US Population Change - What it means for Dow and financial markets

US Population Change - What it means for Dow and financial markets

Table shown below is from Wall Street Journal (WSJ) which shows demographic change in United States in last decade or so

The table clearly shows 

  • Big additions to 55+ group (dependents)
  • Reduction in 25 to 44 group 
  • Minor addition to 16 to 24 group (Dependents)

Points to be noted 

  • The students who passed out with degrees in United States during 2007-2013 period are unlikely to start on with their families
  • Hence demand for new homes will be weak no matter how much QE US Fed does
  • Consumption will remain weak - significantly below pre crisis levels
  • Thus their contribution to economic growth and inflation would be very less
  • As new families do not start, rise in population shall remain anemic. This means the future demographic composition will show even grater proportion of retirees

Fall in unemployment rate - More due to demographic change

  • The fall in unemployment rate is clearly due to poor demographics which has reduced labor force participation rate to 30 year lows
  • Hence unemployment rate cannot be considered as barometer of economic recovery
  • Moreover, economic recovery in U.S. is mainly trade driven rather than consumption driven
  • The current demographic composition and energy boom only point to a export driven economic growth

What about inflation ?

  • The hyper inflation is already being witnessed in U.S. stock markets
  • As far as CPI is considered, given the weak demographics it is unlikely to rise much in future
  • So long as US Fed is conducting monthly QE  - even a miniscule one, stock markets would continue to inflate
  • Inflation or rise in price is seen wherever new money supply enter - currently it is entering capital markets in U.S and other parts of world

QE to end before CPI target is hit?

  • US Fed appears comfortable with current pace of $10 billion Taper every meet
  • We are already down to $55 billion per month from $85 billion 
  • If Fed continues to Taper at current rate, QE would end somewhere in October or December 2014

Trouble for Dow - The end of QE is likely to happen despite CPI remaining well below target rate of 2%

  • Dow and global equities rallied or "Inflated" mainly because of QE money entering into markets
  • The economic inflation had very little to do with the rally in stocks

If QE ends with CPI well below target rate of 2%, it would mean

  • Stocks cannot continue to inflate on fresh money entering into markets
  • Neither do stocks have economic inflation to rally nor strong economic growth

Given this, it is highly probable that stock markets in U.S. witness a major fall. However I feel that would happen in June -July 2014 rather than Dec 2014 because -

  • Markets tend to price-in developments at least six months in advance
  • Markets would seriously start considering the prospect of total end of QE in OCt or Dec 2014 once we have another couple of Tapers
  • This also means the process of pricing-in would begin somewhere in June - July 2014

Views: 90

Comment by Omkar Godbole on April 8, 2014 at 4:50am

Correct. and thus if you have weak population, consumption will be low, which also means current account surplus and disinflation or deflation. On top of that if U.S.starts exporting energy, USD would rise. 

Same thing EUR too would rise Yen from 1990s to 2010

Comment by Francesc Riverola on April 8, 2014 at 9:45am

very interesting!

Comment by Omkar Godbole on April 8, 2014 at 1:39pm

Thank You Francesc


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