Millennial Debt Will Not Pick Up The Slack From Boomers; Stock Market Low Late 2017

| About: SPDR Dow (DIA)

Summary

The economic spending driver from Boomers is fading.

Gen Y and Z have building debt issues, which adds to future problems.

We are sticking with a call for a stock market low by the end of 2017.

We have a long-term sell rating on SPY.

We had written that the 50-year-old is shrinking as a percent of the population. We think the 50-year-old is a peak earner and spender. As the economy has gained and lost this powerful human in the economy, so goes the market, typically. We think generations X, Y (Millennials) and Z have their own challenges, primarily debt. We don't expect them to carry the Boomer load.

(This report is based on the novel and incredibly complex Elazar theorem that, get this, People Drive The Economy. Amazing Elazar! If you don't buy that idea, you may not agree with this report.)

Let's review

50-year-olds are the key drivers of the economy.

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Our numbers on the above chart show births plus 50 years. The years above the red line show peaks of 50-year-olds, and those below are troughs.

Here's how it lines up on the Dow Jones.

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Peaks of births are represented above the Dow (NYSEARCA:DIA) and troughs below. Total coincidence? We don't think so.

You can generally see a relationship between the peaks and troughs of 50-year-olds coinciding with peaks and troughs of the stock market.

The reason is that 50-year-olds reach their prime earning years along with their prime spending years. They are more confident in their situation than ever before.

Once someone retires, they automatically become more conservative because they don't have the money coming in. They are depending on the principal they built over the years, and so, begin to pull back on spending. 50-year-olds, though, are not conservative like 60-year-olds.

50 year olds increasing as a percent of the population drive spending and investment. That may be why the '90s was flush with productivity, spending and investment. This is also a key reason the Fed recently blamed weak GDP and productivity.

Here is the market performance in those periods.

Peak Trough
Peak Trough Dec 31 Jan 01 Yrs Total Ea Yr
1971 1983 890.2 1027 12 15.4% 1.3%
1993 1995 3794 3838 3 1.2% 0.4%
1997 1998 6442 7965 2 23.6% 11.8%
Average 2.4%
Trough Peak
Trough Peak Dec 31 Jan 01 Total Ea Yr
1983 1993 1258 3794 9 201.6% 22.4%
1995 1997 5117 7908 2 54.5% 27.3%
2000 2007 10786 12474 6 15.6% 2.6%
Average 16%
Click to enlarge
Click to enlarge

You can see (above) that the peak to trough years (+2.4% on average) underperformed the trough to peak years (+16% on average).

We are currently in the peak to trough period. Where are we?

Peak Trough
2011 Today 12217 18226 5 49.2% 9.8%
Real 2017 ??
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Click to enlarge

Since the last birth peak in 2011, we are up 9.8% on average per year. That is almost exactly two times the historical pace per year.

The Long-Term Market Needs To Catch Up On The Downside

We'd expect that the demographic trends help the market catch up to the historical trends. That would imply weakness ahead. Of course it doesn't need to, but we think the demographic trends are so powerful that they will ultimately drive fundamentals, which will drive the stock markets. (Fundamentals!?!? Crazy concept to ATH-ers, we know.)

Even after all the QE money, the Fed is in a quandary why the economy didn't pick up to expectations. They have recently started to use demographics as an excuse.

The Fed has no ammunition to stop a demographics-led slowdown.

Millennials: Debt Worries Us

As Boomers and 50-year-olds slow the economy based on their changing life needs, we are dependent on the Millennials to carry the torch.

Here's student debt.

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Student debt is $1.4 trillion. That would be 7% of total US debt. That's a large number, right?

Here's a longer-term perspective.

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It's up big in the QE era.

There's a few charts that look like this in the post-QE era.

This chart is called a...

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... hockey stick. Very nice. Who got it right without peeking?

You can see (above) that there are plenty of them, thanks to the QE era.

Now the punch line, sorry about this one.

This is from The New York Federal Reserve.

90+ day delinquency rates:

Category Q1 2016 Q4 2015
Mortgages 2.1% 2.2%
HELOC 2.2% 2.2%
Student Loans 11.0% 11.5%
Auto Loans 3.5% 3.4%
Credit Cards 7.6% 7.7%
All 3.6% 3.7%
Click to enlarge
Click to enlarge

While delinquencies ticked down, they are 11% of loans. Since 2008, those loans are up a ton (hockey stick).

We said punch line - sorry, not yet, this is the punch line.

After a payment is missed, it's considered delinquent. What's worse, bankruptcy proceedings don't erase student loans.

Students - Millennials mostly - are royally stuck.

What can happen instead of bankruptcy if student loans are unpaid (Keep in mind, 11% of them):

  1. Automatic garnishing of wages to pay down past debt
  2. Automatic deduction in tax refunds
  3. Build-up of fees and penalties.

That can surely drag someone from optimism and chance-taking to "I have to take this job because I have no choice" and stuck. Really, the system is rigged to help students fall behind and fail. It is not encouraging success.

And 10%+ US-wide delinquencies is a serious problem

We're wondering why productivity is slowing and the economy didn't benefit from QE 1, 2, 3+?

So besides the Boomer, who's going to pick up the slack? 11% delinquencies on a $1.4 trillion pie. Ouch.

Stock Market Low End 2017 Confirmed

We need a rally from 50-year-olds as a percent of the population. They bottom in 2018, which has us call for a low ahead of that.

Conclusion

We were bearish based on demographic trends led by 50-year-olds declining as a percent of the population. We wanted to do the work to see how the Millennials could pick up the slack. If 10%+ delinquencies on a $1.4 trillion debt mound is any sign, we're not so optimistic.

We're more bearish longer term and call for a low at the end of 2017.

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Weekly Rating: Downside, Weekly Aggressive Rating: Downside

(Aggressive ignores our medium-term fundamental call and just focuses on the week.)

Medium-term Rating: Downside, Longer-term Rating: Downside

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.