With the price of oil hitting a new multi-month low as the Fed kicks off its two-day monetary policy meeting, the world is about to experience something not seen since the Black Death.
A portion of today’s note from Art Cashin: This week the Buttonwood column of the Economist examines how broad these population declines are becoming and ponders on potential economic fallout. Here’s how they start out:
THE world is about to experience something not seen since the Black Death in the 14th century—lots of countries with shrinking populations. Already, there are around 25 countries with falling headcounts; by the last quarter of this century, projections by the United Nations suggests there may be more than 100.
Such a shift seems certain to have a big economic impact, but there is plenty of debate about what that impact might be. After the Black Death a shortage of labour eventually led to a sustained rise in real wages. If that trend were repeated, it would come as a big shift after a prolonged period of sluggish wage growth, something that has fuelled political discontent across the rich world.
A new report on the demographic outlook by Berenberg, a German bank, focuses on one important measure: the dependency ratio. This compares the number of children and the elderly with people of working age (those aged 15-64). The higher the dependency ratio, the greater the burden on the workforce. In the world’s biggest economies, America apart, the workforce is set to shrink significantly.
In many developed countries, the dependency ratio rose after the second world war (thanks to the baby boom), fell in the late 1960s and 1970s as the boomers entered the workforce, and has recently started rising again. That history makes it possible to analyse how economies performed during periods of both falling and rising ratios. Berenberg based its analysis on ten rich countries: America, Australia, Britain, France, Germany, Italy, Japan, Spain, Sweden and Switzerland.
The Economist then goes on to outline some of the economic consequences noted in the Berenberg study. None are very good.
Dependency tends to put negative pressure on housing prices as smaller and older populations need less space. The study also found a negative influence on things like GDP per capita and even downward pressure on inflation.
Not very helpful to Messrs. Kuroda and Draghi. Not since the Black Death, indeed.
Of Food And The Fed – Tonight, I am scheduled to break bread with nearly a dozen very astute Fed watchers from across the industry. One of the topics that I hope to touch on is what is happening to lending and interest rates – away from the Fed.
Banks Have Been Tightening Lending For Months
For example, the last two or three Senior Loan Officers Surveys clearly suggest (to me, at least) that banks have been tightening their lending standards for months. Loan delinquency has been rising significantly and provisions for loan losses have been marked higher.
The combination of regulatory pressure and the ZIRP seem to have money market funds shifting away from commercial paper lending to more risky assets. (When the CP markets froze, post-Lehman, the wheels almost came off.) I hope we find some answers.
Overnight And Overseas – In Asia markets are somewhat mixed. The yen is soaring as speculation grows that the upcoming stimulus package may be less than expected, or hoped for. The yen move helped send the Nikkei lower, while Shanghai and Hong Kong rose.
In Europe, calls for easing by the BOE are growing, which sent the pound lower, which helped lift the FTSE very slightly. On the continent, most markets are mixed to a shade lower.
Among other assets, the dollar fell against the yen but has rallied against the pound and the euro. Crude continues lower with critical support seen at $42. Gold is flat. U.S. futures are mixed as FOMC meets for day one.
Consensus – Stocks are mixed as traders ponder what wording changes the Fed will make. The key influences for today are likely to be crude and currencies.
Stick with the drill – stay wary, alert and very, very nimble.
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