Dow up 103 yesterday, into record territory again.
Gold up $14, still recovering last year’s losses.
Tomorrow, we intend to outline our big picture view. But today, we’re going to reply to colleagues with caveats, quibbles, and corrections .
First, our colleague Merryn Somerset-Webb, who lives in Edinburgh, took issue with our suggestion that small governments are, ceteris paribus, better than big ones: “If Scotland votes for independence it will be as a socialist nation, not a wealthy capitalist one. The result will be profound misery. I really don’t think it is something to wish for. It’s already a disaster in the making. What small countries actually do these days if they aren’t tax havens full of educated people (Switzerland) is indulge in one variety or the other of nepotism/theft/corruption/public sector crowding out, and then collapses.”
She’s probably right about that. Big country or small one, the ruling elite always wants as much mis-government as the country can afford – and often more!
The whole idea of modern government, we remind readers, is to pretend that the feds work for the citizen. The little guy is led to believe that his enemies will be smitten, that the rich will be robbed so that the stolen loot will be given to him, and that all he holds dear will be protected, enhanced and made obligatory. It’s hard to feel sorry for the guy… even when the feds clean him out.
Meanwhile, another colleague – Chris Hunter of the Bonner Family Office – corrects us. The US consumer is no longer deleveraging, he says. Now, he’s borrowing again. Reuters has the story:
“US household debt rose in the latest quarter by the most since before the recession, a sign that Americans may be nearing the end of a multi-year belt-tightening trend, data from the Federal Reserve Bank of New York showed on Tuesday. Total consumer debt rose 2.1 percent to $11.52 trillion in the fourth quarter of 2013 from $11.28 trillion in the third quarter, the New York Fed said in its quarterly household debt and credit report. The increase, $241 billion, marked the biggest quarterly jump since the third quarter of 2007.”
If this is so, it is either 1) mistaken, 2) flukey, or 3) an important new trend. For the moment, we’re going with 1 or 2. But we give the American consumer his due. If there is any way for him to get himself into a deeper hole, he’ll get out the spade. And the Fed’s low-interest rates are waiting for him. And now that he has a little more equity in his house, he may be inclined to start digging.
But he’s getting older. He tires faster. And he’s seen what happens when he gets himself in over his head. He remembers how uncomfortable it made him feel. Demography is beginning to turn against the ‘borrow and spend’ economy. So, it is not clear that he will continue and spending at last quarter’s rate.
Age and population – along with debt – have big consequences for stock prices. We included a wild figure for the effect of demography on stock prices in yesterday’s letter. Even before we were challenged, we had our doubts. So we wrote to the analyst responsible for it to ask for clarification.
It turns out that the negative 15% figure was a composite, Much of that number is based on the market value of stocks compared to GDP. At today’s levels – based on historical patterns since 1871 – the model predicts that stocks are going down…for a long, long time.
Demography is just one component. Our analyst tells us that demography alone would account for a negative pull equal to about 5% per year – the largest negative number ever recorded. Which makes sense; never have so many people in the US approached retirement at the same time.
But wait. Does an aging population in the US really matter?
“Nearly half of S&P profits come from overseas,” one of our colleagues pointed out. “US demographics shouldn’t have so much effect.”
“But most of those overseas profits come from Europe and Japan,” replied another. “And their demographics are worse than our own.”
Finally, we decided that the source of S&P profits didn’t matter. The model looks at the effect of demographics on stock prices, not on earnings. Prices today are built upon today’s earnings – which include overseas sales and profits. The study merely predicts that old people will sell stocks – no matter what their profits – reducing the price/earnings ratio… and, of course, the prices.
For a nation, as for its capital structure, debt and demography are destiny.
But wait again. Any model based on history assumes that the future will be more or less like the past. It anticipates that extraordinary things that are happening today will be “normalised” tomorrow. In the past, when stock prices, GDP, debt and demographics have been similar to today’s, the process of normalisation brought stocks down – a lot. And over a long time.
But never in the past did a nation have QE and Janet Yellen. Stay tuned.[xyz_lbx_custom_shortcode id=5]