Suite101.com Market Timing Model

Top 18. May 18, 2000 10:47 AM

» Demogremlin - Shall we resurrect this discussion?

Glen,

I've seen a lot of potential indicators thrown around here. Which ones are you thinking of using for the model?

Are you trying to reconstruct Brinker's model, and go from there? Or are you trying to start from scratch?

What do you think of demographic considerations? I'm not a huge Harry Dent fan, but I do think demographic considerations played a large part in the high unemployment/high inflation environment in the late 70s/early 80s. It may have something to do with the productivity gains in the 90s too.

Dent puts a lot of stock in what he calls the "spending wave", which is basically reducible for him to the number of 46-47 year olds in the country.

Households spend more when headed by people of that age, than households headed by people of any other age.

I'm suspicious of this. I can provide my reasons later if anyone is interested.

I'm more interested in trying to predict the size of the labor pool based on demographic considerations.

I got the fed's civilian labor pool statistics from the late 40s to present. I charted the absolute increase from year to year. (I'll post that somewhere if anyone is interested) By the way, I've found www.economagic.com to be a great site for charts and data. Perhaps there are better ones, but that's what I've been using.

I also found a graph of the number of live births annually from 1910 to present. I did my best to put the data in a table (reading it off the chart) and made a chart of my own.

I also made a number of charts to try to get a proxy for the growth of the labor pool. As a first attempt, I charted the number of 22 year olds minus the number of 62 year olds.

I figured people tend to enter the labor force full time on average at 22, and leave it, on average at 62. I kind of pulled these numbers out of the air, but they seemed a reasonable first stab.

I found that the chart looked something like the official labor pool statistics in the past, but not enough so for comfort.

So I fiddled with the ages a bit. I went as low as 16 years for entering the market, and as late as 65 for leaving it. I haven't tried every combination, but nothing seems to fit as well as I'd like. Although some are better than others, and may actually be of some value.

My thought is that if I can find a combination that matches the past data pretty well, it might match the future data also. That's what we want isn't it.

well, I have many questions. Perhaps I should supplement my data with immigration data, Government sector employment figures, and other things I haven't thought of yet. (maybe death rates for people between 22 and 62) Perhaps that would make a better model for predicting future labor pool numbers.

One thing that is striking. No matter what numbers I use: Sometime between 2008 and 2015 there is going to be a shrinking of the domestic labor pool, due to baby boom retirements outpacing the number of people entering the market.

Here's the final question. What would this mean. What would be the results of a contraction of the labor pool. It seems like it would have significant ramifications. GDP would have to suffer, wouldn't it -- unless, of course, we could find enough foreign workers to fill in.

Would such an economic contraction be inflationary or deflationary? What would this depend on?

Just some thoughts.

Panspar

-- posted by Demogremlin

Top 19. May 18, 2000 12:23 PM

» Kirk - Great thoughts Panspar

I'll add my $0.02 worth.

We have seen unemployment go from 9% to 4% in the last decade. How much of that was Clinton and his goal to end welfare with "Welfare to work" that was a first for Democrats to support? What happens to the efficiency of this labor pool as it learns on the job and then have offspring born with a better work ethic than their parents were taught? I would think this would show in our productivity but I wager economists don't measure it.

Are we just starting to see the results of dollars that were spent on defense that are now put to more productive uses? IF society continues to have few wars, will this shift the productivity data somehow?

It seems we are at an inflection point on education and there is sufficient concern AND resources to do something positive about it. THIS has to help productivity 10 to 20 years from now when these children enter the labor pool.

We used to joke that many now come out of schools only knowing how to sue for sexual harrasment but don't have the math skills to calculate how much would be paid to their lawyers for the contingency fee! 8)

-- posted by Kirk

Top 20. May 18, 2000 5:16 PM

» Rande - Pollyana checking in with good news on the labor front.

Pollyana checking in with good news on the labor front. Incredibly, Congress appears to be ahead of the curve for once. Eliminating the punitive rules on reduced Social Security benefits for older workers and increasing the number of alien work visas (as Kudlow and others have suggested) are good first steps with respect to the shrinking labor pool. Supposedly, the pool of available workers has been a big concern of Greenspan's. But, is it unreasonable to suppose that a ton of Baby Boomers will continue to work past the traditional retirement age (not unreasonable at all if the studies that show the majority have failed to adequately save for retirement are true). And, as Kirk has pointed out so often, is there not a seemingly inexhaustible supply of foreign workers who are literally dying to enter our borders in search of gainfull employment?

-- posted by Rande

Top 21. May 18, 2000 7:12 PM

» Demogremlin - Baby boom retirements

OK, so the best case scenario is that foreign workers pick up the slack when the boomers retire. It's important to keep in mind that this could happen. In that case, those who expected a major contraction and bought a bunch of 6% 20 year zeros to prepare will probably not do as well as those who stay invested in, say, stocks.

But what if the shrinking domestic labor pool does lead to an economic contraction? Two further questions to repeat:

1) Is this worth taking into consideration for long term forecasting and investment planning?

2) In that scenario, what do people think? would the contraction be inflationary or deflationary? It seems that most contractions tend to be deflationary with higher unemployment. But could the shortage of workers lead to inflationary pressures instead? I really don't know what to think. It seems that it could go either way depending on other factors. What would those other factors be?

Panspar

-- posted by Demogremlin

http://www.economagic.com

Top 22. May 18, 2000 7:18 PM

» JenL_2 - Demo -

Thanks for resurrecting this discussion. Interesting demographic information. As for future labor shortages I agree with Rande that the U.S. will just loosen up on immigration restrictions as the need arises.

Here's the website you recommended as a clickable link:

.....Jen

-- posted by JenL_2

Top 23. May 20, 2000 10:42 AM

» Demogremlin - Brinker's Model--Economy

Let me run through the indicators on Glen's site to see if I can understand what we are seeking.

Inflation:
--------------
What are we after here?
It seems to me that the change in inflation rate is more important than the absolute number.

If we had a way to lock in a 10% inflation rate (quite high by historical standards), so that this became a stable expectation for the future, then we could expect earnings to grow 10% faster than with no inflation, so a p/e multiple contraction might not happen.

But if the inflation rates are changing, this adds uncertainty. So it seems that what we want to pay particular attention to is the rate of change in inflation. Rising inflation is bad, disinflation is good. This makes sense, because people psychologically expect trends to continue.

Monetary Aggregates:
-------------------
What is the significance of these? Are these used primarily to forecast future inflation trends? Or do they have some other function?

Debt
------
How does this figure into the model?

Productivity
--------------
This is important in relation to GDP growth and inflation. We can tolerate higher growth with higher productivity. It also relates to unemployment. Low unemployment normally leads to wage hike pressures. If the wage hikes are offset by increases in productivity, then inflation will not be a problem. Otherwise, it will.

Unemployment
------------
High unemployment means lower GDP output. This means lower earnings. However, wage pressures are lower (or negative), so disinflation should result.

Also, as noted above, with low unemployment, there are inflationary pressures.

SHOULD WE ADD GDP GROWTH?
--------------------------
It seems we need the GDP numbers to fully appreciate some of the others, as noted above.

==============================================
Do I understand the relevance of these factors adequately? If not, please explain further.

QUESTIONS:
1. How much weight should be given to economic considerations in the model? Should we start with 25% and see what that gets us?

2. It seems that the two biggest factors for market considerations that come out of the economic indicators is INFLATION expectation, and EARNINGS expectation. Sould we try to make these indicators give us predictions about these two things. Or should it include other things as well?

3. We need to pick a time frame. Our model might be bullish for 3 months, but bearish for 12 months. What is the time frame our model will be most effective at predicting?

4. Do we come up with a "most likely inflation expectation number" and a "most likely earnings expectation number" and have a way of assigning a number between -1 and +1 to these numbers?

Some thoughts.

I will probably post a similar message with respect to monetary policy, valuation, and sentiment.

Panspar

-- posted by Demogremlin

Which Way Is The Market Headed? -
Strategies for weak markets and for making the most out of market recoveries

Top 24. May 26, 2000 7:57 PM

» JenL_2 - Which Way is the Market Headed?

I just started receiving another 2 weeks free subscription to Investor's Business Daily. There's a great article on page 1 today: Judging the Market? Focus on the Source. Tried to find the article on the internet, but looks like IBD doesn't put the current edition online anymore. Instead at the IBD website....

http://www.investor.com

...there is this excellent series of articles:

These articles use a mixture of TA and various market indicators to gauge market direction. Obviously since these are IBD articles they refer a lot to charts and indicators that are printed daily in Investors Business Daily.

Realizing that it's not possible to consistantly time the market correctly, in your opinion are there some market indicators mentioned in these articles that we should be watching?....Jen

-- posted by JenL_2