From the monthly archives:

January 2015

The investment banking world is intricately involved in influencing the direction of interest rates. Of the many factors that “surprised” many in the investment banking business in 2014 was the continued downward pressure on interest rates.

Essentially, at the start of 2014 the presumption among most in the investment banking universe was that global growth would accelerate, with inflation going along for the ride. That didn’t happen. Instead, global growth weakened and the yield on interest bearing securities weakened as well. This is the conventional wisdom explanation.

Is the “Global Growth Was Weak” explanation right? The “global growth” explanation for declining yields in 2014 is not the only possible explanation. There’s a demographic explanation as well.


The demographic explanation is simply this.  The aging of the workforce is putting downward pressure on interest rates through a demand-side mechanism.  Essentially, with a larger portion of the workforce being made up of older Americans, there’s a greater demand for Treasuries and other interest bearing assets.

Here’s the evidence.

The left side of the graph is the younger population’s (16-34) share of the workforce.  The percentage of the workforce between 16 and 34 has been declining significantly since 1981, peaking in 1981 at an amazing 53 percent.

The figure “recently” bottomed in early 2011 at around 41 percent.


The Yield

What have interest rates done over the same period? The yield on the 10-year note peaked in September 1981 at around 15 percent. Since that 1981 peak, the 10-year yield has precipitously declined, reaching a bottom of about 1.5 percent in July 2012.

What’s Happened Since 2012?

The figure shows that perhaps there is a long-run correlation between the two, but does it explain the 2014 interest rate surprise? Well, here’s a zoom look at the relationship since 2012. Interestingly, the relationship may also have a short-term connection as well (although, there’s certainly a lag).


The figure shows that the share of the working age population 16 to 34 bottomed in mid-2011. The yield bottomed a year later in mid-2012. Fast forward to 2014. The share of the working age population 16 to 34 experienced a slight peak at a little more than 41.3 percent in mid-2014 and has since slightly declined. Likewise, in early 2014 the yield on the 10-year note peaked in early 2014 and has precipitously declined.

Perhaps causal, perhaps not.


Overall, the investment banking world may want to pay more attention to demographics when explaining interest rate movements, and less towards the conventional wisdom of “stronger or weaker than expected economic growth.”

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It has been an interesting year for economic growth. Overall, the world economy grew by about 3.5 percent on a real, price differential adjusted, basis.  The growth of 3.5 percent was relatively decent, although, of course, it was not even.

Perhaps surprisingly, the 2014 GDP growth figures show a widely uneven experience in the amount of contribution to global growth in the year we just finished.


The king of economic growth in 2014 was businesses and consumers in China.  Economic growth in China accounted for more than one-third of all growth worldwide, at about 34 percent.

Interestingly, the 34 percent take occurred even though the Chinese economy slowed by a couple of percentage points from 2013 to 2014.  Economists put the China GDP growth rate for 2014 somewhere in the low 7 percent range, which is still enormous by western standards, but nowhere near the 9 or 10 percent growth experienced a few years back.


Next, take a look at European economic growth. Perhaps surprisingly, growth in the old world was worse than lackluster, accounting for a measly 5.5 percent of global output growth in 2014. The disappointment in Europe, of course, stems largely from incredibly weak smaller economies as well as some of the globe’s largest.

The weakest links of the European economies include Italy (in a recession), France (barely positive growth), and many of the so-called peripheries. Some of the stronger members include the workhorse of the European Union – Germany — as well the Netherlands and parts of Poland.

Overall, European economies are estimated to have experienced 0.8 percent growth in 2014.

United States

Business conditions were on the upside in the United States, with growth likely somewhere around 2.5 percent to 3.0 percent for 2014 as a whole. Although the entire European Union is about the size of the American economy, economic growth in the United States accounts for around one-fourth of all output growth in 2014, an amazing number for an economy with a still quite weak housing and labor market. (This probably speaks more the weak prospects of much of the world than to the strength of the U.S. economy.)


In prior years, growth in Russia has accounted for a strong portion of global economic growth. That was not the case in 2014, with Russian businesses and consumers estimated to have accounted for less than 1 percent of global growth.

The outlook for 2015 is not bright for the Russian economy either, anticipated to decline by around 2 percent.

A Broad Look at 2014

Overall, amazingly, about three-fourths of all economic growth in the world is estimated to have occurred in just five countries, with almost 60 percent estimated to have occurred in China and the United States alone.

gdp.fwLooking Forward to 2015

The 2014 background leads us to ponder the question: how will 2015 turn out?

For the global economy to achieve the same growth rate in 2015 as it did in 2014, we’ll likely have to see a little bit better than 0.8 percent growth out of EU members, as well as growth out of Japan, Brazil, and some of the other bigger players in the globe who are currently in a contraction. Should these conditions materialize, the global economy should be able to shrug off a cooling China economy and a potential recession out of Russia.

What would happen if China re-heated and Russia grew at 4 percent (and the previous conditions held)? We would probably see growth of at least 8 percent, and more than likely 9 or 10 percent.

Perhaps it’s time to get rid of the sanctions on Russia?  (At least if we want greater global growth)


Overall, the investment world saw a somewhat surprising end to 2014, at least when it comes to economic growth as measured by GDP.  The 2015 outlook is, of course, less certain, although indications are that growth might slow somewhat this year.

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