Former Microsoft CEO, and Founder of the nonprofit USAFacts (www.usafacts.org), Steve Ballmer, was on CNBC early in April arguing that the best he could see for real GDP growth was 1.5%!
That adds another voice to what we’ve been warning since 2016 now
He reasons that population growth is 0.3% and real GDP per capita growth has been 1.2%. Together, that gives us 1.5% growth. That’s not even close to the 3% to 4% growth rates the White House and economists keep forecasting.
My math gives me a similar result: slowing growth rather than booming growth like we’ve been promised.
Workforce growth is projected to be zero for many years to come, and even negative in the next several years. Productivity rates have been 0.5% and falling. How do you get 4% growth out of that, especially now that we’re at or near full employment? Quite simply, you don’t!
Any way you add up the numbers, there’s no way to get sustainable, real growth rates of 3% to 4% over the coming years or decade.
Yet the stock market has bought into the 3% to 4% growth scenario due to tax cuts that won’t see substantial investment in real expansion. We’re running at a below-average 78% capacity and that’s up from a very low 75.5% in March 2017. We don’t need more. And already, according to some surveys I’ve heard, many companies are using the tax cut benefits to increase profits above wage increases or expansion!
The bond markets have not bought into this new growth scenario as much. They’re typically more realistic.
So, this month, let’s explore the reasons why the promised 3% to 4% growth will NOT materialize…and then Rodney will give you some guidance on where to find growth for your investment account in this environment.
Central Bank QE is Decelerating Fast
There’s an 800-pound elephant in the room that few people are talking about. It goes by the name Central Bank QE.
Global central bank buying of bonds and financial assets to add liquidity and create economic stimulus has been falling since March 2017. It’s projected to go negative into the second half of 2019.
According to a Bloomberg survey of economists, which it conducted between April 12 and 19, the consensus is that the European Central Bank (ECB) will phase out net asset purchases by the end of this year.
And as we know, the Federal Reserve is already steadily reducing its balance sheet (as Rodney discussed with you last month).
You can’t have an economy that was failing due to excessive debt and slowing demographics — both predictable — magically turn around with $14 trillion of QE and zero interest-rates policies, and not have repercussions when you pull away that punch bowl
During the last 13 Fed tightening cycles, 10 have seen recessions.
Look at this…
This chart looks at the monthly net asset purchases whereas most charts show the cumulative growth in the balance sheets of central banks. That makes this chart much more sensitive to changes in policies and impacts.
As you can see, the greatest monthly acceleration first occurred right at the beginning of stimulus efforts in early 2009. That was to fight the financial meltdown.
At the zero point in 2011, we saw the Greece and European debt crisis and a 20% correction in the US stock market, which was the largest drop since 2008.
Japan drove the next sharp rise in stimulus efforts in 2013. It tripled its QE out of desperation after 23 years of off-and-on recession and zero inflation.
Then net asset buying decelerated again with US tapering down to zero in 2014.
Of course, the ECB stepped up its QE efforts to offset the Fed’s backing off until we arrived at the recent peak of $181 billion worth of asset purchases monthly in March 2017.
The ECB started reducing its buying from $60 billion to $30 billion in January of this year. Telegraphing that in October 2017 didn’t cause a taper tantrum like it did when the US announced its plans to taper in late 2013.
With the ECB cutting back $30 billion worth of monthly asset purchases and the Fed reducing its balance sheet by about $10 billion a month in the first quarter of 2018 (by just letting present bonds expire), we should already be closer to $100 billion a month in April, or about 45% off the peak.
But, with the Fed’s plan to increase their sell-offs by another $10 billion every quarter (putting that number at $20 billion a month in the second quarter, $30 billion in the third quarter, etc.), the US will be reducing its balance sheet by $40 billion a month in Q4 of this year!
Even Japan is now hinting at tapering. Although that’s more because its approaching 100% of their GDP in their balance sheet so it’s running out of assets to buy. At this point, it’s already bought a major portion of the stock ETFs that trade in Japan. That’s just crazy!
With all of this in mind, the current projections are that we’ll be back to zero purchases in mid-2019, and at negative $10 billion by the end of 2019.
There is NO way — zip, zero — that, with the underlying fundamental trends still so weak, there won’t be an adverse economic and stock market reaction to this in the years ahead. In fact, stocks will be especially prone to disliking and suffering from the end of quantitative easing because they’ve been the single greatest beneficiary!
Since the peak in central bank asset buying was in March 2017, I expect we’ll see the effects of the disappearance of QE hit the markets on a 12- to 18-month lag. That puts the third quarter of 2018 on my radar as a time to expect deeper trouble.
Another reason we won’t get 3% to 4% growth promised is because of the situation with real estate…
Net Housing Demand is Set to FALL from Now Until 2039
A couple of years ago I had an aha moment about the future of real estate. It’s not just younger buyers that matter as they peak in their real estate purchases around age 42. It’s that dyers are sellers and as the Baby Boomer generation dies, their real estate will flood the market. Real estate lasts indefinitely (excluding fire or natural disasters). People live on average to around 78 years old.
When I forecast workforce growth, I subtract the number of retirees at age 63 from the new workforce entrants at age 20.
When I forecast net real estate demand, I subtract dyers from buyers.
Mark my words, the predictable dying of the Baby Boomers will ensure that real estate will never be the same again.
Just ask the Japanese, who saw a 60%-plus crash in their real estate prices in the 1990s. They’re still scraping that bottom nearly three decades later!
In this next chart, I subtract peak buyers at age 42 on average from peak dyers at age 78. Look at what that will do to the real estate market…
As the chart shows, the first US real estate bubble got ahead of the fundamental trends and then crashed 34%.
This second bubble has gotten even farther ahead of such basic demand. Trends should have been heading down since 2016! The next decline into 2020 or so will result in a much greater crash, with property prices likely losing as much as 50%.
But, even in the next global boom, the net demand will continue to slow! It doesn’t bottom until around 2039.
In fact, net demand will be negative between 2034 and 2039.
Although that is minor compared to what Japan has experienced…with 10 million empty homes after their elderly occupants died and not enough younger people to buy them up. It’s projected that the number of empty homes in Japan will hit 20 million by 2040. That’s compared to total households of 49 million!
We won’t have quite as large a crash as Japan did, but like Japan, real estate could appreciate little or not at all for decades to come. Most likely in line with inflation as has been the longer historical trend.
Buyers in the future should wait for this second and last bubble to burst into the early 2020s and then buy to own and improve. If you buy too early, you’ll just lose money. And don’t expect to see your home price double in the next boom.
I tell you all of this because real estate is not just one market, although the overall economy and interest rates tend to have a general impact.
The Demographic Impact on Real Estate…and Growth
Apartments buying peaks at age 26.
Starter home buying peaks at 31.
Trade-up home buying peaks at 42.
Retirement and vacation home buying peaks at age 65.
Nursing homes peak the last at age 84.
Apartment buying began to peak for the first wave of Millennials around 2017. It’s likely to remain buoyant as even fewer young households will want to or can afford to buy when the next crash sets (and I think it’ll start sooner rather than later).
Starter homes, when adjusted for dyers (31-year-olds minus 78-year-olds) had a plateau between 2009 and 2017. From here on out, into around 2020, net demand will be down modestly.
But, the big surprise here is that net demand for starter homes will be down sharply from 2022 to 2035, just when the next boom is starting to set in.
You might wonder why I’m adjusting for dyers when these starter-home buyers are so much younger?
The truth is that older Baby Boomers tend to downsize into retirement. It starts when their kids leave the nest and they no longer need so much space. So, older and younger people tend to compete for the smaller home market. As the Boomers die, they’ll be dropping more of these smaller homes back onto the market.
The retirement/vacation home market is currently the best of the lot and will have a long plateau into 2022 (since 2011). Then it drops off sharply from 2023 into 2039… again, just as the next boom gets rolling.
Trade-up homes will hold up the best of the lot with peak buyers rising from the Millennial generation. But the trends will still be down due to the increasing numbers of dying Baby Boomers into 2039.
All of this will be a heavy drag on economic growth, as will generational cycles of productivity…
Generational Cycles of Productivity: Zero or Negative Rates Ahead
A growing population or, more accurately, a growing workforce is one way to grow economically.
The other is increasing productivity — the same workers produce and earn more.
Well, it’s a no-go on both fronts. The trends here have been falling since late 2003. Productivity is now as low as 0.5% and will fall further into around 2019 or 2020.
The logic here should be obvious. New workers become more productive after they enter the workforce around age 20. They grow because they’re eager to learn and advance, but also as they bring new technologies into the mainstream.
Eventually though, that productivity peaks. Older people become increasingly more resistant to change and tend to get stuck in their ways.
The chart shows the peaks in productivity of the Bob Hope generation in the fourth quarter of 1962, at 5.1%. Then it shows the peak in productivity of the Baby Boomer generation in the third quarter of 2013, at 4.4%.
The lowest point in productivity was at -0.7% in 1980. We can expect to hit a similar low point again around 2020. That’s a 1.5%-plus differential in one generation cycle!
That’s how much of a difference the aging of a generation makes!
Note that the Bob Hopers peaked in productivity three years before the peak on the Dow, adjusted for inflation. As for the Boomers, that peak was four years before the peak on the Dow.
Clearly, productivity peaks a few years ahead of spending!
It’s another insight in our long list of impacts of aging and generation cycles on the economy and markets. Here’s yet another…
Can We Draw Enough People into the Workforce to Offset Boomer Retirements?
Although we’ve reached as low as 4.1% unemployment, recent arguments point to the fact that the rate doesn’t reflect up to as many as five million people who have given up looking for work.
I buy that argument up to a point. But I also think a lot of those uncounted people dropped out for retirement. Also, some two-working couples had one spouse (typically the wife) drop out or work part-time once the kids left the nest.
Regardless, the Boomers are going to be retiring — or wanting to retire — in much higher numbers in the years ahead, as the next chart shows.
Workforce participation peaked in 1996 at 67.0%. It has since fallen to 62.7%, despite an economy that has now been growing for nine years and a 4.1% unemployment rate.
This chart shows a clear correlation between participation rates and the retirement wave of Boomers; more so than with GDP growth or any other indicator I can find. And it strongly suggests we could see those rates fall to around 58% in 2023…and that we’ll never see that 67% peak rate again in our lifetimes.
The range, even with the Millennials’ cycle of entering and then retiring, is likely to remain between 58% at worst and 62% at best.
One factor that could change this in the future is higher retirement ages, which is something countries like Germany and Australia have already begun to implement. But this would only occur substantially if countries experience an entitlements crisis due to slowing economic growth and further rises in already high deficits.
From everything we know, see, hear, and learn, the US is in for one of those entitlement crises before long.
Trump’s tax cuts will take our deficit up to between $1 trillion and $1.2 trillion in 2019, if the boom continues. We expect a $2 trillion to $2.5 trillion deficit, if we’re right about a deeper recession or depression ahead.
Interestingly, regardless of our demographic trends, we’ve had a recession about once every decade since the 1950s. There was one in the early 1960s, another in the early to mid-1970s, again in the early 1980s, then the early 1990s, then the early 2000s and 2008 to 2009. We are due for another recession just ahead.
The Debt Bubble Has Been Extended, Not Dealt With
Economists often talk about the great debt bubble deleveraging. The truth is that we now have more total debt — public and private — than at the peak of the last bubble in 2008.
The primary debt bubble occurred from 1983 to 2008, right when the Baby Boomers were in their massive Spending Wave.
Debt grew 837%, or 2.67 times GDP for 25 years.
Any economist who couldn’t see that would be a problem shouldn’t be an economist…and obviously doesn’t study history.
After the bubble burst, GDP has grown more modestly, at a mere 31% above the last peak, while debt has grown more modestly still, at 23%. But it has still grown, especially in the government and corporate sectors (borrowing with cheap money to buy back their own stocks to leverage their earnings per share).
Hence, our economy is still heavily weighed down by debt. That makes it hard to grow. And when that debt finally does deleverage it will cause a much more severe crash, along with stronger deflationary trends (think 1930s).
And there you have it: five reasons why we won’t get the 3% to 4% growth we’ve been promised…and why we’ll see slowing instead.
Before I hand over to Rodney for this month’s investment recommendation and portfolio update, let’s have a quick look at the two scenarios I see for stocks based on what we’ve just discussed…
Two Scenarios for Stocks in a Slowing Rather than an Accelerating Economy
On March 12, I emailed you an update with the chart below showing two scenarios for stocks. I’ve updated this chart as of April 20.
The first scenario would be that markets have already peaked on January 26. That at first looked more likely due to the overthrow of the top channel line, which normally means a top is being put in.
In that scenario, stocks would test the bottom channel line and then break it.
Well, stocks did break that bottom channel line a little, but it has held thus far.
Also, if January 26 were indeed the top, then normally the first crash in a bubble of this magnitude is 40% or so in the first 2.5 months. The fact that stocks have only been down 12% at the worst leads me to believe the second scenario is most likely.
In the second scenario we continue to hold the bottom trend line and stocks eventually break up to enjoy a final wave into as late as August.
That’s when this rally, which started in March 2009, will be as long as the longest rally in history (from October 1990 to March 2000). Hence, this 5th wave up since early 2009 will be equal to the 3rd wave up.
I would project around a 28,000 target on the Dow for that. After that, we should see a sharper 40%-plus crash into October or November.
I’ll keep you updated on these scenarios.
But I see the bond markets as having a more realistic view as long-term rates aren’t rising as much as short-term ones. As I’ve said, bonds aren’t buying the 3% to 4% growth scenario like la-la-land stocks are! They see the writing on the wall.
Now let’s turn to Rodney…
For, Markets & Money