Generational Dynamics

John J. Xenakis

US CPI continues in deflation, as Europe offers negative interest bonds

The US Labor Department said on Thursday that its consumer price index (CPI) fell 0.7% in January, after falling the previous two months as well. In the 12 months through January, the CPI fell 0.1% over the year. The economy continues its deflationary spiral that is predicted by Generational Dynamics. 

Europe has clearly been in a deflationary spiral for a couple of years, with January's inflation rate at -0.6%. On Thursday, Germany announced that it will sell five-year bonds at negative yields (interest rates) for the first time ever. That means that if you have a lot of money and you want to put it into the bank for safety, then you have to pay the bank money to keep it. 

Five-year bonds from four other eurozone countries -- Netherlands, Austria, Sweden and Finland -- also have negative yields. 

The negative interest rates are forcing investors to look for other places to invest, and one of those places is Wall Street, which is part of the reason for the surge in stock prices. 

The result is that the Wall Street stock market bubble is exploding to new highs. According to Friday's Wall Street Journal, the S&P 500 Price/Earnings index (stock valuations index) on Friday morning (February 20) is still at an astronomically high 19.79.

 

 S&P 500 Price/Earnings ratio at astronomically high 20.53 on February 20 (WSJ)

This is far above the historical average of 14. It's a large jump from last month, and it's a fresh high in recent years. This indicates that the stock market is in a huge bubble that could burst at any time. Generational Dynamics predicts that the P/E ratio will fall to the 5-6 range or lower, which is where it was as recently as 1982, resulting in a Dow Jones Industrial Average of 3000 or lower. It's best to keep money in cash, even in the face of mild deflation, because you stand to lose a great deal of money if/when the stock market crashes.

German five-year bunds trade at negative yields for first time ever

German five-year government debt sold at a negative yield for the first time in history on Wednesday as borrowing costs and inflation in the eurozone continue to fall. 

In January eurozone inflation was -0.6%, down from -0.2% the previous month, so even bonds with zero or slightly negative yields are offering a small positive real return in this environment.

What happens when you run out of taxpayers?

“This is the working-age population of Germany – 45 million people.” Then he drew a thick slice, almost a sixth of the circle: “This is 6.7 million people, the number of working-age people we expect to lose over the next 10 years.” That’s the very large number of people who will reach retirement age or move away, minus the much smaller number who will reach working age or migrate to Germany.

The gap between the tax-contributing and government-dependent population is known as the dependency ratio. Germany is one of many Western countries that are about to see it more than double. In 2000, it had four working-age people for every senior; by 2035, it will be nearly seven seniors for every 10 working-age people. When you subtract that many taxpayers, the numbers just don’t add up, and government is crippled.

Germany's Birth Rate:

Country	2000	2001	2002	2003	2004	2005	2006	2007	2008	2009	2010	2011	2012
Germany	1.38	1.38	1.39	1.37	1.38	1.39	1.39	1.4	1.41	1.41	1.42	1.41	1.41

United States Birth Rate:

Country	2000	2001	2002	2003	2004	2005	2006	2007	2008	2009	2010	2011	2012
United States	2.06	2.06	2.07	2.07	2.07	2.08	2.09	2.09	2.1	2.05	2.06	2.06	2.06

DYI Comments:  The U.S. will experience the same problem of a low birth rate as Europe only to a lesser extent.  Boomer's will be costly as they tap into Social Security and Medicare showing its hand of demographic imbalance.  What is coming, whether one agree's or not, is competitive immigration to boost our declining birth rate.  If our numbers decline to around 1.6 (similar to Canada) then immigration will be imperative.  I believe this is not only possible, it is the most likely outcome.

Comments from Mexico's ex president (article below) today stirs up emotions to a fever pitch.  As we approach the late 2020's the U.S. will be competing around the world for their best and brightest to immigrate.  This will be seen as a strong dollar and a strong military.  A growing economy boosted by immigration symbolized by a strong dollar and a growing population to supply needed military manpower for our commitments around the world.

Ex-Mexican president Fox says immigration reform would help U.S. stay competitive

  DYI