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God’s work is done…

The Wall Street Journal reports that Lloyd Blankfein is preparing to step down as Goldman Sachs chief executive as soon as the end of the year, capping a more than 12-year run that would make him one of the longest-serving bosses on Wall Street.

While the firm’s co-presidents, Harvey Schwartz and David Solomon, are leading candidates to replace the 63-year-old CEO, one can’t help but wonder about the timeliness of Gary Cohn’s White House exit.

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For the third day in a row, the close of European trading (around 1130ET) has prompted a sudden, heavy volume selling pressure across the crypto-space…

Having rebounded dramatically off early weakness, the moment European equity markets closed seemed to spark panic-selling once again in Cryptos with Bitcoin suffering most.

Just a coincidence.

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Authored by Chris Hamilton via Econimica blog,

The global economy is the sum of its production of goods and services versus its capability to consume those.  This article will outline the mismatch of fast rising capacity versus the deceleration of consumptive capability.

As for productive capacity; mechanization, innovation, technology, and cheap debt have helped ramp up the potential.  Going forward, a flurry of advancements including AI, robots, and autonomous vehicles are among the slew of factors that will drive productive capacity even higher.

Regarding the potential capability to consume; each person is essentially a unit of consumption multiplied by their earnings, savings, and access to credit.  But I really want to focus on the childbearing population (ages 15 to 45 years old) and births to show what is taking place and what is yet to come.  In the charts below, I exclude Africa because they haven’t the earnings, savings, or access to credit to be anything more than a very minor rounding error from a global economic standpoint…but they represent such a large portion of global population growth as to skew the data.  Likewise, African’s represent a very small portion of global immigration (detailed HERE).

Global Childbearing Population (x-Africa)

In the first chart below, maroon columns show the annual change in childbearing population and blue line the total childbearing population.  Annual growth peaking in 1988 at +46 million annually…down over 90% to just +4 million).

Below, the annual change in childbearing population (as a percentage of total x-Africa population…maroon columns) versus total childbearing population (blue line) and adding the federal funds rate (black line) and global debt (red line).  Tellingly, the fed funds rate (approximating inflation) peaked simultaneous to the peak in annual childbearing population growth.  The rise, peak, and now deceleration in the annual childbearing population has essentially been the driver for the rise, peak, and now decelerating growth in demand.  The substitution of fast rising debt for the decelerating population growth is plain.  The subtle uptick in yoy childbearing population change over the next five years is the end of the road for growth…and from there on there is only outright declines likely hand in hand with negative interest rates and parabolic debt creation.

The Federal Reserve and central banks around the world are cutting interest rate against a decelerating base of growth.  This is promoting the creation of significant new capacity.  That new capacity can only be sustained by even greater cuts and deficit spending plus central bank asset buying.  Further, the asset bubbles and inflation of these policies absent wage growth appear to be further decelerating family formation.  This is creating a Federal Reserve driven downward spiral as it is the young that drive growth.  The chart below shows US income and spending by age of head of household…45-54yr/olds make and spend twice as much as those under 25 or those over 75yrs/old.  This is likely even more pronounced globally.

Global Births (Excluding Africa) Continue Declining
Buried deep in the back pages of the internet, stories and details of collapsing births are ripe.  Some examples:

• Birth Rates Hits 10-Year Low in Russia (HERE)

• S. Korea’s Demographic Time Bomb Ticking Faster Than Thought (HERE)

• Termination of China’s One Child Policy…Much Ado About Next to Nothing (HERE)

• Brazil 2016 Births Fall, Now Just 2/3rds of Early 1980’s Peak (HERE)

• US Birthrates at Record Lows, Total Births 8% Below 1950’s Peak (HERE)

The global childbearing population growth (red line in chart below, excluding Africa) is ending but the number of births per five year periods (blue columns, excluding Africa) has been declining for decades.  Total births peaked in about 1988 and have been declining since despite the still growing childbearing population.

However, the childbearing population peak (x-Africa) will take place in 2030, and indefinite decline from there combined with already negative birthrates could send births reeling significantly more than the UN’s medium variant (charted below).

Depopulation Ground Zero…East Asia
East Asia is China (+ HK, Macau, Taiwan), Japan, N/S Korea, and Mongolia.  Total births here have nearly fallen in half, consistently declining since peaking in the 1965-70 period.  But since 2005, the depopulation loop is in high gear as the shrinking childbearing cohort and negative birth rates combine among nations with net emigration.  The childbearing population is now shrinking fast, already down 120 million or about 15% fewer persons of childbearing age.  By 2035, this population will be about 215 million smaller, a 27% reduction of those capable of reproduction and births nearing a 2/3rds decline.

As for Europe, births peaked even earlier than E. Asia, falling since the late 1960’s and the childbearing population began declining by the early 1990’s but net immigration has slowed the depopulation loop.

As for the combined US, Canada, Australia, and New Zealand childbearing population and births…never have births equaled the peak seen in the late 1950’s despite the near doubling of the childbearing population.  Even high rates of immigration have not resulted in a net rising quantity of births.

Conclusion:

The global economy is set to continue increasing its capacity to produce more and produce it more efficiently.  However, excluding Africa, the populations capable of childbirth and their offspring are set to accelerate their declines…and resultant global consumption hopelessly overmatched versus the significant overcapacity being created. 

Significant depopulation of young populations is a given while elderly populations continue exploding.  Only through this lens can one understand the true problems facing an economic system premised on infinite growth.  We are at the end of an epoch and the hopefully the beginning of another…the confusion in the interim and messy attempts to sustain the old system shouldn’t be surprising, although these attempts haven’t a chance to succeed.

*  *  *

For those interested, you are welcome to also consider:

How Did America Go Bankrupt? Slowly, At First, Then All At Once!!!

Who Will Buy Those Trillions of US Treasurys???

The Faster America “Grows”, The Faster America Goes Bust

The Federal Reserve and Trump Intent on “Squeezing Blood from a Turnip”…Or Why Most Americans Are in a No Win Scenario

Economic Recovery – But for Whom?

Extra Credit:

Africa…

India…

India turned the corner to a declining number of births over 15 years ago and continues tumbling.  India which has seen it’s fertility rate tumble from nearly 5 to a 2.3 rate in 2017 (2.1 is zero growth)…the same India where all the population growth is happening in the poorest Northern regions with incomes in line with Sub Saharan Africa (among people who don’t migrate elsewhere for cultural and religious reasons) while relatively wealthier some Southern regions have fertility rates even below that of China and Japan.

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The Russian double agent poisoned along with his daughter in Salisbury, England last weekend is linked to former British Spy Christopher Steele, reports The Telegraph. 

Col Sergei Skripal – who is currently in intensive care after he and his daughter Yulia were poisoned with a suspected nerve agent – was recruited by MI6 while working at the British embassy in Estonia, according to Russian intelligence services.

When Russia discovered that Skripal had allegedly been paid $100,000 by MI6 to expose undercover Russian intelligence agents in 2006 – the same year Russian double-agent Alexander Litvinenko was poisoned, he was sentenced to 13 years in prison. In 2010, however, Skripal was one of four prisoners released by Moscow in exchange for 10 US spies – after which he moved to the UK and befriended an employee of Christopher Steele. 

The Telegraph understands that Col Skripal moved to Salisbury in 2010 in a spy swap and became close to a security consultant employed by Christopher Steele, who compiled the Trump dossier. –Telegraph

A recently deleted LinkedIn account revealed that the British security consultant is based in Salisbury, and his employer is Orbis Business Intelligence – Steele’s firm. Steele notoriously assembled a series of memos contianing anti-Trump opposition research to Fusion GPS, the first seventeen of which were compiled into the unverified “Trump-Russia” dossier which the FBI relied on to obtain a spy warrant against a Trump campaign associate. 

21 people were hospitalized last week when Yulia Skripal reportedly opened a “gift from friends” as they ate in a restaurant.  UK counterterrorism police and domestic security agency MI5 are investigating why the Russian double-agent was targeted seven years after his release from a Russian penal colony. Of note, Skripal’s son, Alexander, died last year at the age of 43. 

Was Skripal still working as a double agent?

If, as The Telegraph posits, Skripal assisted Steele in compiling the dossier – which notably relies on senior Russian officials, despite Steele never having traveled to Moscow – according to testimony by Glenn Simpson of Fusion GPS, it could explain the motive behind the assassination attempt in Salisbury town centre. 

Valery Morozov, a former construction magnate who fled Russia after revealing corruption, claimed last night that Col Skripal, 66, was still working, and remained in regular contact with military intelligence officers at the Russian embassy. That would raise the possibility that he was still feeding intelligence to people in this country.

Mr Morozov said that, as a result, he had decided to steer clear of Col Skripal for his own safety. He told Channel 4 News: “If you have a military intelligence officer working in the Russian diplomatic service, living after retirement in the UK, working in cyber-security and every month going to the embassy to meet military intelligence officers – for me, being a political refugee, it is either a certain danger or, frankly speaking, I thought that this contact might not be very good for me because it can bring some questions from British officials.” –Telegraph

Authorities are trying to piece together the movements of both Sergei and Yulia Skripal, who lives in Moscow but was due for a visit – believed to mark the birthday of Skripal’s deceased son. 

Skripal had reportedly asked his housekeeper to clean his daughter’s room on Monday, Feb. 26 in advance of her visit. Her travel plan may have activated the assassination attempt.

Security services now suspect that when Miss Skripal flew out of Moscow, her departure triggered a “red flag” with a hit squad that was being dispatched to assassinate Col Skripal. It is thought that Miss Skripal was being targeted along with her father in a clear message that “traitors” are not tolerated by the Kremlin.

It is not clear when Miss Skripal landed in the UK, but sources suggest the Russian team sent to kill her father was probably a day behind her. –Telegraph

While Russian media has warned “traitors” after Skripal’s poisoning, British lawmakers have suggested Moscow will have committed a “brazen act of war” against Britain if Russia is found to be behind the attack. 

British intelligence suspect that the attempted assassination would have been made earlier, but weather conditions from a massive snowstorm dubbed the “Beast from the East” delayed the hit squad. 

The snow may have deterred father and daughter from venturing out, while it also would have put in doubt the assassination squad’s likely escape from the UK. With flights cancelled and delayed at Heathrow, they risked arrest if they were stuck in the UK.

By Sunday afternoon – and with Miss Skripal on the brink of returning to Moscow – the assassination squad had little room for manoeuvre and were forced into action in broad daylight in the middle of a busy shopping precinct. –Telegraph

“It now looks as though they got desperate by Sunday afternoon and decided to strike,” reported a confidential source.

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First it monopolized the online retail space; then it made a dramatic appearance in the bricks and mortar grocer sector with its acquisition of Whole Foods, and lately it has been preparing to take on both the pharmaceutical & healthcare sector,  and even banking.

And it’s only just starting, because as Housing Wire notes, Amazon is now looking to get into the mortgage lending business. The company for which barriers to entry simply do not exist, was first reportedly planning on starting with offering checking programs first, then move into the debt product space after. And now, Housing Wire confirms that Amazon is currently looking to hire someone to lead their newly-formed mortgage lending division.

Here, a humorous aside from the report author, who refuses to provide the identity of the mortgage lender firm that Amazon has targeted:

Due to non-disclosure agreements, we probably shouldn’t reveal their identities. After all, with Amazon planning a move into mortgage lending, it’s best we work with them and not against them. Am I right?

… but gives the following hint:

We can say that if you look at the top 10 HMDA lenders and pick out the nonbanks, that’s where Amazon is recruiting their talent.

… and adds that “one person we spoke to turned down the job, but couldn’t say why.”

We are confident, however, that the next person Jeff Bezos speaks about the role of starting up Amazon’s mortgage lending division, will be delighted to accept.

The timing of Amazon’s entrance into the highly competitive sector is hardly coincidental: last month we reported that America’s formerly largest mortgage lender, Wells Fargo, just lost its title to Quicken:

Quicken revealed that it originated $25 billion in home loans during the quarter, compared with Wells Fargo’s $23 billion in home mortgages. Wells is the country’s leading bank in home mortgages; Bank of America and JP Morgan Chase & Co. reported $13 billion and $11 billion that quarter, respectively.

In other words, as of this moment, an “online” service is the most popular provider of mortgage loans in the US. It is this niche that Bezos has realized provides a major opportunity for Amazon, and he is not shy of making it clear that in just a few years, your mortgage lender will be none other than Jeff Bezos as Amazon continues on its unstoppable crusade of intergalatic domination.

 

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10Y Treasury yields are back above 2.90% – the highest since spiking on Powell hawkish comments  – and back into what some have called the ‘danger zone’ for stocks…

 

Last month’s payrolls print (blue rectangle) prompted a spike in yields which sparked a drop in stocks and the collapse of XIV and the short-vol trade…

This time is different… for now.

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The bull market for stocks turns nine years old on Friday: while the S&P hit its famous “generational” intraday low of 666.79 on March 6, it was not only three days later, March 9, 2009 that the S&P actually closed at the post-crisis low price of 676.53. The gains since – uninterrupted by a drop of 20% or more – rank this bull market stretch as the second longest ever and about 6 months behind the bull run from October 1990 to March 2000 during the tech boom.

So “as a bit of fun” Deutsche Bank’s Jim Reid decided to take a look at the “winner and losers” over this period, and has updated his usual performance review charts for the 9 year period since that historic moment.

As shown below, the S&P 500 has actually outperformed all other assets in the bank’s sample, delivering a total return of a whopping 389%. The Russian MICEX (+369%), Hang Seng (+271%), Nikkei (+256%), DAX (+235%) and Stoxx 600 (+226%) follow with similarly impressive returns. Only one equity markets is in negative territory over that time and, not surprisingly, it’s the Greek Athex (-34%).

It’s paid to be in credit markets too with returns anywhere from +57% (EU Fin Sen) to +209% (EU HY). Sovereign bond markets have lagged although returns are unsurprisingly still positive. EM Bonds (+77%) and BTPs (+61%) stand out the most while Treasuries (+23%) have underperformed.

Commodity markets on the other hand are a lot more mixed. Copper (+88%) prices are up, along with Gold (+43%) however Brent (-43%) is the biggest underperformer in the sample of assets.

All in all 35 out of the 39 assets in Deutsche Bank’s sample (which sadly excludes cryptos) have delivered a positive total return in local currency terms with the average return a fairly staggering 111%.

 

Looking at the same dataset, BofA CIO Michael Hartnett notes that this has all been due to one thing: QE, which has delivered “big global annualized returns since QE start Mar’09…stocks up 16%, HY bonds 13%, IG 7%, govt bonds 3%, cash 0%; global stock market cap up epic $60tn to $90tn.“

Hartnett also looks at the next milestone, although here he is a little more skeptical: with just 116 trading days until the S&P500 hits the longest bull market all-time, he is worried that bullish QE is peaking. After all, Fed/ECB/BoJ have bought $11tn of financial assets since Lehman, and yet in ‘18 Fed sells $400bn, ECB tapers Sept, by year-end Fed/ECB/BoJ asset purchases turn -ve YoY.  When will stocks notice?

Other, such as Reuters, are more sanguine, and in a note this morning the newswire notes that “the bull market for stocks turns nine years old on Friday and, despite being long in the tooth, appears poised to set the record as the longest in history, buoyed by global economic growth and stronger company earnings.“

“Bull markets just don’t die of old age, they die of recessions and economic slowdowns,” said Art Hogan, chief market strategist at B. Riley FBR in New York.

“The earnings growth picture for this year continues to get better on a weekly basis,” added Hogan.

Still, not everyone is convinced: The strong earnings growth could turn into a headwind, however, as results this year will be tough to top in 2019. “When you look to 2019, it’ll be very hard to repeat those numbers,” said Jonathan Mackay, investment strategist at Schroders Investment Management in New York.

“Next year will probably not be as good. Then you’re probably getting into the last stages of the cycle.”

Concerns about an overheating economy could further derail the bull market: “If your economy can’t handle that growth that quickly, then we run into shortages and then we have a business cycle on our hands,” said Jack Ablin of Cresset Wealth in Chicago.

But the biggest concern, at this point, is the shift from “QE to protectionism” according to BofA: the possibility of a global trade war in light of recent tariffs announced by the Trump administration are also cause for concern.  “Obviously anything trade talk, political event risk, certainly could create problems but right now there is certainly a valid concern out there that ripping up NAFTA would create a whole litany of uncertainties,” said Ablin.

According to Hartnett adds, “as QE ends, protectionism begins; War on Inequality to be fought via Protectionism, Keynesianism, Redistribution; monetary & fiscal policy now spent leaving markets to discount Protectionism & global tariffs.”

In other words, the fate of the bull market, and whether it becomes the longest in history, is now squarely in the hands of one man: Donald Trump. And, incidentally, should stocks crash, it will also be on Trump: he now “owns” the market, and anything that happens in the next few years.

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Authored by Kevin Muir via The Macro Tourist blog,

I would like to take you back to 2012. Just a few short years after the soul-searching-scary Great Financial Crisis of 2008-9, market participants had finally given up their worry of the next great depression enveloping the globe, but had replaced it with an equally fervent fear that inflation would uncontrollably explode.

The Federal Reserve had recently completed their second round of quantitative easing, much to the chagrin of a large group of distinguished economic thinkers who had gone as far as writing an open letter to the Fed Chairman pleading he reconsider the program.

You remember that old A&E show Intervention? Well, this was like an academic peer episode – more neck beards and sophisticated language, but sadly, the same amount of crying.

So when the Fed’s favourite inflation gauge, the Core PCE index, spiked up to 2% in 2012, it was especially hard on Chairmen Bernanke. After all, his colleagues had just warned him that this was about to happen.

Like any good addict, Bernanke insisted he had his usage under control.

In fact, during a 60 minutes TV interview, when faced with the question about how confident he was that he could control inflation, he responded – “100%.”

Yet, here was Bernanke, staring down the barrel of 2% inflation, having done nothing to prepare the market for higher rates. He believed the inflation was “transitory” and it would be a mistake to nip off the budding recovery with tighter monetary policy.

The hawks went ape-shit. They screamed and yelled. They warned about Weimar Republic style hyper-inflation. But Bernanke hung tough.

This was bold. It took guts.

Now you might think it was wrong – so be it. I am not so omniscient to give judgment, but more importantly, it’s in the past, so arguing is about as interesting as when your 98-year-old grandma tells you that she was once “quite a dish.” Yeah sure, it might be true – but it ain’t doing anything for anyone today.

I am more interested in what this might mean for markets going forward.

This episode provided an important “lesson” for markets. I think that Cullen Roche’s admission was symbolic of the change of thinking that went through financial circles – The “Transitory” Inflation… Bernanke was right.

I don’t often give Ben Bernanke a lot of credit for the job he’s done. I am admittedly hard on him and perhaps unfairly so. But he deserves some serious credit for his persistent comments on inflation in the last 24 months. Dr. Bernanke was mercilessly mocked in some circles for calling the surging commodity prices following QE2 “transitory”. In early 2011 he was cited:

“I think my take on inflation right now is that we are indeed seeing some increases, obviously,” Bernanke said. He attributed them to “global supply and demand conditions.” But he reckons these prices “will eventually stabilize.”

“I think the increase in inflation will be transitory,” Bernanke said. But we added: “we have to monitor inflation and inflation expectations extremely closely because if my assumptions prove not to be correct than we would certainly have to respond to that.”

He was further mocked by some who said the inflation would prove global in nature and that the impact would eventually spread to the USA. But this excellent chart below from Also Sprach Analyst shows that Ben Bernanke was very right about inflation. He deserves a great deal of credit for his prescience on the inflation front.

How this will affect markets in the coming years?

Although I believe the next surprise will be disappointing global economic growth, and not the other way round, I come from the Yogi Berra school of forecasting – “it’s tough to make predictions, especially about the future”, so I fully accept the possibility that inflation might take off in the coming quarters.

But I want to highlight that the stage has already been set for the Federal Reserve to “look through” those increases. Don’t expect Core PCE ticking above 2% to alter the Federal Reserve’s course. After all, I am sure that Bernanke has passed down the secret recipe for being able to 100% control inflation to Powell. No need to worry. Trust him, he just uses it recreationally.

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