Oct

24

A symptom of what's wrong with America, economics, and the cattle trader's economics is this sentence in Robert Gordon The Rise and Fall of American Growth. If the stock market continues to advance, we know that inequality will increase, for capital gains on equities accrue disproportionately to the top income brackets". The book predicts that "the outlook for future growth in the standard of living is not promising" because of this predicted inequality (and slowing innovation, the baby boom, increased debt, and poor education). "We face headwinds that are stronger barriers to continued growth than were faced by our ancestors a century or two ago". Yes, the barriers are economists like Gordon and policies like those of the cattle trader. A totally flawed book suffering from the English and Pickety disease that could have been great if not suffused by collectivist fallacies.

Jim Sogi writes: 

Take a look at the Nikkei chart for the last 50 years. They had decades of tremendous growth. In 1989 it peaked, and crashed. Then for the next 25 years until now, its been in a range. Their population is declining. Young Japanese people, increasingly, are not attracted to the opposite sex. When you go to Japan, you really notice a lot of 60 year olds. There is a big population bulge at that age. Those are their boomers. There are no immigrants. There is no diversity. Diversity causes innovation.

Technology has a hard time increasing productivity in the face of large demographic shifts. The cell phone brought huge increases in productivity, but there is a plateauing zombie effect going on with increasing screen addiction.

Both the above are presented in support of my theory about long term market ranges.

Alex Castaldo writes:

Sogi-san's idea about the importance of demographic trends finds some support in a recent paper by Fed economists:

The United States, like other advanced economies, is undergoing a dramatic demographic transition related to the unfolding of the post-war baby boom. As a consequence, the growth rate of the labor force has declined and should remain low for the foreseeable future. In this paper, we investigate the extent to which demographic changes, especially those related to the baby boom, can explain the currently low levels of real interest rates and GDP growth.

We build an overlapping generation (OG) model that is consistent with observed and projected changes in fertility, labor supply, life expectancy, family composition, and international migration. The model allows us to explore the extent to which demographic changes, in and of themselves, can explain the timing and magnitude of movements in real interest rates and real GDP growth during the post-war period and beyond. […].

We find that demographic factors alone can account for a 1.25 percentage-point decline in the equilibrium real interest rate in the model since 1980 - much, if not all, of the permanent decline in real interest rates over that period according to some recent time-series estimates, such as Johannsen and Mertens (2016b) and Holston et al. (2016). The model is also consistent with demographics having lowered real GDP growth 1.25 percentage points since 1980, primarily through lower growth in the labor supply; this decline is in line with changes in estimates of the trend of GDP growth over that period. Interestingly, the model also implies that these declines have been most pronounced since the early 2000s, so that downward pressures on interest rates and GDP growth due to demographics could be easily misinterpreted as persistent but ultimately temporary influences of the global financial crisis.

Larry Williams comments: 

Amen! Especially now that everyone owns stocks in one form (retirement programs,etc) or another.

Like JFK said, "a rising tide lifts all ships".

John Floyd comments: 

I first arrived in Japan in 1985 in the midst of the boom. Reservations were necessary well in advance to have a sit down lunch anywhere and the likes of Maiko Kawakami were more than willing to pay me $40 an hour to teach them, English. But after many years of a palpable buzz that included the Plaza Accord, expanding money supply, real estate price increases, etc. came the arrival of a new BOJ Governor Mieno in December 1989. Mieno believed the gains in asset prices was a bubble and "undermined the stability…of Japanese society by weakening the ethos of labor…" and immediately began tightening monetary policy. Equity markets began a decline and with a lag of a year or so did real estate prices.

In thinking about Japan I would consider some of the following, Further I would consider how it relates to what is happening in Europe, US, and China at the moment, to name a few.

Why has the "great hedge fund trade" that began in the mid 1990's of shorting Japanese bonds not worked?

Is there something inherent in Japanese culture that has prevented the open restructuring of debt that is more prevalent in Western societies? Why can you drop $1,000 of your English teaching money in a restaurant and have someone return it to you the next day gift wrapped?

Does an aging population save or spend more and what might that influence be on the economy and markets?

How does the rise in China debt levels over the past few years compare to both the Japanese(circa 1980 area) and US debt (circa 2000 area) expansions?

Do you believe the Japanese will stick on the path of the 3 arrows which have been partially successful? Might they expand their arsenal?

What is happening to the stock of JGB's and the ownership there of and thus the subsequent interest rates demanded?

What about this new 10 year yield target and how does it square with inflation and the Yen?

Is there a debt write off as that is the ultimate solution? General government gross debt has gone from about 50% of GDP in the late 80's to about 250% now.

What happens to the JPY, stocks, and bonds if debt is restructured given the impact on growth, inflation, etc.? I was last in Japan a few years ago and remarkably the prices had not changed much since the 1980's for hotels, noodles, beer, coffee, etc. But, alas I did not price out the demand for young English teachers.


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3 Comments so far

  1. Gregory Rehmke on October 25, 2016 1:44 am

    The complaints of the literate are not so much about economic challenges as biological ones. The literate are wealthy enough but are getting older.

    Younger folks complain they we can’t seem to get wealthier working 40 hour weeks (in China the average workweek is 9 am to 9 pm 6 days a week).

    Western workers (and layabouts) are the wealthiest in the history of the world.

    For baby-boomers I suspect the problem is more about getting older, slower, balder, and crankier.

    For the problems of wealthy people getting older, entrepreneurs are working on solutions. Biotech advances are reprogramming stem cells to restore youthful vigor to aging body parts, though a lot of us will kick the bucket before our individual solutions are ready.

    Advances will trickle then flood down to everyday people, and will likely hurt as they help (so journalists can still complain about the discomfort of therapies that extend lives…extending the suffering of the less-well-off).

    The main story is of ongoing progress. Astonishingly under 10% of the world population is struggling to survive with incomes less than $2 a day. Billions more people have been added to the world population through recent decades. No mass starvation. Not even an extension of past suffering. Instead fewer and fewer are suffering the pain of deepest poverty.

    Progress continues to lift millions over $2 a day and on toward $5 then $10 a day. People in China, India, Indonesia, and Africa, lift themselves through connections to the global economy, creating goods and services each day for others. From call centers in India to shoe and shirt making in China and Vietnam, millions just departed from rural villages are learning value-creating skills.

    Of the 7,349,472,099 people the World Bank says walk the Earth, 6,643,922,777 are no longer in extreme poverty. Still 705,549.322 are.

    Further progress from open trade, international investment, and market forces will lift these 705 million up and out into the global economy.

    Advances in economic understanding could also reform the policies and reduce the damage caused by millions of politicians and bureaucrats who each day thwart the ambitions of entrepreneurs while consuming the taxes paid by the billions worldwide capitalism has lifted out of poverty.

    Sources:
    https://ourworldindata.org/grapher/world-population-in-extreme-poverty-absolute
    http://fusion.net/story/306404/global-poverty-rates-plummeting/

  2. Eric Ross on October 25, 2016 10:56 am

    What are you thoughts with “Medical Technology” as we move into the next decade? Could this be one industry along with traditional Technology, which could great another quantum leap for the Economy? Even with Obama-care (err Affordable Care Act ).

  3. Gregory Rehmke on October 25, 2016 2:58 pm

    Low-cost CRISPR technology is key. Across the U.S. and China, at least, researchers are editing genes to solve medical problems. And stem cells are being reprogrammed to restore organs and tissue. 3-D printers are making precision limb replacements. Nerve cells are being regrown and melded with electronics. Many more medical innovations and enterprises. The FDA can slow advances in the U.S., but not off-shore. There are so many aging billionaire in the world, all with various medical issues, and most willing to invest in at least some cutting edge research projects. Here is one article and CRISPRs:

    https://www.bostonglobe.com/magazine/2016/05/11/three-cambridge-startups-are-mission-fix-broken-genes/DpmKMfsMtkXuqPQWfrWiHN/story.html

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