Brent really appreciated your comment on X as well, and sorry for not replying sooner - I probably shouldn't admit this but I am so tech-challenged sometimes I only just realized last night there is a frigging comments section on posts -- seriously Tech IQ 60 for Paulo. Sorry for the delay and thanks mate!
Comment on the youth population - late 90s is when the big immigration push began for Y2K and the Internet boom. Went full speed until it was slowed down a bit after 9/11. Bunch of those were from India and everybody knows our procreation abilities. All those kids will be in their 20s now.
I've never been able to figure that little bump - assumed it was "Era of Good Feelings" related to 90s boom but I'm willing to bet immigration related for sure.
Lots of people have got the lag effects from this tightening cycle abysmally wrong this time. Me included. I thought after 13 yrs of a economy levered on zero rates and QE a reversal of all that was sure to slow things greatly. Hasn't materialized. I'm humbled.
I also thought once all the pandemic direct stimulus to consumers ended, things would slow dramatically. Hasn't happened like I thought. They stopped the stim checks, special unemployment, child care credits, ERC, PPP, rent/mtg/student loan moramtoriums.... all a while back, and it still hasn't showed up in consumer demand. Again I am humbled.
Oh, man, am I with you. The lag on all those items is so long because there is still so much money sloshing around. Yeah, we hear about M2 shrinking, but the fiscal deficit remains at war time levels. Household balance sheets, on average, which is deceiving, still look great, even though we know the young are struggling on the margins (see delinquency by age). Big picture... We're just not seeing any real effects of tightening yet... No pain, which is why Paulo's argument for reflation / sticky inflation feels so plausible.
Worth the listen if you haven’t already. Joseph Wang touches on the lag effect which could effectively be infinite as the Fed begins its cuts with how corporations and households termed out their debt at low rates. Fiscal dominance playing a huge role as well.
Funny I remember writing about Fiscal Dominance back in maybe May 2022 and it was definitely not a popular term in the US... people got educated quickly though - speaking Portuguese and all! :-)
Nice argument supported by data! Cem (on X) has been beating this exact same drum for over a year... his argument is framed as "systemic inflation" will NOT yield to monetary policy because, well, it's systemic :-) More specifically, interest rates simply don't work to reduce wage inflation that is driven by a lack of fundamental supply (your argument in this article).
There is however one very compelling counter-argument worth considering. Much of the jobs data you've shared does NOT reflect the reality that 1 job does NOT = 1 worker. In fact, over the last year, lower middle class workers in the U.S. have taken on 2nd and 3rd jobs at an accerlated pace in order to survive the Covid induced supplyl side inflation. So while wages are increasing, for the low/no-skilled worksforce segment, the wages received are still too low to survive on just one job.
So, curious how you accomodate the reality that the lower 1/3 of the U.S. workforce is causing a SKEW in jobs data as they take on 2 and 3 jobs to make ends meet.
Thanks Wolf for the thought. This is a great point that I have a hard time with. We see the layoffs in tech since early 2022, but what of the WFH gang that have 2-3 full time jobs where each employer doesn't know about the other? There is a wage/job suppression due to that "productivity" where the very definition of "employed," "temporary," and "participation rate" are becoming meaningless, and not just in the NFP establishment survey but also the Household survey as well?? Brent Donnelly also made a good point recently about Challenger/mass layoff announcement getting attention but hiring getting done piecemeal away from the headlines...
One point to add, which sadly compounds the labour shortage trend - we’ve been experiencing a sharp rise in deaths of 18-45 year olds, from drug overdoses (fentanyl primarily) as well as suicide. Looking at the data, this has risen to levels that have never been experienced. With no end in sight - sadly the data is not only not reversing, it’s not even plateauing - this will continue to impact the labour supply of the younger generations, further exacerbating the labour/wage trends you outline.
Thanks Brian - So you nailed something that I meant to include and decided to leave out because I would have trouble quantifying it and the note was running long ... if you make it to retirement, you prob live to 85+, not the average 77-78, because the average is skewed by 18-45 deaths (fentanyl/suicide). 70-year olds are extremely low risks re drug overdose/suicides. So the services expenditure will run that much longer, while the labor availability runs that much tighter as you suggest. Great point - now I wish I had included it originally!! Excellent point mate!
Appreciate the perspective, I think this may be the actionable jist, please let me know if I am off.
Potential winners:
Value and Cyclical Stocks: commodities, consumer staples, industrials, and financials.
Short Duration Bonds: less exposed to interest rate fluctuations
Active Investment Strategies: changing market dynamics might favor active strategies that can adapt to sector rotations and identify undervalued opportunities.
Potential losers:
Passive Investment Strategies: broad market exposure and sectors, like technology or growth stocks, underperform due to labor limitations.
Long Duration Bonds: sensitive to interest rate changes and could experience losses if the Fed raises rates.
Growth Stocks: some growth stocks might still thrive; the overall sector could face labor headwinds.
This article caught my attention in regard to the rotation for low, med and high inflationary environments. I am just starting to think about inflationary rotations, so I am not saying this is correct, but maybe a good start.
So I want to wholeheartedly agree, but with some caveats... the Passive bid is not necessarily being trumped by Boomer liquidation immediately (see my next note on the Forcing Factor). And oddly I get the sense that equities have become a sort of "Safety Trade" for Boomers rather than their fixed income portfolio because rates were so low for so long, and "stocks always come back" that if anything it could be the bonds that get liquidated first (sounds crazy, but what if the Boomers take equity allocations UP in retirement because they know they are likely to make it to 85 and need capital appreciation to offset their life expectancy and "stretch a dollar")... it may seem bizarrely risky on its face but totally rational if you still have a 10yr+ horizon (and believe me I get it and am sympathetic to valuations and the "long volatile path to nowhere" for US equities over the next 10-20 years).
Au contraire, now is your time to shine as you embrace and unleash your inner demographer.
R code below is the simplest US cohort component single year of age and sex population forecasting model you can imagine.
This is a goofy response, but you must concede entirely appropriate for a post with color coded population by single year of age.
You should be able run the forecast if you get the base data.xlsx file from me which I am happy to give you.
If you don’t have R, Rstudio from Posit is free opensource and cool. If you’ve never coded, this is your chance. If you have coded, this’ll be a fun exercise given your demonstrated interest in demographics.
Forecast runs 100 years to 2122 in a couple of seconds.
Parameters include fertility, mortality, migration and labor force participation. You can adjust these.
Current values are most recent observed data.
You know about population decline in Japan and China from declining fertility. The US will experience natural population decline (births exceed deaths) in the next couple of decades, 2035 w current parameters, which include net migration of 1.5 million people per year. Think that’s a bad estimate of future migration, change it and see what happens. With migration of 1.5 million, US population reaches 400 million in 2122, growing at 0.05%, down from 0.5% now.
Labor force growth slows from 2.8 mil in 2023 to 800k in 2024 (this is an artifact of constant participation rates), to 600k in 2035 to 100k in 2122.
If migration is ZERO, labor force change is NEGATIVE -70k in 2024, -470k in 2035 and -640k in 2122.
Of course, this zero migration makes population change negative in 2031, with population declining from 336 mil in 2030 to 203 mil in 2122.
SURELY YOU ARE CHOMPING AT THE BIT TO UNLEASH YOUR INNER DEMOGRAPHER BY RUNNING R CODE.
R code below
>>>>>
library(tidyverse)
library(readxl)
library(writexl)
base <- read_excel("D:/economics/population/base data.xlsx", sheet = "base", range = "a1:h203")
what a terrific description of underlying inflation facets that are completely glossed over by the 'inflation has ended and the Fed has won' crowd. This articulated very well what has been gnawing at me for a while as my eyes continue to look for the slowing in price hikes other than the ordinary fluctuations of gasoline. today's hot GDP is right in line with this thesis and I suspect that the pining for lower interest rates may take a bit longer to come about
agree Andy... actually I'm starting to wonder if the Fed is in a position a few months from now to unpivot and actually contemplate another set of hikes. People say this is impossible... and practically zero pricing of this currently.
If this mechanism is true... why has Japan, a country further along in demographic decline than the US, not seen wage pressure resulting from smaller cohorts of young people replacing retiring older workers while both continue consuming?
I think the labormarket is not fully comparable. Many people have a life long employer, and also work to higher age. Plus culturally you cannot ask for higher salary so easily I asume. Also the deflation world might be so deeply imprinted that it takes some time until a new dynamics (suddenly) takes its course. Just my thoughts
Great question...admittedly I have not thought deeply on Japan in this respect, and while I played with some data I won't begin to hold up a demography credentials badge here. But I tend to think that their great deflation was actually a driver of poor demography (people have fewer kids when growth slows which slows demography, which slows growth), and it was reflexive for 30 years. Slower growth and inflation along with significant productivity brought income growth and wage inflation to heel. This could be the big story in 2024-26 for Japan as they turn the proverbial Animal Spirits corner... ?
this is great man ... very useful and enjoyable.
Brent really appreciated your comment on X as well, and sorry for not replying sooner - I probably shouldn't admit this but I am so tech-challenged sometimes I only just realized last night there is a frigging comments section on posts -- seriously Tech IQ 60 for Paulo. Sorry for the delay and thanks mate!
Interesting reading and points raised, thanks Paulo
thanks buddy!
Comment on the youth population - late 90s is when the big immigration push began for Y2K and the Internet boom. Went full speed until it was slowed down a bit after 9/11. Bunch of those were from India and everybody knows our procreation abilities. All those kids will be in their 20s now.
I've never been able to figure that little bump - assumed it was "Era of Good Feelings" related to 90s boom but I'm willing to bet immigration related for sure.
Lots of people have got the lag effects from this tightening cycle abysmally wrong this time. Me included. I thought after 13 yrs of a economy levered on zero rates and QE a reversal of all that was sure to slow things greatly. Hasn't materialized. I'm humbled.
I also thought once all the pandemic direct stimulus to consumers ended, things would slow dramatically. Hasn't happened like I thought. They stopped the stim checks, special unemployment, child care credits, ERC, PPP, rent/mtg/student loan moramtoriums.... all a while back, and it still hasn't showed up in consumer demand. Again I am humbled.
Oh, man, am I with you. The lag on all those items is so long because there is still so much money sloshing around. Yeah, we hear about M2 shrinking, but the fiscal deficit remains at war time levels. Household balance sheets, on average, which is deceiving, still look great, even though we know the young are struggling on the margins (see delinquency by age). Big picture... We're just not seeing any real effects of tightening yet... No pain, which is why Paulo's argument for reflation / sticky inflation feels so plausible.
Worth the listen if you haven’t already. Joseph Wang touches on the lag effect which could effectively be infinite as the Fed begins its cuts with how corporations and households termed out their debt at low rates. Fiscal dominance playing a huge role as well.
https://podcasts.apple.com/us/podcast/forward-guidance/id1592743188?i=1000640935516
Funny I remember writing about Fiscal Dominance back in maybe May 2022 and it was definitely not a popular term in the US... people got educated quickly though - speaking Portuguese and all! :-)
Paulo,
Nice argument supported by data! Cem (on X) has been beating this exact same drum for over a year... his argument is framed as "systemic inflation" will NOT yield to monetary policy because, well, it's systemic :-) More specifically, interest rates simply don't work to reduce wage inflation that is driven by a lack of fundamental supply (your argument in this article).
There is however one very compelling counter-argument worth considering. Much of the jobs data you've shared does NOT reflect the reality that 1 job does NOT = 1 worker. In fact, over the last year, lower middle class workers in the U.S. have taken on 2nd and 3rd jobs at an accerlated pace in order to survive the Covid induced supplyl side inflation. So while wages are increasing, for the low/no-skilled worksforce segment, the wages received are still too low to survive on just one job.
So, curious how you accomodate the reality that the lower 1/3 of the U.S. workforce is causing a SKEW in jobs data as they take on 2 and 3 jobs to make ends meet.
Thanks!
Thanks Wolf for the thought. This is a great point that I have a hard time with. We see the layoffs in tech since early 2022, but what of the WFH gang that have 2-3 full time jobs where each employer doesn't know about the other? There is a wage/job suppression due to that "productivity" where the very definition of "employed," "temporary," and "participation rate" are becoming meaningless, and not just in the NFP establishment survey but also the Household survey as well?? Brent Donnelly also made a good point recently about Challenger/mass layoff announcement getting attention but hiring getting done piecemeal away from the headlines...
Great read! Thx
As to crickets on low unemployment claims... ⤵️🤷
https://x.com/AnnaEconomist/status/1749637756794376516?s=20
some interesting flags in there Craig - especially the "real" benefit aspect re inflation!
Superb. Thanks, Cloudbear.
Amazing article.
One point to add, which sadly compounds the labour shortage trend - we’ve been experiencing a sharp rise in deaths of 18-45 year olds, from drug overdoses (fentanyl primarily) as well as suicide. Looking at the data, this has risen to levels that have never been experienced. With no end in sight - sadly the data is not only not reversing, it’s not even plateauing - this will continue to impact the labour supply of the younger generations, further exacerbating the labour/wage trends you outline.
Thanks Brian - So you nailed something that I meant to include and decided to leave out because I would have trouble quantifying it and the note was running long ... if you make it to retirement, you prob live to 85+, not the average 77-78, because the average is skewed by 18-45 deaths (fentanyl/suicide). 70-year olds are extremely low risks re drug overdose/suicides. So the services expenditure will run that much longer, while the labor availability runs that much tighter as you suggest. Great point - now I wish I had included it originally!! Excellent point mate!
Appreciate the perspective, I think this may be the actionable jist, please let me know if I am off.
Potential winners:
Value and Cyclical Stocks: commodities, consumer staples, industrials, and financials.
Short Duration Bonds: less exposed to interest rate fluctuations
Active Investment Strategies: changing market dynamics might favor active strategies that can adapt to sector rotations and identify undervalued opportunities.
Potential losers:
Passive Investment Strategies: broad market exposure and sectors, like technology or growth stocks, underperform due to labor limitations.
Long Duration Bonds: sensitive to interest rate changes and could experience losses if the Fed raises rates.
Growth Stocks: some growth stocks might still thrive; the overall sector could face labor headwinds.
This article caught my attention in regard to the rotation for low, med and high inflationary environments. I am just starting to think about inflationary rotations, so I am not saying this is correct, but maybe a good start.
https://www.twosigma.com/articles/a-machine-learning-approach-to-constructing-an-inflation-themed-equity-portfolio/
Thank you
So I want to wholeheartedly agree, but with some caveats... the Passive bid is not necessarily being trumped by Boomer liquidation immediately (see my next note on the Forcing Factor). And oddly I get the sense that equities have become a sort of "Safety Trade" for Boomers rather than their fixed income portfolio because rates were so low for so long, and "stocks always come back" that if anything it could be the bonds that get liquidated first (sounds crazy, but what if the Boomers take equity allocations UP in retirement because they know they are likely to make it to 85 and need capital appreciation to offset their life expectancy and "stretch a dollar")... it may seem bizarrely risky on its face but totally rational if you still have a 10yr+ horizon (and believe me I get it and am sympathetic to valuations and the "long volatile path to nowhere" for US equities over the next 10-20 years).
Incredibly well researched and detailed. And as a boomer, guilty on all counts but to the benefit of my millennial children and the grandchildren.
Thanks Syrio! Generational Transitions are messy, but inevitable - it is what it is!
This tells me to invest in companies that make or heavily employ automation.
Trends in motion tend to...
Superb. Thank you so much for the terrific piece!
Thank you guys!!
Au contraire, now is your time to shine as you embrace and unleash your inner demographer.
R code below is the simplest US cohort component single year of age and sex population forecasting model you can imagine.
This is a goofy response, but you must concede entirely appropriate for a post with color coded population by single year of age.
You should be able run the forecast if you get the base data.xlsx file from me which I am happy to give you.
If you don’t have R, Rstudio from Posit is free opensource and cool. If you’ve never coded, this is your chance. If you have coded, this’ll be a fun exercise given your demonstrated interest in demographics.
Forecast runs 100 years to 2122 in a couple of seconds.
Parameters include fertility, mortality, migration and labor force participation. You can adjust these.
Current values are most recent observed data.
You know about population decline in Japan and China from declining fertility. The US will experience natural population decline (births exceed deaths) in the next couple of decades, 2035 w current parameters, which include net migration of 1.5 million people per year. Think that’s a bad estimate of future migration, change it and see what happens. With migration of 1.5 million, US population reaches 400 million in 2122, growing at 0.05%, down from 0.5% now.
Labor force growth slows from 2.8 mil in 2023 to 800k in 2024 (this is an artifact of constant participation rates), to 600k in 2035 to 100k in 2122.
If migration is ZERO, labor force change is NEGATIVE -70k in 2024, -470k in 2035 and -640k in 2122.
Of course, this zero migration makes population change negative in 2031, with population declining from 336 mil in 2030 to 203 mil in 2122.
SURELY YOU ARE CHOMPING AT THE BIT TO UNLEASH YOUR INNER DEMOGRAPHER BY RUNNING R CODE.
R code below
>>>>>
library(tidyverse)
library(readxl)
library(writexl)
base <- read_excel("D:/economics/population/base data.xlsx", sheet = "base", range = "a1:h203")
p0 <- base[,1:4]
bshr=as.numeric(p0[p0$s==1 & p0$a==0,4]/(p0[p0$s==1 & p0$a==0,4]+p0[p0$s==2 & p0$a==0,4]))
dfac=0.88
bfac=1.0
mig=1500
p1 = data.frame()
pc1= data.frame()
for (i in 1:100) {
p0$t=p0$t+1
p0$a1=p0$a+1
p0$m=mig*base$migshr
p0$vp=p0$p+0.5*p0$m
p0$d=p0$vp*dfac*base$dr
d=sum(p0$d)
p0$sp <- with(p0, ifelse(a==0,p-0.1*d,p-d))
p0$b=p0$vp*bfac*base$fr
b=sum(p0$b)
b1=bshr*b
b2=b-b1
t1=2022+i
t=c(t1,t1,t1,t1)
s=c(1,2,1,2)
a=c(0,0,100,100)
a0m=as.numeric(b1-0.9*p0[1:1,c("d")])
a0f=as.numeric(b2-0.9*p0[102:102,c("d")])
a100m=sum(p0[which(p0$s==1 & p0$a1>=100), c("sp")])
a100f=sum(p0[which(p0$s==2 & p0$a1>=100), c("sp")])
p=c(a0m,a0f,a100m,a100f)
pa0100 <- data.frame(t,s,a,p)
pa199 <- p0 %>% filter(a1 < 100)
pa199$a=pa199$a1
pa199$p=pa199$sp+pa199$m
pa199 <- pa199[,1:4]
pa=rbind(pa0100,pa199)
p0 <- pa[with(pa, order(t,s,a)),]
row.names(p0) <- 1:nrow(p0)
p0$lf = p0$p*base$lfp
psum=sum(p0$p)
lsum=sum(p0$lf)
pc0 <- data.frame(t1,psum,b,d,lsum)
p1 = rbind(p1,p0)
pc1 = rbind(pc1,pc0)
}
pc1 <- data.frame(transform(pc1, pc = c(NA, diff(psum))))
pc1$ni=pc1$b-pc1$d
pc1$m=pc1$pc-pc1$ni
write_xlsx(setNames(list(p1), "dat"), "D:/economics/population/forecast_dat.xlsx", col_names = TRUE)
write_xlsx(setNames(list(pc1), "dat"), "D:/economics/population/forecast_sum.xlsx", col_names = TRUE)
Wow Peter. You are my go-to demographer quant now... be careful what you wish for :-) :-)
Pure gold. Thanks!
what a terrific description of underlying inflation facets that are completely glossed over by the 'inflation has ended and the Fed has won' crowd. This articulated very well what has been gnawing at me for a while as my eyes continue to look for the slowing in price hikes other than the ordinary fluctuations of gasoline. today's hot GDP is right in line with this thesis and I suspect that the pining for lower interest rates may take a bit longer to come about
agree Andy... actually I'm starting to wonder if the Fed is in a position a few months from now to unpivot and actually contemplate another set of hikes. People say this is impossible... and practically zero pricing of this currently.
so true, wrote about that this morning. what if there is a hike? clearly not the consensus view.
The ground in fixed income will shake
as will portfolios
If this mechanism is true... why has Japan, a country further along in demographic decline than the US, not seen wage pressure resulting from smaller cohorts of young people replacing retiring older workers while both continue consuming?
I think the labormarket is not fully comparable. Many people have a life long employer, and also work to higher age. Plus culturally you cannot ask for higher salary so easily I asume. Also the deflation world might be so deeply imprinted that it takes some time until a new dynamics (suddenly) takes its course. Just my thoughts
Great question...admittedly I have not thought deeply on Japan in this respect, and while I played with some data I won't begin to hold up a demography credentials badge here. But I tend to think that their great deflation was actually a driver of poor demography (people have fewer kids when growth slows which slows demography, which slows growth), and it was reflexive for 30 years. Slower growth and inflation along with significant productivity brought income growth and wage inflation to heel. This could be the big story in 2024-26 for Japan as they turn the proverbial Animal Spirits corner... ?