likely an overestimation) were of the 7 to 10 year variety (gold line).  The Fed has already rolled off / sold off 1.5x’s more 7 to 10 year debt than the Chinese even have.  

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

America’s Greatest Crisis Upon Us…Debt to GDP Makes It Clear

America’s Greatest Crisis Upon Us…Debt to GDP Makes It Clear

America in the midst of its greatest crisis in its 242 years of existence.  I say this based upon the US federal debt to GDP (gross domestic product) ratio.  In the history of the US, at the onset of every war or crisis, a period of federal deficit spending ensued (red bars in graph below) to overcome the challenge but at the “challenges” end, a period of federal austerity ensued.  Until now.  No doubt the current financial crisis ended by 2013 (based on employment, asset values, etc.) but federal spending continues to significantly outpace tax revenues…resulting in a continually rising debt to GDP ratio.  We are well past the point where we have typically began repairing the nation’s balance sheet and maintaining the credibility of the currency.  However, all indications from the CBO and current administration make it clear that debt to GDP will continue to rise.  If the American economy were as strong as claimed, this is the time that federal deficit spending would cease alongside the Fed’s interest rate hikes.  Instead, surging deficit spending is taking place alongside interest rate hikes, another first for America.
The chart below takes America from 1790 to present.  From 1776 to 2001, every period of deficit spending was followed by a period of “austerity” where-upon federal spending was constrained and economic activity flourished, repairing the damage done to the debt to GDP ratio and the credibility of the US currency.  But since 2001, according to debt to GDP, the US has been in the longest ongoing crisis in the nations history.

But what is this crisis?  The chart points out the debt to GDP surges in order to resolve the Revolutionary war, the Civil War, WWI, and WWII. But the debt to GDP surges since 1980 seem less clear cut.  But simply put, America (and the world) grew up and matured, but the central banks and federal government could not accept this change.

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

“Will The Real Global Economy Please Stand Up”

“Will The Real Global Economy Please Stand Up”

To say I’ve become skeptical of “markets” and their movements is probably an understatement.  However, rather than waste more time trying to make sense of these skewed markets, I believe real economic activity is more accurately represented by changing populations and their energy consumption.  So today, we’ll play a little “To Tell The Truth”, an old television show where two imposters could lie but one contestant had to tell the truth.  The celebs would ask questions and then attempt to pick which contestant was the real deal.  I’ll lay out the data and let you determine how well this lines up with non-stop narrative of record market valuations and stories of strong economic activity.

I’ll start with Japan and work my up progressively larger.  The population data is from the UN and I use the 15 to 60 year old population to avoid speculation about changing birth rates over the next fifteen years.  Energy data is from the US Energy Information Administration (EIA) and their projections using their IEO’17 (International Energy Outlook, 2017) models.

Japan

  • Core population peaked 1993, declined 14% since (as of 2015), will decline 22% by 2030 and 33% by 2040.
  • Energy consumption peak 2006, declined 17% since
    • My est. -25% by 2030, -30% by 2040
    • IEO’17 est. +3% by 2030, unchanged by 2040.


Germany

  • Core population peaked 1995, declined 5% since, will decline 17% by 2030 and 19% by 2040.
  • Energy consumption peaked 2006, declined 14% since, will decline 22% by 2030 and 28% by 2040.  IEO’17 data will be wrapped together for EU below.

Italy

  • Core population peaked 2005, declined 4% since.  Will decline 17% by 2030 and 25% by 2040.
  • Energy consumption peaked 2005, declined 17% since.  I estimate declines of 26% by 2030 and 32% by 2040.

Greece

  • Core population peaked 2006, declined 5% since.  Will decline 15% by 2030, 29% by 2040.
  • Energy Consumption peaked 2007, declined 27% since.  I estimate declines of 40% by 2030, 47% by 2040

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

What Patient Zero, Japan, Can Tell Us About China & The Developed World At Large

What Patient Zero, Japan, Can Tell Us About China & The Developed World At Large

To see the future, sometimes you have to look to the past.  Japan is patient zero in the global epidemic of slowing growth and although Japan was assumed to be the emerging world power in the ’80’s, we now know better.  The title of emergent power now rests with China…and for the same reasons it didn’t work out for Japan, it won’t work out for China.  To make my case, I’ll use UN population data coupled with EIA total primary energy data (cumulative energy consumption from coal, oil, natural gas, nuclear, and renewables), plus EIA fore-ward looking forecast data (the International Energy Outlook, 2017 or IEO’17).

First, Japan.

The Japanese 15 to 60 year old population peaked in 1993 and declined over 15% by 2018.  The core population will continue falling, down 24% by 2030, and 34% by 2040.  Energy consumption growth began stalling in 1997, consumption peaked in 2006, and has declined 17% from the ’06 peak through 2015. However, the EIA estimates the falls seen since ’06 will cease shortly and energy consumption will stabilize through 2040.

The chart below breaks down the annual change in the 15 to 60 year old Japanese population versus the annual change in energy consumption.  The twin deceleration should be fairly obvious.

Below, the actual data as above versus the EIA IEO’17 forecast.  While the core population will fall at an even faster rate, the EIA forecasts energy consumption will stabilize (against all logical rationale)?!?
To round out the picture, the Japanese 15 to 60 year old population versus 60+ year old population.  All growth is currently in the 60+ population until it too is projected to peak in 2040 and begin declining.

What does this mean for China?

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

Who Is It That Wants to Buy Trillions of US Treasury’s???

Who Is It That Wants to Buy Trillions of US Treasury’s???

As of the latest Treasury update showing federal debt as of Wednesday, February 15…federal debt (red line below) jumped by an additional $50 billion from the previous day to $20.76 trillion.  This is an increase of $266 billion essentially since the most recent debt ceiling passage.  Of course, this isn’t helping the debt to GDP ratio (blue line below) at 105%.

But here’s the problem.  In order for the American economy to register growth, as measured by GDP (the annual change in total value of all goods produced and services provided in the US), that growth is now based solely upon the growth in federal debt.  Without the federal deficit spending, the economy would be shrinking.

The chart below shows the annual change in GDP minus the annual federal deficit incurred.  Since 2008, the annual deficit spending has been far greater than the economic activity that deficit spending has produced.  The net difference is shown below from 1950 through 2017…plus estimated through 2025 based on 2.5% average annual GDP growth and $1.2 trillion annual deficits.  It is not a pretty picture and it isn’t getting better.

Even if we assume an average of 3.5% GDP growth (that the US will not have a recession(s) over a 15 year period) and “only” $1 trillion annual deficits from 2018 through 2025, the US still continues to move backward indefinitely.

The cumulative impact of all those deficits is shown in the chart below.  Federal debt (red line) is at $20.8 trillion and the annual interest expense on that debt (blue line) is jumping, now over a half trillion.  Also shown in the chart is the likely debt creation through 2025 and interest expense assuming a very modest 4% blended rate on all that debt.

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

China’s Growth Story…Don’t Look For a Happy Ending!

China’s Growth Story…Don’t Look For a Happy Ending!

Many economists suggest China is on the cusp of significant growth in domestic consumer demand as China shifts from exporter to consumer.  These economists postulate that rising domestic demand coupled with continued growth as the global exporter will push both China and the global economy into high gear.  China suggests that it will achieve 6.5% annual GDP growth.  However, I’ll briefly show why none of these outcomes is remotely likely.
Problem #1- China as Consumer:

According to the UN data, China’s 15-40yr/old childbearing population peaked in 2005 and has been rapidly shrinking since.  Since ’05, China’s population capable of producing more Chinese has fallen by 83 million persons or a 14.3% decline.  By 2030, China’s childbearing population will have declined by 157 million or a 27% reduction of those capable of childbirth (no estimate here…this is simply moving the existing population forward in adulthood).  Couple a massive decline in the childbearing population and the ongoing negative birthrate and serious depopulation (particularly among the rural regions) is not only possible but growing more likely.  Minor increases in wages will be no match for the massive declines in the consumer base.

The chart below shows China’s total 15 to 40 year old population (in blue) and the annual change (in red).

As for China’s 40 to 65 year old population, peak annual growth is well in the rear view mirror but one final bump in population growth remains before depopulation ensues.  However, the mild acceleration in growth will be more than offset by the declining 15 to 40yr/olds (chart below).
Simply put, China has seen peak domestic consumption and peak demand.  The impact of large, growing declines in the consumer base are only being masked by massive central monetization and wasteful misallocation of resources.  That misallocation has resulted in China’s massive surge in energy consumption.

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

Bubble-nomics

Bubble-nomics

Question: What is a bubble?
Answer: A bubble is trade in an asset at a price range that strongly exceeds the asset’s intrinsic value.  Or it could also be described as a situation in which asset prices appear to be based on implausible or inconsistent views about the future.

Question: How do you know when you are in a bubble?
Answer: Gauge asset prices against a standard, foundational premise to determine if the price appreciation is warranted.

Lucky for us, the Federal Reserve provides exactly what is needed to show how unjustifiable current prices are against households disposable income.  The chart below is all US household’s net worth (current value of all real estate, stocks, bonds, etc.) as a percentage of their disposable personal income (disposable income is what they have left to spend or save after paying their taxes).  To round out the picture, I’ve added in the net growth in full time workers during each period, dramatically decelerating.

Since 1970, every time asset values have risen above 520% of households disposable income (the dashed line in the chart) then the US has been in a bubble and a subsequent crash has followed.  This has simply meant asset values growing much faster than households income or households capability to sustain those price increases.  The depth of each crash has been relative to the overshoot of asset values on the upside.

Why???

I hear much discussion that the millennials are the largest age group in US history and are expected to drive growth in demand.  However, most people fail to understand what this truly means.  The millennials are just marginally larger than the boomers but what this truly means is zero growth.  The millennials are just meeting the previous high water mark the boomers set.  When the boomers came through, they nearly doubled the previous high water mark.

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

The Tale of Two America’s…Urban Rise, Rural Demise, Rationale to Hyper-Monetize

The Tale of Two America’s…Urban Rise, Rural Demise, Rationale to Hyper-Monetize

 (The following was written as an outline for a potential book.  To this point no publisher has shown interest and time and funds have run out.)

America is in the midst of an ongoing and accelerating shift in demographics and population growth.  These trends, long in place, are at a tipping point that are simultaneously driving urban economic growth (plus associated asset bubbles) and rural economic declines (plus associated asset collapses).  The spin up and spin down are mutually interconnected, the result of movement in a zero sum game.  But for select regions (and rural America in general), there is a surging quantity of sellers and a dwindling quantity and quality of buyers that will result in the primary asset of most Americans, their home, transitioning from an asset to an outright liability.

Many will point to record stock market valuations as an indicator of positive economic and/or business activity to refute my claims.  Instead, I argue it is the Federal Reserve and federal government policies, in place as a quasi “life support” for the negatively affected regions and rural America at large, that are driving the asset valuation explosions of equities (chart below, representing all stocks publicly traded in the US) and urban housing.  I will outline why the situation in the affected regions will only get worse and thus the Fed believes its hands are tied.  Why any amount of normalization will only induce localized collapses across much of the nation.  The total market capitalization ($ value) of the Wilshire has nearly doubled the acknowledged “bubbles” of 2000 and 2008 and is likely to continue rising further, precisely due to the worsening issues I detail below.

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

Why The Next Recession Will Morph into a Decades Long Depressionary Event…Or Worse

Why The Next Recession Will Morph into a Decades Long Depressionary Event…Or Worse

Economists spend inordinate time gauging the business cycle that they believe drives the US economy.  However, the real engine running in the background (and nearly entirely forgotten) is the population cycle.  The positive population cycle is such a long running macro trend thousands of years in the offing that it’s taken for granted.  It is wrongly assumed that upon every business cycle downturn, accommodative monetary and fiscal policies will ultimately spur greater demand and restart the business cycle once the excess capacity and inventories are drawn down.  However, I contend that the population cycle has been the primary factor in ending each recession…and this most macro of cycles is now rolling over.  Without this, America (nor the world) will truly emerge from the next recession…instead it will morph into an unending downward cycle of partial recoveries…contrary to all contemporary human experience.

The evidence for my contention begins with the 25-54yr/old US population, which peaked in December 2007 and remains below that peak ever since (this population is presently about 400k fewer than Dec of ’07).  However, total US full time employment is now 3.6 million above the previous peak in 2007.  This 25-54 to FT employment relationship is now 1:1…just as it was in 1980 and 1970.

Annual change in 25-54yr/old US population vs. annual change in total full time US employees (below).  The macro population cycle provided millions of new adults (consumers) and their increased demand restarted the more frequent gyrations of the micro business cycles…until 2008 and again now in 2017.  Some may take note that the Federal Reserve cost of money (the Federal Funds Rate in blue) generally followed the population cycle, only making some deviations for the business cycle along the way.But the change per 8 year periods of the 25-54yr/old population and total US full time employment turns out to be not so dissimilar.  In fact, it’s a pretty nice correlation.

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

Contemplations for a Sunday (unless you can’t get around to it til Monday)

Contemplations for a Sunday (unless you can’t get around to it til Monday)

Some simple themes today…

Population growth, economic growth, and resultant energy consumption are inexorably slowing.  The Federal Reserve knows it can not stop this and is simply slowing the inevitable with interest rate cuts to incent greater consumption via skyrocketing credit/debt (particularly government debt….debt that is undertaken with no intent of ever repaying it and is really just pure monetization).
The chart below highlights that employment among 25-54yr/olds (the foundation of US consumption) ceased growing in ’00.  Once employment among this group ceased growing, total US energy consumption also ceased growing, and accelerating debt was substituted to maintain growth thanks to nearly 40yrs of interest rate cuts.
The impact of the declining rates and rising debt can be seen in the Wilshire 5000 (chart below).  The Wilshire represents all publicly traded US equities radically moving upward with surging US federal debt but inverse to US total energy consumption, jobs creation, and economic activity since ’00.
The driver of the Fed’s federal funds rate was and continues to be the rate of population growth and the growing demand this population growth represents.  The adult population growth rate peaked in ’79 and the federal funds rate peaked in ’80…rates plus population growth have been decelerating/declining together since.