Everything is looking good for the US of A! Or is it?
The dollar – up.
Auto sales – up.
House prices – up.
Consumer confidence – up.
Consumer credit – up.
Stocks – up.
Oh, and jobs are up too…
As to this last point, even normally gloomy economist at brokerage Gluskin Sheff David Rosenberg feels the light of a rising sun on his face. The recent jobs report was a “game changer,” he says:
First came the healing in the credit markets in 2009-2010. Then came the healing in the housing market from 2011 to now. And now we have the third act in full swing, which is the healing of the labor market.
It’s not merely the 195,000-plus in the headline payroll data for June and the upward revisions that really made it a 265,000 reading. It was the fact that the private sector added 202,000 net new jobs and that basically has been the norm now for the past five months.
Considering the magnitude of this year’s intense fiscal squeeze, only the most ardent pessimist would regard this as anything other than downright impressive. In the leveraged 2002-2007 cycle, the average monthly gain in private payrolls was 136,000. In the tech boom 1992-2000 cycle, the average was 210,000.
So I’ll leave it up to you to judge how the current pace of 200,000 should be treated in that context. The case for the Fed’s above-consensus forecasts to be met this time around, especially as the budget cuts fade in 2014, looks pretty strong to me…
When the Facts Change…
“When the facts change,” said Keynes to a heckler, “I change my opinion. What do you do, sir?”
What this suggests to us is that Keynes’ opinions weren’t very good in the first place.
But what about us?
Should we change our opinion, dear reader?
Could it be that we were wrong? Could it be that the economy really is recovering? Could it be that stocks are in a real bull market… not just a hysterical, Fed-fueled bounce? Could it be that you don’t really need gold anymore because the feds really do have this credit cycle thing under control?
Should we admit we were wrong, sell our gold and buy all the US stocks we can afford?
Nah. Remember our dictum from yesterday:
You can’t cure an alcoholic by buying him another drink. He may get high again. But the problem is still there… and getting worse.
The US economy (this applies broadly to the economies of Japan and Europe too… but we’ll leave them out for the moment) reached a turning point in the 1980s. Natural, healthy, sustainable growth gave way to credit-boosted phony growth.
We’ve been over this many times already, but it’s important to understand. The “growth” of the last 30 years was not like the growth of the 30 years before it. It was not based on rising productivity, increased wages and real capital formation.
Wages stagnated. The only way people could increase their standards of living was by spending money they didn’t have. That’s where the credit came in, made possible by America’s post-1971 flexible paper money system.
Spending money you don’t have is one of those things that economist Herb Stein had in mind when he said, “When something can’t go on forever, it will stop.”
In the event, it stopped in 2007 – with total US debt at about 360% of GDP, up from under 200% in 1980.
Since 2008, the feds have worked feverishly to get their mojo back… administering larger and larger doses of credit to an economy that already had more than enough.
“More than enough?”
How do we know how much debt an economy can carry? And looking around the world, we find that Japan, Britain and Ireland have far more… over 500% of GDP for each of them.
Hey… if they can do it… so can we! At least, that seems to be the theme of the whole show now.
The Fed offers more EZ credit. Investors believe this will lead to more good times. And consumers – bless their stupid little hearts – are getting in the spirit of it. They’re spending even more money they don’t have on even more stuff they don’t really need.
Credit Is Back!
Yes, dear reader, after a short period of deleveraging, mom and pop… bro and sis… and all their kin from Palm Beach to Prudhoe Bay… are taking up the challenge. Here’s Reuters with the report:
Consumer credit increased in May by the most in a year, a sign low borrowing costs were boosting economic growth although interest rates have since risen.
Total consumer installment credit advanced by $19.6 billion to $2.8 trillion, Federal Reserve data showed on Monday. Economists polled by Reuters had expected consumer credit to rise $12.5 billion during the month.
Consumer debts grew both for non-revolving credit, which includes loans for cars and college tuition, as well as for revolving facilities like credit cards. Overall consumer debt rose the most since May 2012.
Now the government is adding debt… and so is the private sector.
Whee! Is this a great economy, or what?
The feds wanted to get the economy moving – in the worst possible way. From where we sit (in rural Normandy), it appears they may have succeeded.
They may have once again prevented a big correction. Now they’ll face an even bigger one down the road.
The Coming Demographic Bombshell
From the desk of Chris Hunter
It wasn’t just “credit-boosted phony growth” that caused the big spurt in growth…
A demographic “sweet spot” also provided a highly favorable tailwind.
According to a recent study in the Financial Analysts Journal:
Favorable trends in the size and composition of populations have helped to fuel the rapid economic growth experienced in the developed world over the past 60 years, and their reversal plays a crucial part in the current rapid deceleration in developed world growth.
The problem, say authors Rob Arnott and Denis Chaves, is that these tailwinds are about to turn into headwinds. This will push growth rates into negative territory in 12 of the world’s biggest economies: the US, Canada, Australia, Britain, France, Germany, Italy, Japan, India, Russia, China, Brazil
The problem is aging populations…
More specifically, something called the “dependency ratio.” This measures the non-working age population compared with the working-age population.
Dependency ratios of the world’s major economies (both emerging and emerged) are spiking, as you can see from the chart below, which looks at the US, Britain, Canada, Australia and New Zealand.
And as you can see from the chart below, the situation is worse in the other major developed markets, Japan, France, Germany and Italy.
And here are the growth projections of the study, based on this big demographic shift.
This is a major structural headwind facing the US economy. And the Fed is acting as though it didn’t exist. It is pumping stimulus to bring growth back to its “normal” 3-4% range. But “normal” ain’t coming back.
It was a fluke. A one-off. A happy coincidence.
Why Growth Must Fall
Fertility rates in the major global economies simply aren’t keeping up with replacement levels (roughly 2.1 children per woman of childbearing age).
GDP growth is mainly a function of two things: productivity and output. And since output growth is basically a function of population growth (unless the new workers are highly unproductive), population growth is a huge boost to economic growth.
When you break it down, countries with older populations and lower fertility rates tend to grow slower than countries with expanding workforces and higher productivity rates.
This is why, for instance, Japan grew so swiftly in the 1960s-1980s… and why it started to slow in the 1990s, as legions of Japan’s boomer population hit retirement age and started to become a negative influence on GDP.
It’s also the major reason why we got a burst of growth from the 1980s onward. The fall of the Iron Curtain opened up massive new labor markets as well as consumer markets… and millions of new workers joined the labor forces of the world’s emerging markets. And in the US, the population grew from about 200 million at the end of the 1970s to about 300 million today.
These powerful demographic forces shape the world… and long-term asset prices. But as investors, we sometimes don’t see them. That’s because we are vulnerable to something called “recency bias.” We’re inclined to use our recent experience as our template for what will happen in the future.
When it comes to investing, this is a disaster. Because instead of thinking about the trends shaping the future, we extrapolate past trends out into the future. This is one of the biggest mistakes you can make as an investor, because markets are cyclical… and often follow a boom-bust pattern.
Stimulus has a powerful effect on US stock prices. We’ve seen a nearly 90% correlation between the rise in the S&P 500 and the expansion of the Fed’s balance sheet. But long term, fundamentals matter.
Combine these demographic headwinds with current valuations, and the major US indexes look overpriced. I am certainly not a buyer at today’s levels.
Bonner & Partners Family Office