The Demographics Myth Inside Labor Force “Participation”

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“The Federal Reserve is often the chaperone who has ordered the punch bowl removed just when the party was really warming up.”

William McChesney Martin, Fed Chairman from 1951 to 1970, special thanks to our associate Arthur Bass for this gem.

As U.S. unemployment crept lower in recent years, Federal Reserve Chair Janet Yellen stayed with the slow crawl of policy tightening.  Which begs the question, did the Fed keep interest rates too low for to long?

Jobs at First Glance

Friday’s jobs report showed  payrolls rising 222,000 in June, the biggest increase since February.   At first glance it appears joblessness has fallen further, to 4.4% in June from 4.7% at the end of last year and 5% in December 2015.  Average hourly earnings have risen at an average year-on-year pace of 2.6%, but lets look beneath the data to see what’s really going on.

File_002 (2)A picture says a thousand words – stubbornly low wage growth is being held back by an army of young people still sitting outside the labor force.  Blaming the 2008 financial crisis for this dynamic is the biggest copout in modern economics.  Just look at 2012-16 data, it’s clear this problem is structural NOT cyclical at this point.

Much of the media cheerleading during the Obama years covered up some UGLY data that’s still with us today and had a lot to do with the election of President Trump.

Far from intentional, but hopeful Media and Wall St. “Fed (central bank) cheerleading” has misled investors for years.  Every January like clockwork – from 2012 – on we were promised a “great rotation” out of bonds and into stocks.  Every year, the crowd has called for higher rates and bond yields – only to see them plummet again and again.  Year after year, bonds were panned – but often times were the place to be.

Hope is not an investment strategy – only by digging into the hard facts can the truth be found in the bond market.

U.S. Bond vs. Stock Fund Flows


Bonds: +$825B
Stocks: -$43B

EPFR, S&P Global data, cumulative data

Central bankers globally have created the mother of all asset bubbles here.  The reach for yield is unprecedented.  Interest rates should be used to price risk, today the risk-pricing mechanism is broken, it’s toxic.

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Productivity in Decline


Labor productivity is a measure of economic results – a comparison of the amount of goods and services produced (output) with the number of labor hours used in producing those goods and services. It is defined mathematically as real output per labor hour.  Growth occurs when output increases faster than labor hours – but we’ve seen very little of our long lost friend.  Labor productivity growth can be estimated from the difference in growth rates between output and hours worked.  During the 2012-2016 business cycle – labor productivity grew at a sad annualized rate of 1.1%*.  This growth rate is notably lower* than the rates of the 10 completed business cycles since 1947—only a brief six-quarter cycle during the early 1980s posted a cyclical growth rate that low (also increasing 1.1%).  That’s ugly indeed, but what’s driving this picture?

*U.S. Department of Labor, BLS data

Full Employment with Youth on Strike?

“Men ages 21 to 30 years old worked 12 percent fewer hours in 2015 than they did in 2000.  Nearly 15 percent of young men worked zero weeks in 2015, a rate nearly double that of 2000.”

Young American Men Living at Home with Parents or Relatives

2017: 35%
2000: 12%

National Bureau of Economic Research study, July 2017

Artificial Intelligence AI’s Impact, the Side Effects of Easy Money

There’s a lot going on in labor market data – far more than who led the country at one time or another.  We must ask a few questions?  How much is AI artificial intelligence (robotics) at play here?  By keeping interest rates so low for so long, has the Federal Reserve brought forward billions in venture capital dollars (funding the AI explosion) into a short period of time?  Investments which would have come over 20 years have been accelerated forward in time – displacing millions of workers?  How many jobs across the U.S. retail sector are robots eating each year?

Number of Robots across Fulfillment Centers

2020: 145k
2019: 101k
2018: 67k
2017: 45K
2016: 30K
2015: 20k
2014: 10k
2013: 5k
2012: 2k

Business Insider, Amazon data

Amazon and U.S. Jobs

Since October 2016, employment in the U.S. retail sector has plunged by nearly 160,000 jobs, that’s easonally adjusted, BLS data.

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Artificial Intelligence, the AI Explosion, thanks Janet?

AI Jump

U.S. Full Time Employed

2017: 126M*
2007: 122M
1997: 104M
1987: 92M

*From 2007 to 2017 the U.S. population grew to 325M from 301M.  Only 4m new full time jobs on a population 24m larger?  Yes, as immigration makes up most of the population growth, there are far less full-time jobs to support the influx of people jumping over the border – even less to support middle class Americans.  This helps explain secular stagnation and endlessly low bond yields – the U.S. has been in a productivity depression.

Productivity Depression

Hours Worked

Total hours worked per employee plunged during the Obama recovery – especially 2013-15.

BLS, Bloomberg Data

Real Unemployment Rate is Far Higher than 4.37%

25-54 Year Olds: Labor Force Participation: 81.6%, is down 2% from 2007

Labor Part 2

If you do the math, there’s roughly 20 million relatively young people NOT in labor force, this speaks to the opioid tragedy and income inequality.   The U.S. maintains 5% of the world’s population – but consumes 80% of the opioids produced on earth annually*.  The media blames demographics, but that’s only part of the problem – these are fairly young (25 to 54 years old) displaced workers.  There’s a reason why President Trump turned Michigan, Wisconsin and Pennsylvania red for the first time since the mid 1980’s – it has far more to do with the above data than Russians.

The Opioid Tragedy

Opioid abuse kills more than 100 Americans per day.   There are as many opioid prescriptions written annually in the United States as there are adults.   Over 97m Americans used prescription pain relievers in 2015 – while over 12m persons misused** their prescriptions.

*Angus Deaton, “Economic Aspects of the Opioid Crisis”
** National Survey of Drug Use and Health, Goldman Sachs

Latest Bank of International Settlements Report

Low Rates for Too Long = Misallocation of Capital

File_000 (2)Lots of financial engineering – NOT enough real job creation.  Low rates for too long has created “Zombie firms (top right above).”  Zombie firms are defined as public companies with EBITDA (earnings before interest, taxes, depreciation and amortization) to interest expenses ratio below one. 

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This Decade vs the Last


U.S. Population: +24M
Full Time Jobs: +4M


Population: +22M
Full Time Jobs: +18M

BLS data

Today we’re looking at 125.6m 24-54 Year Olds actually in the Labor Force.  As a percentage of the population – this number has come down over the last decade. 

Bloomberg’s View on the FOMC, our Comments in Bold

Victory? The Fed is Millions Away from that Declaration

Janet Yellen and her colleagues say they’re closing in on full employment, and she’s tiptoed closer to suggesting that slack has been absorbed, though she never declared total victory.

Reasonable Close?  It’s NOT Close at All

She said in January that the labor market was “reasonably close” to the committee’s maximum employment objective, for instance, and that the cyclical element of participation declines had “largely” disappeared.

May have been Lingering on the Sidelines?  Really?

The latest data could vindicate the idea that potential workers may have been lingering on the sidelines. The Fed has lifted rates only slowly, and the effect on the economy has been limited as financial conditions remain easy. Against that backdrop, employers continue to hire rapidly, taking on 222,000 new workers last month.

Finally Scraped Bottom?

It seems they’ve finally scraped bottom when it comes to people who are actively applying to jobs and thus classed as unemployed. Unemployment was 4.4 percent in June, up from a 16-year low of 4.3 percent the month before, and the share of people moving from unemployment to jobs has moved lower.

Sweet Accomplishment??? 

As that has happened, employers have begun to tap sidelined labor pools. The shift has helped to stabilize — and now slightly lift — the labor force participation rate, which measures what share of the population is working or looking for a job. That’s an especially sweet accomplishment for the Fed because it flies in the face of demographic trends, which should be weighing the rate down.


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Gary Cohn, Now the Leading Candidate to Succeed Yellen as Fed Chair

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Updated, July 11, 2017 at 6:45pm

Breaking: Gary Cohn is now the leading candidate to succeed Yellen as the world’s most important central banker…

President Donald Trump is increasingly unlikely to nominate Federal Reserve Chair Janet Yellen next year for a second term, four people close to the process told Politico.

Yellen’s Job is Cohn’s if he wants it, and he would win Senate confirmation easily, one Republican close to the selection process told Politico.

National Economic Council Director Gary Cohn is now the leading candidate to succeed Yellen as the world’s most important central banker, these people said. Yellen begins two days of congressional testimony on Wednesday, and her own future in the job may come up in questioning.

You have to go back to the 1970s to see a non-economist Fed Chair, we’ve been telling clients all year – we believe Trump wants a practitioner, NOT another academic who’s never taken professional risk.  G. William Miller was Fed Chair under President Jimmy Carter, the last Chair outside academia to run the world’s most powerful central bank.

Yellen’s Legacy Has an Impact on Markets

Gold prices plunged again Friday, now 7% off their June highs, while the gold miners GDX sits 12% lower over the same period.  What’s going on?

As central bankers from the U.S., Canada, Europe and Asia have turned more hawkish (publicly discussed pulling back accommodation) – bond yields have surged while gold has plunged.

“If we were not to withdraw accommodation, the risk would be that the economy would crash to a very, very low unemployment rate and generate inflation.  Then the risk would be that we would have to slam on the brakes and the next stop would be a recession.”

Bill Dudley, New York Federal Reserve Bank – July 2017

Implied Probability of Deposit Rate Hike from the ECB*

July: 66%
June: 20%

*OIS swaps, looking out over the next 11 months to June 2018.  Most of this move higher occurred after Mario Draghi’s speech last week.  Banks like HSBC are anxiously adjusting their outlook, now forecasting 10-yr German bund yields will hit 90bps (53bps today – 22bps in June)) by year-end.  The breadth of that kind of sell off brings back memories of Jean Claude Trichet’s ECB.  Their 2011 rate hike was judged by most market participants as a disaster – pulling back accommodation into a deflation storm.

“We’ve not only reached full employment mark – we’ve exceeded it by a fair amount.  If we delay too long, the economy will eventually overheat, causing inflation or some other problem.”

John Williams, San Francisco Federal Reserve Bank – July 2017

In our opinion, President Trump is in Fed chair Yellen’s head – legacy in on her mind.  With Yellen’s term up in February and receiving no visibility on a White House re-appointment – Yellen has been digging in.  She’s taking this opportunity to pen a few pages in the history books.   After years of gross over-accommodation – an easy money gravy train pumping up asset bubbles – Yellen’s Fed is singing a far different tune today.  If she goes out – the Yellen Fed wants the world to know in their last 9 months of service, they tried to let some air out of the balloon.

Fed Chair Yellen on Capitol Hill, July 12-13

Federal Reserve Chair Janet Yellen has been making the case – strong hiring will feed through to higher wages and price pressures over time.  She will explain her views on the labor-market and the Fed’s colossal balance sheet (levered 77-1 see below) when she delivers semi-annual testimony to Congress next week. She speaks to the House Financial Services Committee on July 12 and the Senate Banking Committee on July 13.

Short Positions in Gold Futures and Options*

July: 96k
June 63k
May: 51k
April: 41k

*CFTC data, highest since January 2016 – signals that global central banks are shifting ever closer to pulling back economic stimulus helped boost bearish bets on the gold to the highest in almost 18 months.

U.S. 2 Year Bond Yield

US 2s new

A hawkish turn by the Fed has two year bond yields at 6 year highs.  Government bonds globally have lost nearly $350B in recent weeks under the bond sell off siege.

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To add fuel to the fire, this week’s ECB minutes (European Central Bank) hint toward coordination with Yellen’s FOMC.  The “financial conditions” targeting narrative we laid our in our Bear Traps Report (in June) is picking up believers, moving toward a consensus view.

Financial Conditions are Driving the Gold Bus

Chi Fed Fin Con v GoldWe have an index of our 21 Lehman Systemic Risk Indicators, the Chicago Fed’s Financial Conditions Index is similar above.  Over much of the last five years – as financial conditions tightened, gold surged (see above).   On the other hand, in 2017 we’ve witnessed a regime change.  This year as the Fed has hiked rates twice – financial conditions eased – NOT tightened.  As long as financial conditions are NOT stressed – Yellen’s Fed has runway on the hawkish side to pull back accommodation.   Relationship to gold?  A year ago today there were close to $15T of negative yielding bonds on earth – this number is now well below $7T today.  As bond yields have surged – globally gold is far less attractive to hold – the macro impact on this metal has been profound.

Negative Yielding Bonds on Earth in July (in Trillions)

2017: $6.1T
2016: $15.1T

Bloomberg data

Fed Fund Futures, only Pricing in a 19% Chance of a September Rate Hike

Wall St. has unanimously read the Fed’s recent hawkish turn with focus on the Fed’s balance sheet, NOT rate hikes.  At a colossal $4.46T, most of Wall St’s economists see the Fed reducing the size of its SOMA* in September.  Wall St’s braintrusts like to hangout together, they typically think very much alike.  A year ago today, NOT one firm on the Street believed the Fed would touch the SOMA in 2017, or 2018 for that matter.  Today, they’ve moved up their expectations in a panicked hurry.

System Open Market Account (SOMA)

*The Federal Reserve System Open Market Account (SOMA) is a portfolio of U.S. Treasury and Federal Agency securities, foreign currency investments and reciprocal currency arrangements.

Central Bank Assets as a % of GDP

2007 to 2017

BOJ: 18% to 92%
ECB: 12% to 40%
BOE: 3% to 27%
FOMC: 7% to 23% (SOMA)


Fed’s Balance Sheet (SOMA) and Funds Rate

SOMA3We must keep in mind, in February there was only a 17%  probability of a Fed rate hike in March (according to Wall Street’s economists).  This was before the Federal Open Market Committee (FOMC ) began shifting market expectations and ultimately tightened (hiked rates) in March.  Rule #1, more often than NOT – Wall St. gets the Fed wrong.   Today, the entire street has their eye on September SOMA reduction – rate hikes are (near) unanimously a December issue in terms of street expectations.   Our Bear Traps Report research team meticulously measures the breath of crowded trades on Wall St. – very often this is where alpha is found, going the other way.   

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