Let me make a few “happy” predictions for the next 10 years and then a few more sobering ones. Like all such lists of predictions, several will be wrong but at least you will get the idea of where we might be going.

  1. We are going to see major advances in healthcare. I mentioned a few weeks ago the invention of Far UVC which doesn’t penetrate the skin or eyes of human beings but will kill viruses and bacteria. Cancer will become a nuisance, rather than life-threatening and expensive. Treatment will likely be done in a doctor’s office rather than a hospital.

Advanced MRI scans will be done annually or at least every two years, with artificial intelligence to help interpret them. Treatments that will look like the “Fountain of Middle-Age” will help us make it to the time when we can turn our own biological clocks back.

There will be treatments for obesity and heart disease. Muscular regeneration will be much easier. These studies and a thousand others are happening all over the world. Picking the winners today is difficult, but the true winner will be humankind.

  1. We will see a continuing move to renewable energy, not because it is mandated under some climate policy, but because it will be cheaper. There are already places where solar energy costs less than conventional methods. I believe by the end of the decade solar will be cheaper than even natural gas.

It would not surprise me, given the number of research projects in motion, if we see new renewable energy technologies that will even outpace solar. Battery research and technology is improving (finally) and will make solar ever more viable.

  1. We will be moving to electric cars (or their hydrogen fusion cousin) by the end of the decade. Urban dwellers will either own cars in co-ops or simply opt to use ride-sharing services.
  2. Self-driving autonomous cars will be ubiquitous. Half the cars manufactured in 2040 will be autonomous. This will have a profound impact on the transportation business much sooner though, as the millions who are currently employed as drivers will have to find new sources of income. But it will also reduce the number of deaths on the highways and car wrecks that have to be repaired, lower insurance rates, and a dozen other things.
  3. New agricultural technologies, including a whole new generation of seeds and plants, will make food cheaper, more nutritious, and hardier, without the “GMO” stigma. This will have more impact than the Green Revolution did 70 years ago. Imagine plants tailored to produce meat substitutes or reduce allergic reactions.
  4. Of course, computers will be incredibly fast, and we will begin to see the beginnings of the quantum computer revolution. That extra speed will make artificial intelligence, communications networks, the Internet of Things, robotics, and a dozen other technologies far more viable.
  5. You cannot begin to make predictions without mentioning the improvements that the blockchain will make use of.
  6. While the pandemic has caused a major setback in worldwide poverty, I expect that to be short-lived. We will see the number living in poverty steadily decrease, as it has for the last 50 years.
  7. I think the 2024 election is going to be far more important than this one. We will see the final gasp of Neil Howe’s The Fourth Turning, always the most tumultuous period in American and Western history, at the same time as George Friedman’s The Storm Before the Calm(a very powerful book). I think the latter half of this decade could be even more divisive and economically frustrating than the period we are in now.
  8. Sadly, intolerance must be discussed. I am a student of history and I recognize there have been periods when the country was just as deeply divided and vilified both politicians and their opponents just as much as we are doing now. Our republic survived all those periods. But that’s small comfort. It is no fun to actually live in those times.

The worst part is that these passions inhibit discussion with those we oppose. A Cato Institute survey shows only 62% Americans feel comfortable expressing their political views, down considerably from the same survey in 2017.

 

 

Significant numbers of both conservatives and liberals would support firing people who donated to the opposite campaign. Indeed, 32% of people feel their political views could harm them at their work. This has led to a self-censorship and lack of serious and friendly dialogue, which is deeply concerning to me. Friendly, even if spirited, debate is the basis for developing common political consensus. I don’t see that today.

I believe this will change when we have our final flashpoint of political angst later this decade, accompanied by The Great Reset. We will see more social cohesion just like First Turnings have for the last 400 years. But getting to that point won’t be fun. So we need to remember to focus on what we can do in our own areas and take care of family and friends. And seek out the opportunities that will come our way. They will be many and powerful.

 

US Economy

 

  • Durable goods orders rose more than expected last month, boosted by aircraft sales. Capital goods demand, which tends to be a proxy for business investment, also topped economists’ forecasts.
  • Manufacturing momentum has carried over into the fourth quarter, with regional Fed indicators pointing to robust factory orders in October.
  • The combination of the regional Fed surveys indicates a strong month for manufacturing at the national level (ISM).
  • The Dallas Fed’s service-sector index shows robust business activity in the region.
  • Consumer confidence softened in the second half of October but remains stable in the face of the COVID spike.
  • The sharp drop in money velocity points to slower inflation ahead.
  • It may be a while before the GDP trajectory returns to its pre-crisis trend.
  • Pending home sales remain robust (well above 2019), but we are beginning to see some loss of momentum in housing.
  • Driven by falling mortgage rates, home prices have been outpacing wages. But mortgage rates appear to have bottomed for now.
  • Home price appreciation based on Case-Shiller data:

 

 

Rental vacancy rate:

 

 

  • What should we expect from the Q3 GDP report? The Atlanta Fed’s GDPNow model shows a 37% increase.
  • Wholesale inventories unexpectedly declined in September.
  • Over the past few months, manufacturing has been getting a boost from housing and automobile demand (helping many of the supporting industries).
  • Market-based inflation expectations have leveled off.
  • Mortgage applications to purchase a house remain robust.
  • The economy rebounded in the third quarter, with the GDP climbing 33% (the highest increase on record). Consumer spending, business investment, housing, and inventory rebuilding contributed to growth.
  • Trade detracted from growth, with imports rising faster than exports.
  • Initial jobless claims have been drifting lower, but we continue to see more than one million Americans a week file for unemployment benefits.
  • Holiday retail sales forecast (year-over-year):

 

 

 

China’s Demographic Crisis

 

China has made it clear that it seeks military and economic superiority vis a vis the United States and its allies. One of the major drivers of China’s belligerence is the realization that it has mismanaged its demographic future. That means it will not have the right balance of human capital to facilitate its continued rapid development. At the same time, it has destroyed the resilient mechanisms embedded in the traditional Chinese family, which have historically minimized political dissent. In short, decisions that the Chinese Communist Party (or CCP) has made, have put its continued viability in jeopardy.

Consider the facts.

The family is the most basic building block of society.

It is the foundation upon which rests all the more complex arrangements humanity has managed to devise since the beginning of the historical era, including:

  • national economies
  • kingdoms
  • states
  • empires
  • and entire civilizations

As acclaimed demographer Nicholas Eberstat puts it, “The family, is the single human organization absolutely indispensable to the perpetuation of our species. That’s the way it has been since the emergence of humanity, and absent some future dystopia beyond current imagining, it’s likely to maintain until our end.”

While the family is necessarily central to all the world’s great cultures, the institutions of family and kinship have enjoyed an especially prominent role in the Chinese way-of-life. For millennia, Chinese philosophy and metaphysics have imparted a special place to the family in their thinking about the universals and eternity; indeed, the Confucian tradition directly links the family (and one’s family obligations to virtuous conduct therein) to celestial harmony. In China, family, kin, and clan have been accorded a correspondingly impressive priority in the honored literature, history, and traditions of culture.

As such, China has long recognized the family as the key to survival in bad times and to prosperity in good times. Therefore, the family—and one’s own membership in a family—has been a thing in China to be celebrated and revered.

Today, however, over 2,500 years of family tradition in China is on an unavoidable collision course with 21st-century China’s new demographic realities. The initial impact has already taken place and the reverberations promise to play out for generations to come, with oscillations of increasing magnitude.

The demographic forces transforming the Chinese family are extraordinary and historically unprecedented. And we can expect them to leave the Chinese family structure all but unrecognizable before the end of this century.

Until recently, little has been written on the current and future impact these staggering and irreversible demographic changes will have on China’s families and the implications for China’s society, economy, and role in the world.

Importantly, the demographic catastrophe we’re discussing was not triggered by some natural phenomenon like the Bubonic Plague that decimated Europe in the Middle Ages. China’s 21st-century demo- graphic crisis was created by the Chinese Communist Party’s intentional decision to reduce the population via its “one-child policy.” This decision was based on the misguided Malthusian rationale that nations and planets have a finite “carrying capacity” that is essentially fixed. Under this formulation, a densely populated country like China cannot compete against countries like the United States without lowering its population so it has more land, water, and other resources per capita. However, this simplistic and dubious thought process failed to consider the following nine medium and long-term factors, which are at least as significant as the one of China’s planners focused upon:

  1. The relationship between the non-working-age population and the working-age population (also known as the dependency ratio);
  2. The ratio between “the young and entrepreneurial population” and the total population (also known as the entrepreneurialism ratio);
  3. The ratio between those households with complex structure and total households (also known as the complex kinship ratio);
  4. The ratio between the number of elderly people without adult children and the number of total elderly (also known as the welfare provisioning ratio);
  5. The ratio between the urban population and the unit area (also known as the urban vulnerability ratio);
  6. The ratio between the local ethnic minority population and the local ethnic majority population, in this case, the Han Chinese (also known as the ethnic vulnerability ratio);
  7. The ratio between the youthful population suitable for military service and the total youthful population (also known as the military recruitment ratio);
  8. The ratio between College graduates with jobs versus total college graduates (also known as the college graduate employment ratio); and
  9. The ratio of 18-to-35-year-olds with spouses versus total 18-to-35-year-olds (also known as the youth marriage ratio).

These ratios and their trends hint at some of the serious problems in China’s demographic future. And, while the CCP has now developed “after-the-fact plans” for managing each ratio on this list, the composite effects could yet be surprising.

Most importantly, because of China’s weak social safety net, the responsibility for elder care still falls on family members in China. But without aunts, uncles, siblings or cousins, this burden quickly becomes overwhelming when faced with a rapidly aging population.

What’s the bottom line? Without some unanticipated breakthrough, these fundamental ratios are likely to deteriorate for the foreseeable future. Yet the survival of the Chinese Communist Party depends on maintaining social stability in the face of the crisis. And notably, no country in the history of the world has ever managed a rapidly aging and shrinking population while successfully emerging as a global leader.

It’s ironic that a “Godless government” may need a “miracle” to save it.

 

 

Given this trend, we offer the following forecasts for your consideration.

First, in the face of the Sino-American Cold War, China will need booming domestic consumption as a substitute for foreign demand. The booming consumer economy which has made the United States the envy of the world depends on two things: a robust social safety net and a healthy consumer credit system. In China, these two systems are only minimally functional. That means people have to accumulate funds for retirement and save to make major purchases; this constrains the growth of consumption and consumption-driven businesses. For that reason, the Chinese economy is still dominated by infrastructure investment and exports. For at least 20 years, China has recognized the need to ramp up its consumer sector, but even with a younger population it was unable to do so. Going forward, it’s only going to be more difficult.

Second, without a strong social safety net, China’s aging population will not be able to rapidly increase per capita consumption. In the United States, we have Medicare, Social Security, SNAP, housing assistance and a wide range of other pro- grams to ensure that older people are funded by taxpayers as a group. In China, most of the burden for such things falls on family members. As more resources are consumed by dependent relatives or saved for their own retirements, working-age people in China will have less to spend on goods and ser- vices for themselves.

Third, when the current speculative bubbles (driven by retirement savings) collapse, much of China’s new middle class will be left destitute. In a country without a social safety net, the more affluent Chinese have saved by investing in “real assets” and bonds backed by real assets. This has supported a boom in unaffordable housing and surplus infra- structure, like “ghost cities” and “highways to nowhere.” When these assets fail to hold their value, hundreds of millions of Chinese will be left nearly “broke,” but with the continuing burden of caring for family members.

Fourth, the demographic crisis will tend to constrain China’s military adventurism. The Chinese Communist Party makes up 6% of China’s population and the bureaucratic decision-makers represent a tiny fraction of 1%. Therefore, social unrest must be avoided at all costs. Engaging in military adventures that risk killing the children who represent the only support for their families is clearly a situation likely to trigger widespread unrest, even in such a regimented society. Therefore, China’s “dependency crisis” is likely to make the leadership think twice before entering into a “hot war” with the United States and its allies.

Fifth, given China’s on-going demographic crisis and escalating Cold War with the West, Chinese stocks will crash. As we have discussed in prior issues, reduced access to Western capital, markets, and intellectual property will soon undermine the business model that has turned China into an economic miracle since 1990. Beyond that, the demographic crisis discussed here will prevent China from building a robust domestic economy to offset these losses. Barring unforeseen developments, China has passed it’s economic “high-watermark.” Those who still insist on investing in China may know something the rest of us don’t.

But don’t count on it.

 

The Fed

 

“No central bank wants to admit that it’s out of firepower.

Unfortunately, the U.S. Federal Reserve is very near that point.”

– Former New York Fed President Bill Dudley (Bloomberg)

There are millions of small business owners, men and women who are striving valiantly and coming up short. An unforeseen shock. And if they fail, the fire inside does not go out. They—we—get up, jump back into the arena, and create some more. That effort is the heartbeat of America and many places around the world.

The Fed also injected funds to avert further market declines associated with the savings and loan crisis and Gulf War, the Mexican crisis, the Asian financial crisis, the LTCM crisis, Y2K, the burst of the internet bubble, the 9/11 attacks, and repeatedly from the early stages of the Global Financial Crisis to the present.

Another financial crisis will present when confidence is lost. The system is extremely leveraged, margined up with investors heavily concentrated in too few names. This is what a bubble looks like. Great companies, bad valuations.

 

Debt

 

The Fed will monetize ALL of the debt.  Let that sink in.

There has been a rising concern as of late about surging inflation as the Government injects more stimulus into the economy. While it seems logical, the reality will be quite different as weak economic growth rates force the Fed to monetize the entirety of future debt issuances.

As is often stated, “a crisis happens slowly, then all at once.” 

Such is the “trap” the Federal Reserve finds themselves in today. In 1980, the Federal Reserve became active in monetary policy, believing they could control economic growth and inflationary pressures. Decades of their monetary experiment have succeeded only in reducing economic growth and inflation and increasing economic inequality.

However, in 1998, the Federal Reserve “crossed the ‘Rubicon,’ whereby lowering Interest rates failed to stimulate economic growth or inflation as the “debt burden” detracted from it. When compared to the total debt of the economy, monetary velocity shows the problem facing the Fed.

 

 

Look closely at the chart above. From 1950-1980 the economy grew at an annualized rate of 7.70%. The total credit market debt to GDP ratio was less than 150% to accomplish this growth rate. The CRITICAL factor to note is that economic growth was trending higher during this span, rising from roughly 5% to nearly 15%.

There were a couple of reasons for this. Lower levels of debt allowed for personal savings to remain robust, fueling productive investment in the economy. Secondly, the economy focused primarily on production and manufacturing, which has a high multiplier effect on the economy.  This growth feat also occurred in the face of steadily rising interest rates peaking with the economic expansion in 1980.

How did the Federal Reserve get themselves into this trap?

“Slowly, then all at once!”

In an economy that requires $5 of debt to create $1 of economic growth, changes to interest rates have an immediate impact on consumption and growth.

1) An increase in rates curtails growth as rising borrowing costs slow consumption.

2) As of October 1, the Fed now has $7.02 trillion in liabilities and $39.2 billion in capital. A sharp rise in rates will dramatically impair their balance sheet.

3) Rising interest rates will immediately slow the housing market. People buy payments, not houses, and rising rates mean higher payments.

4) An increase in rates means higher borrowing costs and lower profit margins for corporations. 

5) Stock valuations have been elevated due to low rates. Higher rates exacerbate the valuation problem for equities.

6) The negative impact on the massive derivatives market could lead to another credit crisis as rate-spread derivatives go bust.

7) As rates increase, so do the variable rate interest payments on credit cards. With the consumer already impacted by stagnant wages, under-employment, and high living costs, a rise in debt payments would further curtail disposable incomes. 

8) Rising defaults on debt service will negatively impact banks that are still not adequately capitalized and still burdened by massive bad debt levels.

9) The deficit/GDP ratio will surge as borrowing costs rise sharply. 

In an economy supported by debt, rates must remain low. Therefore, the Federal Reserve has no choice but to monetize as much debt issuance as is needed to keep rates from substantially rising.

 

Market Data

 

  • Over the past year, foreign investors have shoveled nearly $200 billion into U.S. stocks, challenging a 40-year high.
  • Last week, the smallest of options traders pulled back on their speculative activity. Call buying was less prevalent, but over the past 10 weeks, it still rivals the most aggressive behavior in 20 years.
  • Stocks had enjoyed nearly 90 days without suffering enough panic that investors were selling everything at the same time. The Up Volume Ratio fell below 10% on Monday for the 1st time since June 24.
  • Energy stocks have lost 60% more from their highs than did the broader market. That’s the worst of any sector going back to 1928. Usually, a sector’s relative losses have stopped at about 35%.

 

 

All content is the opinion of Brian J. Decker