Tuesday, December 30, 2014

The Bursting of the Generational Housing Market Bubble

A paper by Dowell Myers and SungHo Ryu at the University of Southern California looks at what could be the ultimate bursting of the housing bubble in the Unted States.   While everyone from government to the nation's central bankers is quite pleased with themselves when it comes to the resurgence of the housing market since the depths of the Great Recession, this analysis suggests that the improvement may be temporary, thanks in large part to the nation's demography.

Let's open with a look at the composition of the population of the United States by age using a population pyramid:

Normally, the population of both men and women decreases relatively smoothly as age increases.  As you can see on the pyramid above, population does not decrease with smoothly with age, in fact, the number of people in each age bracket generally increases or remains constant between the ages of zero and 60 and slowly declines thereafter.  The shape of the U.S. population pyramid is largely due to the impact of the baby boom.

Now, let's switch gears and look at both historical and projected population growth.  Here is a bar graph showing growth in the U.S. population age 25 and over for each decade from 1960 to 2030 showing the difference in the population growth rates for those aged 25 to 64 (in dark grey) and those aged 65 and older (in light grey) along with the age group that accounts for the largest amount of growth over that decade:

This gives us a bit of a sense about how the changes in the growth rate of older Americans could have an impact on many social and economic issues, particularly the housing market.

Baby boomers were born between 1946 and 1964 and have been a significant force in the United States and world economies ever since.  As the oldest of the baby boomers married and had children in the early 1970s, they purchased increasing numbers of homes, particularly in suburban neighbourhoods throughout America.  This had a market impact on the number of new homes built and sold as shown here (excluding the mid-1970s recession) when compared to the purchase levels of the 1960s:

This rather sharp increase in the growth rate of the housing market appears to be part of a generational housing bubble, created largely because of the rapid growth in the number of baby boomer housing consumers.

Of course, this is going to change with time.  The first of the baby boomers reached age 65 in 2011 and the last will cross the 65 year threshold in 2029.  As we can see on the population pyramid, there are fewer younger people to follow, meaning that the ratio of senior citizens to working-age, younger adults will rise.   History shows that as people, including baby boomers, age and retire, they will change their housing consumption by:

1.) Moving to smaller homes since there are no longer children resident in the family home.

2.) Relocating to regions of the nation that they find more appealing.

3.) Withdrawing from the housing market as they move into long-term care.

Here is a graph showing the buy and sell rates for each age group showing the relationship between age and house buying and selling behaviours:

Interestingly, in all but three states, after the age of 70, most people are net sellers of homes.  

Obviously, the exit of baby boomers from home-ownership will have a significant impact on the housing market since more homes will be for sale and there will be far smaller growth in the number of people between the ages of 25 and 64 who want to purchase a home.  What this means is that there will be far more house sellers than there are house buyers, a situation that will likely lead to the bursting of the generational housing bubble.  The point where the number of buyers equals the number of sellers is referred to as the cross-over point, a point in time which varies by state as shown on this table: 

The first of the states have likely already crossed the point where the number of buyers equals the number of sellers.  

The biggest losers in this scenario will be the baby boomers that are relying on the value of their homes to fund their retirements, particularly the youngest among the baby boomers who will be at the tail end of the bursting of the generational housing market bubble.  Since home equity makes up the largest portion of net wealth for most households (i.e. other than the wealthiest households), the soon-to-be elderly in many states will find themselves facing falling housing prices and declining net worth.  

From this analysis, we can see that the housing boom of the mid-2000s was just part of a long-term generational housing bubble, created largely by the boom in births following the Second World War, an event that has happened only once in modern history.  Once baby boomers begin to sell their homes en masse, their actions could have a negative impact on America's housing market for up to two decades, putting a final, painful end to the generational housing bubble.

Moving Freight - A Leading Indicator of Economic Health

There is an interesting leading economic indicator that gets very little attention from the mainstream media.  Most often, the mainstream media uses a combination of employment, housing and manufacturing data to give us a sense of where the economy is headed, however, this data is trailing the economy, that is, it is released after it has happened and provides us with relatively little sense about where the economy is headed, rather, where it has been.

A study by Dr. Peg Young and Ken Notis back in 2009 looks at using the Bureau of Transportation's Freight Transportation Services Index (TSI) as a predictor of where the economy is headed.  The TSI is the broadest monthly measure of United States domestic transportation services and provides the best possible measure of these services which includes real monthly changes in both freight and passenger transportation services across America.  The TSI includes only domestic for-hire transportation that is operated on behalf of or by a company that provides transportation services to an external company for a fee.  It does not include transportation in vehicles used in the private sector (i.e. car trips taken by families).

Here are the five modes of transportation that make up the Freight Transportation Services Index:

The authors noted that both accelerations and decelerations in the freight TSI are strong leading indicators of the health of the economy.  Here is a graph showing the freight TSI between January 2000 and February 2009:

The blue line shows the actual freight TSI and the red line shows the smoothed freight TSI.  The Great Recession officially began in December 2007.  Looking at the freight TSI numbers, we can see that the deceleration began in either January 2005, November 2005 or May 2006.  According to the rules used by the authors, the peak month for the freight TSI would have been in May 2006, a full one year and six months before the beginning of the Great Recession.

Over a three decade period from the late 1970s to 2009, the freight TSI led economic downturns by an average of four to five months with a range of one to seven months.  The authors explain the longer than average eighteen month lead in the decline of the freight TSI before the Great Recession took hold on the unique aspects of the latest recession, particularly its magnitude and the financial crisis that preceded it.

Now, let's look at the freight TSI from 2000 to October 2014 from the Bureau of Transportation Statistics website:

When we look at the data over the nearly 15 year period, the deceleration or plateauing in the growth level of the freight TSI between mid-2004 and mid-2008 is quite obvious.  It is also somewhat less obvious that the freight TSI looked to be decelerating slightly between the end of 2011 and the third quarter of 2012 as shown on this graph:

If you look at this bar graph that shows GDP growth rate, you'll note that during 2012 the economy grew at a much slower rate in the last half of the year, reaching a low of zero percent in the fourth quarter of 2012:

In this case, the freight TSI predicted a downturn about one fiscal quarter ahead of the economic slowdown.

Looking at the period between January 2013 and October 2014, the latest month for which data is available, we see what might be signs of a deceleration in the growth rate of the freight TSI over the past three months as shown on this graph:

With the authors' conclusions in mind and the freight TSI data showing no sign of decelerating, it doesn't appear that this leading indicator is predicting an economic slowdown at this point in time.  That said, given that history has shown that the indicator can lead the economy by as little as one month, the freight TSI should be watched closely if it begins to show a pattern of plateauing.

Monday, December 29, 2014

Al-Qaeda: Advice for Lone Wolf Terrorists

Updated September 2016

While ISIS aka the Islamic State has been grabbing most of the terrorist-related headlines in recent months, let's not forget Al-Qaeda, the original 21st millennium terrorist force to be reckoned with.  Just in time for Christmas 2014, al-Malahem Media, the media wing of AQAP, released Issue 13 of its online Inspire magazine.  In case you weren't aware, AQAP is the acronym for Al-Qaeda in the Arabian Peninsula.  In this edition of Inspire, AQAP equips its readers with a plan to disrupt western civilization, particularly the United States, through the use of "lone wolf attacks", terrorist attacks that are far less detectable by the intelligence community than the bold, multi-faceted attacks that have taken place in the past since they are planned and executed on a very small scale.

Here is the cover of Inspire Issue 13:

This issue suggests that terrorist attacks be used with the specific purpose of attacking the airline industry, using methods that will be far less likely to be foiled, particularly through the use of small airports.  The term that Inspire uses to describe these attacks is "neurotmesis" which is a term used to classify nerve damage.  In this case, AQAP uses the term to describe the "cutting (of) the nerves and isolating the head", a metaphor that is particularly pertinent given the recent beheadings of hostages by ISIS.  

The goal of AQAP's lone wolf terrorist (jihadi) actions are to hit and disrupt economic targets as follows:

"1.)  Direct Economic Targets 
e.g. the World Trade Centre, banks, forex and others.

2.)   Indirect Economic Targets 
e.g. the targeting of the US airplane by 'Umar Fârouq. The target was not economic by nature, but the consequences' cost was enormous due to extra security measures." 

The anticipated results of these attacks are as follows:

"1.)  Economic hemorrhage due to the targeting of a civil airplane for many reasons including increased security measures, people's refrainment from air transportation, and put in mind that one airplane's price is more than 300 million dollars.

2.) Exposing the government's weakness by defeating it in the 'Intelligence War'.

3.) Creating an atmosphere of fear and terror among the citizens, which will result to the next point.

4.) Creating tension between the government and its people, hence giving an indication that the War against the Mujahideen is hopeless." 

I find point 2 particularly interesting given that, if a terrorist is able to stay off the radar of the world's intelligence apparatus (i.e. keep their communications to others to a minimum), it will be a relatively simple task to win the "intelligence war", despite the fact that governments are spending billions of dollars to snoop on their citizens.

Here are the pages that show potential targets in the airline sector including American, British and French airlines in case attacking a U.S. company is not feasible:

...as well as high profile economic personalities:

On the upside, the authors advise that if these economic personalities remove their money from U.S. banks and declare that they disagree with U.S. policies, they will not be targeted.

In Issue 13, there is a multi-page very detailed presentation showing the steps that will allow a potential lone wolf jihadist to build an explosive device that can be hidden on a person that, unlike the bomb worn by Nigerian terrorist Umar Al-Farouq, better known as the "Underwear Bomber" from Christmas 2009, will be far harder to detect.  The instructions begin by telling potential recruits about the security barriers in many of the world's international airports as shown here:

While imaging devices are harder to defeat, as the authors note, this equipment is not always available in smaller, regional airports.  So, how does an aspiring jihadist beat all of these airport security systems?  While the article doesn't come right out and mention it, the best place is a part of the body that is not included in routine security scans; the lower intestine.  I'd have to imagine that insertion would be painful!

While I will let my readers look at the step-by-step instructions for themselves, here is a page showing a finished explosive device:

The bomb can be prepared in a household kitchen using readily available materials.  What I found particularly interesting is that, scattered throughout the instructions, we find safety warnings like this:

The authors even supply a list of tips on how to securely store the ingredients required to build the bomb.

Here is a quote from a "Letter to the American People" written by Sheikh Aiman Adhawahiri that appears in this issue of Inspire:

"Why Do We Fight and Resist You?

The answer to the first question is simple. We fight you because you attacked us and continue to do so. You attacked us in Palestine, which has languished under military occupation for more than 80 years. The British, with your blessing and support, gifted it to the Jews, who have inflicted upon it over a half-century of oppression, aggression, criminality, murder, expulsion, demolition and destruction. If the creation and perpetuation of Israel is a crime, then you are the chief perpetrators, as I believe that American support of Israel is not a matter that needs to be demonstrated or proven. Israel is a crime and must be destroyed, and everyone whose hands are steeped in this crime must pay the price, and pay it dearly. The Palestinian blood being spilled in the Holy Land must be avenged, and be certain that the Palestinian people shall not cry nor die alone.

You attacked us in Somalia, support the Russian and Indian aggression against us in Chechnya and Kashmir, and supported the aggression of the Jews against us in Lebanon. Meanwhile, the puppet regimes that rule our countries attack us every day under your supervision, orders, and instruction. These regimes deprive our peoples of the rule of Islamic law by force and fraud, and humiliate us and put us in a huge prison of fear and compulsion. They steal our resources and provide them to you for a paltry price. And they surrendered to the Jews, presented them with most of Palestine and recognized their state on its dismembered remains. The removal of these regimes is an Islamic obligation and a basic step towards the liberation of the Muslim nation, implementation of the Islamic Law, and recovery of Palestine. Thus, our battle with these re- gimes is inseparable from our battle with you. You steal our petrol and other resources at the lowest of costs to you, by the force of your navies and threat of your armies, in what constitutes the greatest robbery in the history of mankind.

You occupy our countries with your military forces and build your bases, desecrating our land and encircling our holy places to protect the security of the Jews and to ensure the continuation of the perpetual plunder of our wealth. You perpetrated an embargo against the Muslims of 'Irāq, where children were felled daily. It is amazing that one and half million 'Irāqi children died due to the embargo without you batting an eyelid, but when 3000 of your people were killed, the entire world stood up and never sat back down." 

Let's close with this two page spread from Inspire Issue 13:

As the recent events in France have shown us, lone wolf terrorists are able to defeat the intelligence apparatus of the world and remain undetected until after they have imposed their particular brand of terror on the world.