Yellen To Congress: This Is Slowing The Economy

| About: SPDR S&P (SPY)

Summary

Yellen's serious issue that is slowing the economy is called productivity.

We highlighted this yesterday as a reason to expect "prolonged" inflation and market downside.

We don't see how this gets resolved this decade.

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Elazar news bulletin: "This just in, the Fed has recently discovered that people are getting older."

In our article "Inflation Formula Shows 'Prolonged' Dollar And S&P 500 Selling," we pointed out that Yellen is starting to use the famous nasty 12-letter "P" word in a negative way. She is saying that "productivity" is a reason for the weak economic pickup.

Productivity A Serious Issue

In her June 21st meeting with Congress, Yellen was asked if the US is in a crisis with regard to the aging population and productivity. She answered, "It's a serious issue that productivity growth is slow, and I want to highlight that."

She said that the late 1990s was a time of good productivity, and now is a time of weak productivity.

Yellen pointed to many reasons for a productivity decline, the first being the aging population. She also gave other reasons, such as depressed levels of investment, depressed rate of business formation and technological change showing up less in output gains.

She listed many reasons, but the reason driving them all, we think, is her first one - the Baby Boomer population.

Let's walk through why the aging population is driving all the other reasons for weak productivity

When were the 1990s? About 20 years ago. How old were the Baby Boomers? Turning about 40. Let's look at the chart.

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If you look at 1957, you see the peak in births. That means in the 1990s that bulge was about 40 years old.

What are 40-year-olds doing? They work, they earn, they spend, they buy houses, gadgets, things and it booms the economy.

Quick math: in 2016, how old are they? 59. They are older. They are retiring. That bulge is retiring. What is that, now, main driver on the economy? It takes people OUT of the workforce. It causes people to be less aggressive in the stock market, buy fewer cars, buy fewer new homes and generally spend less. That slows the economy.

Here's another Elazar news bulletin: "This just in, Fed cheers reaching Fed mandate of full employment. Chants for 'Four More Years!' ring through the Federal Reserve."

Let's look at that fully employed workforce and see what all the celebration REALLY means for the economy.

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This is a strange discovery. Exactly since the 1990s, Yellen's good old days of high productivity and everything couldn't be better, the largest number of spenders were employed, driving a real full employment. The percent of the population that was part of the workforce was much higher. They were young, aggressive 40-year-olds - and get this, they were working and earning money.

And now? Now they are humble, more conservative older people out of the workforce. You see the labor participation rate come way down?

Now what's that mean? Hmm.

Far fewer people employed, much less money swishing around on fewer gadgets, fewer homes, fewer things, more doctor visits, less investment and less productivity. All of Yellen's other excuses for low productivity could be wrapped up in the aging excuse.

And really, this problem is only going to get worse as that bulge in 1957 drives the economy for about the next 10 years.

Low productivity will get worse for the next 10 years.

What's Worse Is The New Elazar 60-40 Rule

60-year-olds don't spend as much. They are the largest part of this population, driving most of the decisions (good for drug companies).
But what's also bad is the number of 40-year-olds is at its lowest.

Look at the low in that birth chart at 1975. That represents today's adults in their early 40s. They are at the lowest percent of the population. They drive the fewest decisions of the population. Less spending, fewer all-night Vegas trips. (Actually, nobody does that. Whoops!)

This 60-40 Elazar Rule will not work out right away. The 60-40 population starts to balance out in another 8-10 years.

Weak productivity means inflation

In our "Inflation Formula" report, we take you step by step so you can see through easy math that inflation numbers are going up.

Because of this Fed epiphany about the Baby Boom bulge, productivity should be down for the next 10 years, growth should be held back for the next 10 years, and inflation could be up for the next 10 years. Ouch.

We think the Fed and Yellen are on to something

We think they nailed it. Who could have seen this one coming? People getting older actually having a drag on growth rates. It's an amazing epiphany, right? Not really. We should have seen that one coming.

Elazar Election Campaign: "10 More Years"

We have 10 years of this declining productivity with negative implications on GDP, inflation and all that Fed liquidity now for nothing (you know the song; now it's in context: "money for nothing and the TIPS for free." Those are the lyrics, right? Treasury Inflation Protection Securities for free? (Deflation, guys - I gave you an easy one here.)

Maybe not. We see off-the-charts inflation thanks to productivity. (Please, please see our "Inflation Formula" report. You'll understand why we think inflation could be off the charts, despite all the deflation-sayers.)

The real question

So why spend huge swaths of taxpayer dollars on QE 1, 2, 3, etc.?

Let's roll the dice, and hopefully, this Baby Boomer bulge thing doesn't slow things. Again, ouch. (Now we know why we don't get the transcripts from those closed-door FOMC meetings.)

Or worse, maybe they just didn't see it coming. People are going to get older?!

Conclusion

Yellen told us on June 21st, on C-SPAN, in front of Congress: Big news, people are getting older. It's hurting productivity, which is the key behind the many reasons for stalling growth. This has negative implications all around.

One more reason for Elazar to toot bullish.

Here's another Elazar news bulletin: "This just in, Elazar is still bearish. They seem to make up some new excuse every day to get all bear'd up. But this time it's a big surprise to hit the market that nobody, not even the Fed, saw this one coming. People are getting older. Incredible. These guys are so smart."

Good luck, and please be in touch. All of your comments teach us a ton.

Elazar Advisors, LLC specializes in earnings and predicts, analyzes, and reacts to earnings and earnings events as well as developing current company and macro stories with a hedge fund perspective.

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Disclosure: I am/we are short ES BUT THAT CAN CHANGE AT ANY TIME.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.