Want Growth? Hello Immigrant!

Want Growth? Hello Immigrant!

One of our investing themes here at Tematica is the Aging of the Population. The first baby boomers are turning seventy this year, with another 1.5 million joining the 70+ crowd every year for the next 15 years. That means that we will be seeing record numbers of workers leaving the labor pool, which has a big impact on the economic growth potential.

The growth of GDP is a function of total hours worked in an economy, (which is itself a function of how many people are in the labor pool) and productivity.

This week the fourth quarter 2016 productivity numbers were released and they revealed that worker productivity increased last year at the slowest pace since 2011. With hours worked rising just under 2 percent combined with productivity rising about 0.5 percent per year, the best the economy can muster is roughly 2.5 percent growth. In order to get that much higher, we need people to work more hours, which is unlikely given the aging demographics or productivity needs to rise.

Increasing productivity isn’t something that can be done all that quickly, regardless of who is in the White House or which party dominates in DC, which we’ve talked about earlier in this post. We also discuss in that post how fertility rates in the U.S., and in much of the developed world, are declining to levels well below replacement rates, which means that were the nation to be left in isolation, the population of the country would decline over time. A declining population means fewer workers which leads to weaker growth prospects, not to mention a shrinking taxable base.

So what’s an economy to do? Pew Research just answered that question.

“Without immigrants, Pew projects the total U.S. workforce population — those ages 25 to 64 — would fall from 173.2 million in 2015 to 165.6 million in 2035. But if the current rate of both legal and unauthorized immigration remains steady, Pew projects that the number of working-age adults will rise to 183.2 million in 2035.”


They further found that,

“…the largest portion of the working population, people born in the U.S. to parents who were also born here, is shrinking. According to Pew, this segment of the workforce is expected to fall from 128.3 million people in 2015 to 120.1 million by 2035. U.S.-born workers will go from accounting for 74% of the workforce to just 66% of it.”

While concerns over terrorism are completely valid, the basics of economics tell us that to get this economy back to more historically typical rates of growth, the nation needs to augment its workforce, particularly as the largest generation in American history moves into retirement. This shift is a double-whammy in that not only is the economy losing large numbers from the workforce, but those retirees tend to spend a lot less in their sunset years, where they are more likely to shed assets than acquire more: grandpa and grandma are more likely to be downsizing their homes and less likely to be buying new cars today than they were 20 years ago! While our Aging of the Population investment theme is a tailwind for many companies serving that older cohort, companies that are tied to consumer spending are likely to feel the headwind.

Bottom Line – all the growth-positive legislation that could possibly be issued out of D.C. cannot get around the simple math that the more the pool of labor grows, the greater the potential for the economy.

Source: Without immigrants, U.S. workforce would shrink dramatically over next 20 years – Mar. 8, 2017

America First? When it comes to GDP we get the bronze!

America First? When it comes to GDP we get the bronze!

Yesterday we talked about how the American economy, despite all the euphoric headlines since the election, didn’t deliver much of a performance in the fourth quarter and in fact we saw the weakest full-year GDP growth rate since 2011 which was well below the U.K.’s 2016 growth rate of 2 percent. Today we learned that the Eurozone as well kicked our economic tuckus in 2016.

GDP grows 0.6% in final quarter of 2016, beating expectations and taking annual figure to 1.8%

Yep, that hurt. So much for America being the “cleanest shirt in the economic laundry.” Despite headwinds ranging from the accelerating Greek drama to the mountain of Italian non-performing loans that led to the nationalisation of Banca Monte dei Paschi di Siena, Brexit, failed Constitutional reforms leading to the resignation of Prime Minister Renzi in Italy …. the list goes on, they beat us.


Last week talks between the U.S. and Mexico hit a serious bump after a President Trump Tweet led Mexico’s President Peña Nieto to cancel their upcoming meeting, while the administration has been threatening a 20 percent tax on imports from Mexico, which would put serious upward price pressure on, (among other things) fruits, vegetables and auto parts. Today Peter Navarro, Trump’s top trade advisor, accused Germany of currency exploitation. According to the FT, “In a departure from past US policy, Mr Navarro also called Germany one of the main hurdles to a US trade deal with the EU and declared talks with the bloc over a Transatlantic Trade and Investment Partnership dead.”

While last week’s meeting with the British Prime Minister Theresa May ended with some serious hand-holding, over the weekend the President’s sudden implementation of an immigration ban left, “our closest ally flailing after the UK government was openly contradicted by US diplomats over which British nationals were covered by the measure.”

After Trump’s election victory, the Bank of Japan was initially more optimistic about more favourable economic conditions amid expectations for stronger American growth. That enthusiasm has been fading as yesterday, ahead of a two-day policy meeting, officials are less optimistic about the impact on Japan’s economy. According to the Wall Street Journal, “We now realise that we know very little about him.”

Trump’s team has been poking our allies in some uncomfortable ways, making many around the globe nervous, and yet the VIX (a measure of implied volatility) is pretty much yawning.

The 90 percent of the America economy that is not represented by either inventory build or state and local government spending managed to grow at a whopping 0.6 percent annual rate in the fourth quarter.

Amidst all this, the Fed keeps talking about further rate hikes

Under Armour (UA) just released its fourth quarter and full year results and was yet one more citing currency headwinds.

Upon the announcement of Trump’s immigration ban on Friday, the markets started to fall. Monday the S&P 500 fell 60 basis points and is now down 0.76 percent from its most recent closing high last Wednesday. Bespoke compiled headlines over the past few days that reveal concerns the Trump hope trade is starting to fade.

Is this an inflection point? Too soon to tell, but we can say that having an administration with no political history who has pretty much tossed out the rule book is likely to cause heightened volatility, which is not reflected in market pricing. Erecting trade barriers and surprising the market, let alone allies, is likely to induce more caution in the C suite.

This morning we also saw that compensation costs in 2016 rose 2.2 percent, significantly faster than GDP of 1.6 percent, which makes another Fed hike more likely. We’ll be hearing from the Federal Reserve on Wednesday and will be looking to see if the tone from the FOMC meeting is more dovish than we heard in Fed Chair Janet Yellen’s testimony on January 19th. We will also hear from over 100 companies this week on their earnings, putting the relative complacency in the markets to a test.

Source: Eurozone’s economic recovery picks up speed

Market Movement, Candid on the Candidates & Immigration Crisis

Yes, you read that right! In less than five minutes on with Stuart Varney I managed to discuss the likely next moves for the market, which candidates I think would be best for economic growth and the European immigration crisis… and that was on less than three cups of coffee. Although, to be fair, the sheer terror of making an absolute ass out of myself on national television does provide just a wee bit of adrenaline to put it mildly!

So market moves… S&P 500 went on a tear during the early part of March, but it looks to me to be mostly a momentum move with those stocks that got hit hardest performing the best, all the while earnings expectations keep getting lowered. Think about that for a moment, earnings expectations are lower in early March than at the end of January but stocks are moving higher? Companies are telling us their performance will be weaker than previously thought, yet investors are paying more for their shares? Yes, we’ve gotten a reprieve from crashing oil prices and that is certainly a welcome relief, but we are still facing a strong dollar headwind, as other nations continue to try to stimulate their domestic economies by devaluing their currencies, which regardless of what the Fed does, will strengthen the dollar. That makes U.S. exports less competitive. So while we could see this move up continue for a bit, when I look at all the data, I think it is more likely that this will be a bounce that won’t take us to new highs and the overall downtrend we’ve been seeing in equities since last May will eventually resume.

As for the candidates, I like to keep it simple. The bigger the government, the more opinions you get. The more opinions you have, the more the government gets involved in how businesses from the startup to the gargantuan are run. That makes it more expensive to run a business and makes businesses in aggregate less likely to expand as bigger government means more rules that they have to try and not break or offer the lovely little campaign donation here or there – still more expense. Given the headwinds the U.S. is already facing, more government red tape means less growth.

Next on to minimum wage, just look at what has happened in those cities that have significantly pushed up the minimum wage, such as Seattle. Many smaller businesses have shut down and unemployment for the lower paid wage earners has risen. That is not an improvement for the economy.

Next I look at the tax code. That thing is way too damn big and complex which means way too much time and effort is spent trying to figure out how to pay taxes and how to not pay more than necessary. That is time companies and individuals should be spending on doing what they do better, doing it more efficiently and doing it with a higher level of quality. Instead we have an enormous industry built up around figuring out how to dot i’s and cross t’s to satisfy a monstrously sized IRS. All that is money, time and effort NOT going into growing the economy.

As for the immigrant crisis, this is truly a humanitarian crisis of epic proportions, complicated by understandable fears of terrorism and violence. No nation, no leader has yet to get a handle on a productive way to manage this horrific problem, meanwhile innocent people are dying. They are dying when they try to escape their war-ravaged homes for a better life and they are dying when they stay home and try to fight to protect the land of their birth. There are no easy answers here and the strain of it all is putting enormous pressure on the european union, which is already wobbly with all sorts of debt-induced cracks.