Monday, October 10, 2016

The Fed Found Out About The Baby Boom And Are Turning Dovish For Decades

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*The Fed had a research piece out that the baby boom may be causing the low GDP, low productivity, and low interest rates.
*We've written before that they should have seen this one coming.
*They now expect lower for longer.
*We've pointed out that on a longer term basis there is a demographic led market low at the end of 2017.

The Fed follows their research team. We've used key pieces of Fed research in the past to predict soon-to-follow Fed comments. This recent piece, "Understanding the New Normal: The Role of Demographics" is the Fed's answer to their productivity conundrum. Until this report the Fed did not have a clear answer as to why rates and GDP were low. Now they do. They could have seen this one coming. We've written that demographics should lead to a low by the end of 2017. The Fed may be less sanguine which is probably why they want to hold of raising interest rates.
Here are the Fed's recent findings dated October 3rd:
(This is a long quote but a must read)
"Since the Great Recession, the U.S. economy has experienced low real GDP growth and low real interest rates, including for long maturities. We show that these developments were largely predictable by calibrating an overlapping-generation model with a rich demographic structure... The model accounts for a 1¼-percentage-point decline in both real GDP growth and the equilibrium real interest rate since 1980... The model also implies that these declines were especially pronounced over the past decade or so because of demographic factors most-directly associated with the post-war baby boom... Our results further suggest that real GDP growth and real interest rates will remain low in coming decades, consistent with the U.S. economy having reached a "new normal."
Our official reaction: "ouch."
The baby boom is one of the most predictable cycles you can imagine. Births are known. The Fed has finally figured out with many fancy formulas that this may be the cause of stagnant growth.
What's worse is they expect this to be the "new normal" for the "coming decades."
With this new Fed research out we can now understand why Fed officials arelining up dovish. The Fed has said they are data dependent. The numbers Friday were inline with recent trends.
We think this longer term thinking however may move the Fed from "data dependency" to "dovish regardless." We don't expect them to officially come out and say that.
Births Bottom End Of 2017
Because the Fed is now depressing us we wanted to turn back to our own work which is longer-term less depressing.
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