It wasn’t just “credit-boosted phony growth” that caused the big spurt in growth…

A demographic “sweet spot” also provided a highly favorable tailwind.

According to a recent study in the Financial Analysts Journal:

Favorable trends in the size and composition of populations have helped to fuel the rapid economic growth experienced in the developed world over the past 60 years, and their reversal plays a crucial part in the current rapid deceleration in developed world growth.

The problem, say authors Rob Arnott and Denis Chaves, is that these tailwinds are about to turn into headwinds. This will push growth rates into negative territory in 12 of the world’s biggest economies: the US, Canada, Australia, Britain, France, Germany, Italy, Japan, India, Russia, China, Brazil

The problem is aging populations…

More specifically, something called the “dependency ratio.” This measures the non-working age population compared with the working-age population.

Dependency ratios of the world’s major economies (both emerging and emerged) are spiking, as you can see from the chart below, which looks at the US, Britain, Canada, Australia and New Zealand.

And as you can see from the chart below, the situation is worse in the other major developed markets, Japan, France, Germany and Italy.

And here are the growth projections of the study, based on this big demographic shift.

This is a major structural headwind facing the US economy. And the Fed is acting as though it didn’t exist. It is pumping stimulus to bring growth back to its “normal” 3-4% range. But “normal” ain’t coming back.

It was a fluke. A one-off. A happy coincidence.

Why Growth Must Fall

Fertility rates in the major global economies simply aren’t keeping up with replacement levels (roughly 2.1 children per woman of childbearing age).

GDP growth is mainly a function of two things: productivity and output. And since output growth is basically a function of population growth (unless the new workers are highly unproductive), population growth is a huge boost to economic growth.

When you break it down, countries with older populations and lower fertility rates tend to grow slower than countries with expanding workforces and higher productivity rates.

This is why, for instance, Japan grew so swiftly in the 1960s-1980s… and why it started to slow in the 1990s, as legions of Japan’s boomer population hit retirement age and started to become a negative influence on GDP.

It’s also the major reason why we got a burst of growth from the 1980s onward. The fall of the Iron Curtain opened up massive new labor markets as well as consumer markets… and millions of new workers joined the labor forces of the world’s emerging markets. And in the US, the population grew from about 200 million at the end of the 1970s to about 300 million today.

These powerful demographic forces shape the world… and long-term asset prices. But as investors, we sometimes don’t see them. That’s because we are vulnerable to something called “recency bias.” We’re inclined to use our recent experience as our template for what will happen in the future.

When it comes to investing, this is a disaster. Because instead of thinking about the trends shaping the future, we extrapolate past trends out into the future. This is one of the biggest mistakes you can make as an investor, because markets are cyclical… and often follow a boom-bust pattern.

Stimulus has a powerful effect on US stock prices. We’ve seen a nearly 90% correlation between the rise in the S&P 500 and the expansion of the Fed’s balance sheet. But long term, fundamentals matter.

Combine these demographic headwinds with current valuations, and the major US indexes look overpriced. I am certainly not a buyer at today’s levels.

Chris Hunter 
Investment Director
Bonner & Partners Family Office

STOCKS: There wasn’t a lot of news to account for the rally on Tuesday. Some are suggesting that earnings will be better than expected. There was a release of funds to Greece and Chinese inflation was in line. 

It’s kind of hard to imagine investors saying, “Hey Chinese inflation is not too bad. Let’s buy”. I think this is all part of a rise from a very oversold condition as we’ve been pointing out for the past couple of weeks. 

GOLD:  Gold was up $12. This still doesn’t break the pattern of declining tops that has dominated the yellow metal for so long. 

CHART: I hate to keep showing essentially the same charts, but right now the message is pretty convincing and we need to remember it. There is a lot of bearishness right now. The current 20 day moving average of the CBOE put call ratio is still above the levels of the last three trading bottoms. This tells us that the rally has further to go on the upside. This message is much more important than  Chinese inflation.  

“Mark Twain said the definition of a gold mine is ‘a hole in the ground with a liar standing at the top of the hole’ because there’s just so many of them. Somebody once did a study and I think he determined that more money has been lost in gold mining shares than any other industry in America including airlines and railroads at one time.” – Jim Rogers 12:04 pm July 8th/2013

Here are Jim’s comments on Gold in the last 24hours:

Jim Rogers Destroys The Last Argument Of The Gold Bugs

Jim Rogers correctly predicted gold would fall to $1,200; now he thinks it could go as low as $900

Gold correction is over, suggests Deutsche Bank, but Jim Rogers disagrees

Gold Mining Stocks: Many Other Easy Ways For People To Buy Gold

Jim Rogers Warns “We’re All Going To Suffer From This Crazy, Crazy Money Printing”

“We’re getting to that point where either one of two things are going to happen; either central banks are going to stop all this [money printing], or the market is going to force them to stop it. It looks like we may be having a juncture of both… where the Fed is getting worried… and at the same time, the market is jumping in and saying, ‘Yes, it’s insane what you’re doing, and this has to end.’ And if it’s not ending now, it’s going to end sometime in the next year, because this cannot go on – it’s too insane.“

“There are a lot of leveraged players who are now being forced to sell [gold]. Usually when you have this kind of forced liquidation, you’re getting closer to a bottom, maybe not the final bottom, but certainly close to a bottom.”

The U.S. employment report on Friday helped to give a boost to world equity markets and most sectors. However, the employment report also brought concerns including higher interest rates, higher energy prices (crude oil, heating oil, gasoline) and a higher U.S. Dollar. Short term strength is not sustainable, particularly in front of mixed second quarter earnings reports and mixed third quarter guidance. Preferred strategy is to take advantage of short term strength in equity markets to take trading profits.

Selected sectors with favourable seasonality in the summer time need to be watched for entry points if they show signs of base building. Potential sectors include gold, energy and biotech. All already are showing positive strength relative to the S&P 500 Index.

Gold fell $19.40 per ounce (1.23%) last week. Trend remains down. Gold remains below its 20, 50 and 200 day moving averages. Strength relative to the S&P 500 Index remained at 0.0 out of 3.0. Short term momentum indicators are trying to recover from oversold levels.

100 oz. Gold Futures Continuous Contract Seasonality

Analysis has revealed that with a buy date of September 13 and a sell date of May 23, investors have benefited from a total return of 128.74% over the last 4 years. This scenario has shown positive results in 4 of those periods.

The buy and hold return for the past 4 years was 87.94%.

Silver lost another $0.82 (4.19%) last week. Trend remains up. Silver remains below its 20, 50 and 200 day moving averages. Strength relative to the S&P 500 Index and Gold remains negative. Technical score remains at 0.0 out of 3.0. Short term momentum indicators are trying to recover from oversold levels.

Silver Futures Continuous Contract Seasonality

Analysis has revealed that with a buy date of September 16 and a sell date of May 11, investors have benefited from a total return of 251.41% over the last 4 years. This scenario has shown positive results in 4 of those periods.

The buy and hold return for the past 4 years was 79.27%.

The TSX Metals & Mining Index fell another 20.37 points (2.89%) last week. Trend remains down. The Index remains below its 20, 50 and 200 day moving averages. Strength relative to the S&P 500 Index remains negative. Technical score remains at 0.0 out of 3.0. Short term momentum indicators are trying to recover from oversold levels.

Crude Oil gained $6.63 per barrel (6.86%) last week despite strength in the U.S. Dollar. Intermediate uptrend was confirmed on a move above $100.42 to reach a 15 month high. Crude remains above its 20, 50 and 200 day moving averages. Strength relative to the S&P 500 Index remains positive. Technical score remains at 3.0 out of 3.0. Short term momentum indicators are overbought, but have yet to show signs of peaking.

Natural Gas added $0.04 (1.12%) last week. Trend remains down. Gas remains below its 20, 50 and 200 day moving averages. Strength relative to the S&P 500 Index remains negative. Technical score remains at 0.0 out of 3.0. Short term momentum indicators are oversold.

…….so many more charts and commentary at Don Vialoux’s Timing the Market HERE

……seasonality at EquityClock including the Stock Market Outlook for July 8th HERE