We spend far too much time trying to parse the policy “decisions” of the politicians, and attempting to decode company accounts, and much too little on demographic data. I put “decisions” in inverted commas because those announcements are usually just the postponements of substantive decisions. The company accounts are even more distorted in times such as these by special charges and credits, which will be unwound or explained only after the next management team wants to look better by comparison.
Demographic information, in contrast, is more reliable because much of it has already happened. Births and deaths aren’t falsified like company accounts, or tweaked up like governments’ growth and inflation projections.
It is also worth considering how closely watched data series, such as unemployment rates or payroll data, get dramatically revised years after the frantically analysed initial releases. David Goldman, the credit strategist/polymath, has been doing a lot of work on demography and time series of capital flows. As he puts it: “Credit markets derive from the cycle of human life . . . We invest our retirement savings in the formation of new households. All the armamentarium of modern capital markets boils down to investing in a new generation so that they will provide for us when we are old.”
To get the bad part of the news out of the way first, demography tells us that the housing market is not just toast, but burnt toast. As Mr Goldman recounts: “America’s population has risen from 200m to 300m since 1970, while the total number of two parent families with children is the same today as when Richard Nixon took office, at 25m. In 1973, the US had 36m housing units with three or more bedrooms, not many more than the number of two parent families with children.
“By 2005, the number of housing units with three or more bedrooms had doubled to 72m, though America had the same number of two parent families with children.”
There can be no doubt that America is, overall, a much more hip place than it was in 1970. Truck stops have cappuccino machines, cool Target is displacing boring Sears, and, of course, we are much more tolerant of non-traditional lifestyles. Unfortunately, it is the uncool traditional lifestyles that support the circulatory system of the capital markets. “One person families,” a term not in use in 1970, do not forego spending to support the next generation of one person families.
So a large fraction of those multi-bedroom houses and condominiums are surplus to requirements for years to come, because the intergenerational capital flows are not there to maintain them. Capital imports to replace those flows have to be cut. Dependent children were half the US population in 1960, and the dependent elderly made up 15 per cent. Now dependent children are 30 per cent of the population and dependent elderly 30 per cent.
These numbers suggest you should regard any upward squiggles in the homebuilder ETF as something other than a strong buy signal for a one-decision set of stocks.
However, the US still benefits from its traditional ability to take capital and people from the rest of the world. The relative demographic trends in the rest of the developed world, and China, are so much worse that the US can continue to run a chronic current account deficit.
There is good news, though, in other low-frequency statistics. Susan Sterne, a consumer economist, points out that we have “a large group of 25-34 year olds who are the “ripple boom” of the baby boom. These people were children in the last couple of down cycles, and now they are better able to work and get consumption going again.”
Also, as Ms Sterne says: “We now have two years of mortgage borrowing that has been intensely scrutinised [relative to what was going on before], which means there will be less trouble in the future.”
The most reliably uninformed people in society, newsreaders and politicians, are bloviating over a consumer credit bubble that has already been deflating.
“This has been the most dramatic decline in consumer credit use in history,” Ms Sterne says. Non-mortgage credit, which was growing at an annual rate of 6 to 8 per cent in the recession of 2001-2002, has now stagnated.
Also, as economies restructure, the statisticians are still looking for employment in the old establishments. So they miss the growth in newer, more dynamic enterprises. Consequently, Ms Sterne says, job losses in this phase of downturns tend to be revised downward a year or two later.
So the “takeaway”, in business-graduate-speak, would be that housing will not be the engine of the recovery. By next year, though, there should be enough usable consumer spending power for a recovery in autos, appliances and now-postponed services such as travel and entertainment.