IN-DEPTH: TRANSCRIPTION - LONGWave – 09-07-22 - SEPTEMBER – A Tipping Point Triggered?
SLIDE DECK
TRANSCRIPTION
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Thank you for joining me. I'm Gord Long.
A REMINDER BEFORE WE BEGIN: DO NO NOT TRADE FROM ANY OF THESE SLIDES - they are COMMENTARY for educational and discussions purposes ONLY.
Always consult a professional financial advisor before making any investment decisions.
COVER
In this session I want to step back a little and look at the larger picture so as to put into perspective what may be contributing to the current economic developments we are witnessing both in the US and globally.
I suspect we have finally triggered a major Economic Tipping Point as part of the Fourth Turning!
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I am a long time blue water sailor and as such I am accustomed to plotting my course with regard to both what I see and often can’t see. I am referring to the difference between the current and the waves. I can see the surging waves which normally go in the direction of the wind but I often I can’t easily identify a slow moving current but know it more or less flows directly with the tide. I may sail the shifting wind but I am always adjusting for the variables of the current if I have a destination in mind and want to optimize the time to get there.
That is what we must do in plotting today’s economic environment. We have major long term changes occurring in the less noticeable demographics variables of population growth while at the same time piloting the volatile short and intermediate changes in economics to optimize our portfolios. The markets are taking us where the accumulations of all these forces are pointed.
As such I want to discuss the outline shown here.
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The global population growth rate has been steadily falling since the 1960’s when the Baby Boomer generation birth rate peaked.
We have now reached the point as a result of technology and various country specific public policies where global population growth is nearly stagnant.
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In the US the demographics have reached much the same point of stagnant population growth having fallen fairly significantly since the 1990’s due to a number of factors including slowing immigration, smaller families and having families later in life.
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What is most important to economics is the change in the work force and as such the working age population. We show here the US population growth between the ages of 25 & 64 and the Labor Force Growth over 25 years of ages.
They correlate as you would expect fairly closely on a longer term basis.
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On a global basis the working age population of 15-64 year old shows that Japan, Europe and China have already went negative while the US is marginally positive.
Economic issues are already clearly apparent in Japan, Europe and China from shifting demographics.
There is a direct correlation of a countries economic output with the size of its population and how productive that population is. It is well documented that if the population growth of a country is falling then productivity growth must make up the difference or the economy also slows.
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There are many important correlations that go with this fact and the working age of a countries labor force.
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For example the decline in the US Labor Force Growth rate correlates very closely over the longer term with the US Nominal GDP Growth Rate.
The smaller the number of workers will mean less production. The less productive those workers are, the smaller the economic output. The rate of growth of both is a correlated derivative.
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The Federal Reserve reacts to the demand for money that changes as the output of the labor force require.
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Therefore, the Fed Funds Rate also follows the same long term trend.
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….. as does long term rates as represented here by the 20 Year Treasury Rate.
None of this is useful on anything shorter that an 18 -24 month basis but is nevertheless at work, relentlessly, like the changing tide is for a sailor.
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Where this really gets interesting and valuable is when we start to break these numbers down by considering Age Composition and what is referred to as the Age Dependency Ratio.
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We spent a fair amount of time in our recent UnderTheLens video entitled the “US Labor Market in Productive Decline” along with two supporting newsletters on Generational attitude shifts. There is a lot of information there that I won’t recap here. I encourage you to go through the materials to see how the current demographics of Baby Boomers. Gen X, Gen Y (Millennials) and Gen Z (The Zoomers) are having on the working age work force with regard to their attitudes and expectations.
Basically, we have a rapidly retiring Baby Boomer generation which is being replaced by a Zoomer Generation who is entering the labor force much later and indebted with more education, but being less skilled & trained overall. The result is currently a 5 Million shortfall in the labor force.
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Most important to our discussion is that the current US population therefore is experiencing a dominant demographic shift in consumption.
This is creating major problems since the US is an unprecedented 70% consumption economy. That number has been falling as an expected result of an older generation spending less since normally there consumptions years start to decline after age 55.
Meanwhile, the younger generation who are in their high consumption years is weighing in on a smaller degree and in later years than has been experienced previously. This is additionally aggravated by heavy student loan obligations.
The net result is we have downward pressures on US consumption which is built on a foundation of consumption!
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In parallel we have Dependency Ratio head winds.
THE AGE DEPENDENCY RATIO
The Age Dependency Ratio is a measure of the number of dependents aged zero to 14 and over 65 in a nation, compared with its total working age population aged 15 to 64.
- This demographic indicator gives insights into the number of people of non-working age, compared with the number of working age.
- It is also used to understand the relative economic burden of the workforce and has ramifications for capital availability and taxation.
- The dependency ratio is also referred to as a total or youth dependency ratio.
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The US Age Dependency Ratio is shown here. It is represented such that when it falls there is an increasing burden being placed on the working force by the non-working force age group.
The reason this occurs is primarily associated with entitlement programs from Social Security and Medicare to Child Care & Housing Assistance benefits from the government.
You can see that it is significantly increasing and will continue to get worse through the approaching 30’s.
This chart doesn’t tell the full story as it fails to reflect the actual funding costs of over $84 Trillion of Off-Balance Sheet, Unfunded Liabilities associated with existing social entitlement programs. Additionally, it doesn’t reflect the Fiscal Gap of over $212T of Contingent Liability that may come due in part or whole if the world’s economy and globalization slows.
The Age Dependency Gap is much worse and pronounced in Europe and Japan!
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All this adds up to some real problems going forward that are well understood by G7 countries but are continuously Kicked-Down-The-Road for another administration to deal with! The delay in addressing them have made them almost impossible to envisage how they can be fixed without social anarchy occurring.
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Real US GDP per Capita has dropped precipitously since the Dotcom Bubble popped in 2000. It hit a low with the Covid-19 Recession but the bounce is already weakening.
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It appears the best we can hope for is to somehow sustain a GDP per Capita 20 Year Annualized Growth Rate of between 0.5 and 1.5%.
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The problem with this level is that it is insufficient to fund the US economy which as I have explained many times is now based on Credit Growth (the black bars) for sustained consumption and not savings (blue bars) for investment on wealth creating productive assets.
Capitalism has given way to Creditism. Capitalism is about Savings being employed for Investment in Productive Assets which leads to economic growth and increasing standards of living. What we now have is instead of savings we have credit growth which is used for consumption (versus investment) which leads to lower longer term standards of living.
The US since the 2008 Financial Crisis has increasingly found it harder to create Credit Growth at ever increasingly needed and sufficient levels. Quantitative Easing (shown in green) by the Fed has helped; as has financing from the rest of the world (shown by the red bars). However financing from the rest of the world (labeled ROW) like China and Russia has deteriorated badly since 2018 when Russia sold all its US Treasury FX holdings and China started reducing its rate of buying.
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My colleague Richard Duncan (which I strongly recommend you subscribe to) is one of the world’s leading authorities regarding credit flows and requirements and as you would expect does superior work in this area.
He has shown that if the US’s annual inflation adjusted Credit Growth Rate falls below 1.4% the US consistently suffers a Recession.
This chart from Richard, dated September of 2021 estimated that US Y-o-Y Credit Growth was estimated to possible be as high as 3.2% in 2022. This was based on Inflation being Transitory and falling back to 2% by 2022. That myth has been blown apart and now, even if we achieve a 6% year annual rate this year would make US credit growth negative! We have already seen negative Q1 and Q2 GDP as negative.
The problem this chart lays clear is that Credit Growth in the US will be insufficient and unsustainable at anywhere close to what is required. It is also likely that the recession will last longer and be bigger than most currently envisage!
Quantitative Easing and Debt Monetization on steroids may also be insufficient especially if De-Dollarization continues its current pace globally. Sanctions against Russia have only accelerated this worrisome trend.
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There are the strongest indications that this is “Game, Set, Match!” for the US standard of living.
Hopefully as this graphic indicated we can somehow pull a rabbit out of the hat over the next decade – but be assured, it will be a tough decade ahead!
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What worries me the most about the likelihood of pulling a rabbit out of the hat is something I have outlined before on a number of occasions which I have labeled as the “Event Horizon”.
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Stagflation may in fact soon be felt throughout the developed economies! There is little doubt a Recession is on the horizon but the question of an era of Stagflation is not too many – at least yet!
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To me what is key is to understand that today a potential Stagflation problem is much bigger and much more intractable than most yet fully realize!
The way to visualize what is occurring is to think of Stagflation as a potential Black Hole. It is easy to unwittingly and unsuspectingly get into but extremely if not impossible to get out of once trapped in it.
The secret is to avoid it with sound economic policies before you reach the “Event Horizon”!
Many knowledgeable money managers perceive we are potentially entering such a situation.
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The reaction by central bankers and those on control of Monetary Policy is to apply traditional Keynesian thinking to the problem. But in this case it doesn’t work!
What must be done to control Inflation crushes growth.
What must be done to foster growth inflames Inflation!
It is the proverbial “Catch 22”.
The solution therefore is you must identify it early and act aggressively.
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The hidden problem is that the distortions, and reporting games we have been playing for a very long time, have let us get much too deep in the Black Hole than we understand because our measures have failed to alert us of the reality of the situation.
The political “Kick-the-Can-Down-the-Road” policy approaches have only fostered “tweaking” the warning measures to buy time and make it someone else’s problem!
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Let me be specific.
Inflation through statistical distortions such as Hedonics, Substitution, Imputation and others which I have previously chronicled have distorted Inflation as measured by the CPI to such a degree that Inflation, Inflation Breakevens and Real Rates are ineffective measures.
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I most recently laid out how the new world of Inflation Swaps has exploded in an attempt to protect the more sophisticated institutional investors from these mirrors and mirages.
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Economic Growth is also seriously distorted by an obsolete formula that is based on sound money and adopted during the era of the gold standard and fails miserably to adequately describe real growth in an era of massive government debt, transfer payments and debt financed consumption now being nearly 70% of the economy. The creators of the simple formula never imagined an economy like the one we operate in today.
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Our 2017 Thesis paper entitled “The Illusion of Growth” lays out the indisputable reality of the facts in its 111 pages of detailed analysis.
The central problem and difference with what occurred in the 1970’s is important to understand. We not only have an order of magnitude worse “black hole” problem but our tools are dull and our thinking seriously obsolete. Our politically polarized governance is also a big problem but which I will leave for another day!
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The simple truth and reality is that the US is highly likely to already be well below the event horizon!
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I have unfortunately presented a pretty bad overall story here so far! I am sorry to be so negative but the facts are the facts.
I have learned over the years however is it is never as good as I hope nor as bad as I expect.
We tried to lay out the good news in my recent video entitled “The Dam Has Broken” with Charles Hugh Smith.
The bad news is fundamentally about imbalances that must be corrected before we can launch ourselves into a new era of prosperity. The good news is they will herald new and required changes for a more dynamic and productive future.
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The changes can be expected to be centered on shifts in:
- Financial Rebalancing between productive countries and indebt, unproductive countries consuming more than they produce,
- My colleague Charles Hugh Smith’s Theory on De-Growth
- Re-Shoring,
- De-Financialization
- De-Globalization
SLIDE 37 - CONCLUSION
Developed Economies are going to b radically altered because of the impacts of the elements of the shifting demographics we have outlined.
The pressure on reduced rates of consumption, the financing costs of ever increasing debt loads and shrinking available capital for productive investment versus consumption is going to force the following. .
SLIDE 38 – NATIONALIZATION:
We can expect governments to take over more private sector roles through Nationalization or what the US government termed “Conservatorship” during the nationalization of Fannie Mae and Freddie Mac during the 2008 Financial Crisis.
We outlined this evolution in our UnderTheLens – 02-26-20 – MARCH – The Coming Era of Stagflation which we encourage you to review.
SLIDE 39 – THESIS 2020: GLOBAL CONFLICT
We can also expect Global Conflict to continue to worsen and likely be more intense than the “Cold War”.
Conflict will take a different form than prior wars and will take the form of Currency Wars, Trade Wars and destabilizing stealth Cyber attacks as part of Economic Warfare.
We outlined all this as on the horizon in out 2020 Thesis entitled “Global Conflict” which is available on the MATASII web site.
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As I always remind you in these videos, remember politicians and Central Banks will print the money to solve any and all problems, until such time as no one will take the money or it is of no value.
That day is still in the future so take advantage of the opportunities as they currently exist.
Investing is always easier when you know with relative certainty how the powers to be will react. Your chances of success go up dramatically.
The powers to be are now effectively trapped by policies of fiat currencies, unsound money, political polarization and global policy paralysis.
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I would like take a moment as a reminder:
DO NO NOT TRADE FROM ANY OF THESE SLIDES - they are for educational and discussion purposes ONLY.
As negative as these comments often are, there has seldom been a better time for investing. However, it requires careful analysis and not following what have traditionally been the true and tried approaches.
Do your reading and make sure you have a knowledgeable and well informed financial advisor.
So until we talk again, may 2022 turn out to be an outstanding investment year for you and your family.
Thank you for listening.
