On Those Were the Days my Friend; Dairy and Cancer!

From: Aditya Rana
Date: Sat, Jun 13, 2015 at 2:17 PM
Subject: On Those Were the Days my Friend; Dairy and Cancer!


The ongoing debate about the underlying trend growth rate of the U.S. economy continues, and developing an informed view on this key factor is important as it impacts the pace of Fed rate increases which in turn determine the extent of the overvaluation in financial assets and the risk of a severe downturn. Paul Kasriel, former Chief Economist at Northern Trust, wrote a note recently which provides a helpful framework with which to look at this issue and its implications. To summarise:

-The growth rate of the U.S. economy over 23 quarters since its 2009 trough has been the weakest of any 23 quarter post-cycle recovery from the trough, going back to 1961 (see graph below).

-While the financial crisis was the principal cause behind the relative weakness of this recovery, it is likely that the underlying trend growth rate of the U.S. economy will be lower in the coming decades than its pre-crisis historical trend. The main driver for this is demographics, with a secondary factor being the muted credit expansion when compared to levels prior to the crisis.

-The excesses leading into the financial crisis can best be illustrated by looking at household spending on goods, services and housing as a percentage of household income (see graph below). Household spending as a percentage of household income reached 100% in 2004, for the time in the post-WWII era, and subsequently exceeded it.

-There are two ways in which households can fund this spending – by selling assets and/or borrowing. Households chose to fund their spending by borrowing, with the net change in household liabilities as a percentage of income rising from a median level of 5.9% (from 1952 until 2002) to levels above 12% from 2003 until 2006 (see first graph below). This borrowing was primary in the form of home mortgages (including home-equity financing) to fund their excess spending (see second graph below).

– With housing forming the collateral for the borrowings, the question which might be asked is how house prices were able to continue rising given their traditional relationship to income levels. “Those were the days my friend, and we thought they’d never end” Gene Raskin. From 1952 until 1989, house prices relative to income never exceed 1.7 times, but from 2004 they exceeded 2 times and peaked at 2.35 times in 2006.

-The higher living standards prevailing in the pre-crisis years were clearly fuelled by credit , resulting from a financial system which had the capital to support the lending, a Fed which was more than willing to aid and abet the excess lending and lax credit-underwriting standards. Those were the days my friend, and we thought they’d never end – but they have. While the Fed increased credit aggressively in the aftermath of the financial crisis – it has now ended, and the Fed’s credit expansion was offset by a contraction of private credit. With tighter regulations, it is unlikely that private credit growth will fully recover.

Going to the primary factor behind the low future trend growth rate in the U.S. – demographics. The trend growth of output in an economy is a function of the trend growth rate in its working-age population and the trend growth rate in its productivity and technological advance. While forecasting productivity and technological advance is difficult , projecting growth of various population cohorts is much less difficult.

-In 1980, the 10-year compound annual growth rate (“CAGR”) of the 16-to 64-year population was 1.8% , it was 1.3% in 2000 and is expected to drop to 0.4% by 2020 (see graph below). This simply implies, barring a major surge in productivity growth and technological advance, a slowdown in the U.S. growth rate in the decades ahead.

-In addition, the 10-year moving average ratio of the working-age population (the “makers”) to the people too young or old to work (the “takers”) recently peaked at 1.9 and is expected to drop to 1.5 by 2040 (see graph below).

-The implication of the above two projections is – a slowdown in the growth of real GDP per capita in the decades ahead. This results from: 1) a slowdown in the growth of the population which produces goods and services, and, 2) the rising proportion of takers to makers which implies lower output growth relative to the total population.

-The other important implication is a possible slowdown in the growth of real per capita consumption due to declining per capita output, assuming there is no increase in imports of goods and services. Be kind to your children and grandchildren as they will be the future makers.

-Assuming that society will moderate the slowdown in the growth of consumption per taker, the makers will have to be induced to slow down their consumption which would result in higher equilibrium interest rates. This is because either the government will increase its borrowing to fund spending by the takers to cushion the slowdown in their consumption, or the government increases taxes on the makers inducing them to reduce their lending in order to cushion the slowdown in their consumption, leading to higher real rates.

-There are of course several factors which can mitigate the impact of the above scenario – people delaying retirement which would slow down the decrease in makers, more working-age immigrants, and a surge in productivity and technological advance which would offset the slower growth in output due to a decrease in the growth of makers. These mitigating factors are likely to occur to some extent, but prudence requires planning for a slower rate of trend output growth.

Interesting and a lucid framework to look at the issue of declining trend output growth in the developed world (implying that rate increases, if any, are likely to be slow and gradual unlike previous cycles) , with the important implication of declining consumption growth in the developed world. The implications for emerging markets is that the old export-led mercantilist model is likely to become even more obsolete in the decades ahead, and a transition to a domestic led consumption growth model (albeit at lower levels) is key. China is leading the path down this road with the restructuring of its economy to transfer income from the SOE sector to households, the second stage of its urbanization program to shift more of its rural population to the newly developing urban mega-clusters, and its massive “One Belt One Road” (OROB) initiative focused on developing economies and boosting trade ties (and creating a market for its excess capacity) with 65 countries having a population of 4.4 Bn, a GDP of $21 trillion and exporting goods and services of $18 trillion (see McKinsey chart below).

Dairy Increases Risk for Death from Prostate Cancer:

The evidence continues to mount against eating excessive amounts of dairy, red meats or processed foods.

PRCM, June 2, 2015:


-Dairy products may increase your risk of death from prostate cancer, according to a study published in the International Journal of Cancer. Researchers monitored the dairy intake of 926 men diagnosed with prostate cancer as part of the Physician’s Health Study for 10 years. Those who consumed three or more servings of dairy products a day increased their risk for overall death by 76 percent and had a 141 percent higher risk for death due to prostate cancer compared to those who consumed less than one serving. Both high- and low-fat dairy products were associated with increased mortality. Researchers suspect hormones, saturated fat, and dairy calcium as possible mechanisms for the increased risk.

Here’s to keeping the dairy intake to a minimum!



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