Update on Demographics of Private Pilots

Back in February 2014 - five and a half years ago - I took a look at the demographics of private pilots in the U.S. based on the FAA's database of Civil Airmen Statistics. What I found then was that the number of private pilots had declined 20% over that time period of 13 years, despite 12% population growth over the same time period.

 

There has been another 16% decline over the past six years, so the pace of the decline is actually accelerating.

The growth is in extremely old pilots! The 70+ brackets are expanding. (Harrison Ford landed on the taxiway at KSNA in 2017 when he was 75.) There are also slight increases in the very young 16-20 year old private pilots.

Twenty years ago, age 45-49 was the modal age range for private pilots. Six years ago, it was 55-59. Now it's 60-64.

It's surprising to see the attrition of pilots between those three modes. Since there are 50% more private pilots aged 55-64 than 45-54, it could really be a buyer's market for aircraft.

Comment From Regular Correspondent: High Plateau Drifter Strikes Again

Surfing the zero bound along the permanently high plateau.

Is there no change of death in paradise?
Does ripe fruit never fall?
-Wallace Stevens, Sunday Morning

Since income from financial assets has largely disappeared, with junk bonds yielding just under their historical average annual default rate of about 5%, rising asset prices have attracted investor money for the past 6 years. Stock and bond price appreciation has been the only source of growth in wealth.

What happens when prices stop rising, as they must along a permanently high plateau? The S&P 500 is down slightly from its Dec. 29, 2014 high. That means zero yield for nearly 4 months. What happens if this continues for 9 months or a full year?

If I am Joe Retiree with a modest retirement stash, how long can I allow it to sit in a risky asset like stocks if they aren't appreciating? If it cannot appreciate, you move to a riskless asset like cash. We don't need a spectacular market crash. All we need is zero momentum and zero stock appreciation for 12 months and then a slow grind downward will begin and last for a very long time. We have seen a new S&P high on Feb. 25, 2015 and then two recent attempts that were turned back shy of that mark. Has the process begun before I expected?

Who would have thought that when Herrenstein and Murray were lamenting the dangers of social isolation in The Bell Curve, they could have been talking about the financial markets? For example I take particular delight in all those agitated posters on Zero Hedge who talk about “generational warfare” over social security benefits, as if Gen X and Gen Y do not have parents.

And are those Gen Xers and GenYs going to direct their anger at anything other than the fundamental dishonesty of the welfare state and those who created it when their parents must move in with them or otherwise require their support as their Social Security payments are cut or inflated away? Mainstream economists seem to suffer from the same delusion as most zerohedge posters, concocting this notion of a totally denatured society in which parents and children fail to feel each others' economic pain and fail to react as one against its causes. All generations are going to be hurt when the welfare state implodes and all will be angry. Everyone I know in my own age group has been paying out vast sums to keep the kids out of student loan hell, helping them with a house down payment, helping out with daycare expenses for the new baby, etc. etc. all of which depletes the retirement nest egg. None of the kids are plowing money into the stock market the way my generation did in the 1970's, 1980's and 1990's.

Next, of course we have those ridiculous mainstream articles that claim that retirees will keep their investment assets through old age. My coupon clipping aunt, who died 8 years ago did exactly that as her estate increased almost every year until her death. So did most of her friends and acquaintances in Florida. You could do that back when interest rates on single A credits were at 6 or 7 percent. No more. Similarly, my parents who died 7 years ago lived off their pensions and social security for over 20 years. Pension plans will be bankrupt if the zero bound continues for a few more years. At the zero bound, to claim that retirees are keeping their retirement assets whole is to claim that they are living on social security alone, a sum which will cover not much more than the real estate taxes for those of us living in McMansions. The truth is that prosperous baby boomer retirees are selling assets to maintain their life styles in retirement. Most are selling a small fraction of their appreciated stocks but have been lucky that stock price appreciation has thus far matched or overbalanced their asset sales. The middle class retirees with de-minimis stock portfolios are selling their big houses in the expensive suburbs and moving into smaller exurban houses to raise cash. This trend is evident throughout the flyover states. There is a reason why Warren Buffet has purchased all of the manufactured home builders. I am modestly short TOL and intend to increase that short.

If we have a sustained bear market while interest rates remain at the zero bound, those retirees with large stock holdings are going to freak out, sell and then cut back on their consumption and hope they perish before their non interest bearing cash runs out. In short, asset appreciation has been a substitute for interest and dividend income these past 7 years. When the appreciation levels off the stuff finally hits the fan.

And when the bear market comes, it will not be a short lived violent sell off which quickly recovers back to old highs, but a slow grind downward and then several years of sustained losses, restored dividend yields and interest returns, and little or no price appreciation.

[Past HPD posts/comments: Is Investing Groupthink Caused By The "Urban Versus Rural" Culture Divide?, High Plateau Drifter On the Pharma Bubble, "High Plateau Drifter" Writes On the Federal Reserve's True Priority: Its Own Survival, "Fun on the Permanently High Plateau", and the original "Skeptics To The Ramparts".]

Case Study in Population Collapse: Bulgaria

A correspondent writes in with thoughts about the demographics of Bulgaria,

The reverse of a demographic dividend. This is obviously combined with a major decade-long political and socio-economic collapse starting in 1989.

Bulgaria finished 7th globally (!) in the 1988 Seoul Olympics with 35 medals. It tied for 63rd with 2 at the last games in London (0/1/1 vs 10/12/13 in Seoul). There are 2-3-4 track and field records by Bulgarians still standing from the 1980s (in W hurdles and W high jump). Doping testing is way better now of course.

Wikipedia in Bulgarian has tables from somewhere regarding Bulgarian agriculture over the years, from 1980 to now (kind of). The period was marked by the return of agriland from state-owned large scale farms to mostly urban dwellers who let the land sit fallow (i.e. my great-grandfather's land- small plots given to him as they were war refugees with nothing- is now legally co-owned by about 15 people).

Areas planted with wheat 1980-2009 up 30% (the only thing that is up)
Areas with corn down 52%
Areas with rye down 42%
Areas with beans down 100% (feels true, BG beans hard to find)
Areas with rice down 51%

Tons production 1980 vs. 2005
Apples down 93%
Plums down 87%
Apricots down 69%
Peaches down 85%
Cherries down 68%
Strawberries down 70%

Meat production tonnage down 75%
Milk production down 39%.

I am guessing Eastern Europe had a similar population dynamic (you can also see that the highest living standards, the biggest athletics successes, largest infrastructure project completions all happened around the population peak. I think the final marquee event was Croatia finishing 3rd at the World Cup in 1998. Steaua Bucharest won the 1986 Champions League, as did Crvna Zvezda Belgrade in 1991. In 1992, Serbia was banned from the Euro Championship for the Yugo Wars. Bulgaria just built its first major hydroelectric dam since 1970s and its second bridge over the Danube to Romania (1st and only one was built in 1954).

Wow, Bulgaria had a huge population collapse - from shockingly low birth rates (1.5 TFR) and migration. What's it like there? Is stuff cheap? Or can you still have a real estate bubble while losing 25% of your population - that would be amazing.

There was a RE bubble. Stuff is not cheap.

"Stuff" is priced globally more or less. Because of the production collapse, a lot is imported.

There were no mortgages until the early 00s. Then it was a free for all in the top 3-4 cities (prices are still 2x and more vs 2000). Also in became easier over time to work in the EU even before the 2007 entry so the disconnect bn incomes and housing became bigger (only rents are a true local market; like NYC you have foreigners bidding up, same in BG with emmigrants who don't know better). Also since ppl mistrust banks, they prefer buying property (low carrying costs too). Russians like the Black Sea coast (long a big resort destination for them) and that they can kind-of understand and be understood.

Also with the Communist government, people could not just move, so the population was more spread out (it's still like this in Russia). Now the top 3 cities are larger than ever, and some tertiary cities are down 50% from peak in population.

What are things like in the cities that have shrunk 50%? That's as bad as Detroit but in a shorter time period.

The difference vs Detroit is that you have a substantial % of the housing stock in large multi-family concrete "blocks" so fewer lights at night in a big buildings doesn't make a big difference.

A lot of the old industrial zones look post-apocalyptic. Usually roaming bands of gypsies have stolen everything. First metal for recycling, then doors/windows, then bricks and roof tiles here and there. They also steal the manhole covers from the street so now the utilities usually just use concrete that they break up if they have to get in.

Very uncrowded. People are old (combo state pensions and subsistence farming and support from kids; some move with the kids for the winter to save on fuel). Schools, hospitals and kindergartens get closed. There might be some small EU grant used for renovation in some part of town. Grass grows between the tiles on the sidewalks. If there was a planned and built out city center (ie fountains, sculpture gardens), it's usually very sad looking. Some of the houses where no one lives have paint chipping and uneven roofs (that's often the case with inhabited houses as well).

My copy of Harry Dent's The Demographic Cliff: How to Survive and Prosper During the Great Deflation of 2014-2019 just came. Review forthcoming.

Good Oil Supply/Demand Presentation

Kopits presentation [pdf], among other things, mentions the two schools of thought on oil price forecasts.

Futures Curve: The NYMEX futures curve sees oil prices falling below $90 / barrel by 2020. Underlying this is the implicit assumption that oil will somehow become cheaper or easier to find and produce, in contrast to the experience of the last decade.

'Operators’ Forecast': Absent a convincing oil price model, a number of oil companies are using a 'best guess' approach, which assumes that oil prices will remain around or above $100 / barrel on a Brent basis. This is not scientific, but many, if not most, oil company executives think this seems plausible and sufficiently conservative for investment decisions.

Here's a gem of a chart in the presentation:

Baby boomers are buying all the cars! It's just like the airplanes.

Demographics - Don't Buy an Airplane!

Take a look at the FAA's US Civil Airmen Statistics for 2012, especially the Estimated Active Pilot Certificates Held by Category and Age Group of Holder.

Here's a bar chart of the age distribution of private pilot certificates.

Uh oh - it's an aging population. There are baby boomer and older private pilots, but not as many younger pilots. There are 11% more private pilots 50 and up as there are 49 and below.

You could argue that being a private pilot is just something that 55-59 year olds do because they have time and money - until you compare the statistics for 1999.

Red is 1999 and blue is 2012. One thing you notice immediately is that the number of private pilots has declined 20% over that time period - a 1.8% annual decline rate. And that's despite 12% population growth over the same time period. I hope Textron isn't "banking" on immigration to help out its Cessna subsidiary!

Now there are fewer, older pilots. And the baby boomer, 55-70 year old pilots who own planes, hangars, and so forth aren't going to have enough buyers to sell to.

It's the same mistake they made with their lives, and all their assets and investments, here in very stark relief!

It should be a buyer's market for used aircraft - and a very difficult new sales market - for a long time to come. If you are selling Cessnas, consider selling long term care insurance or group home memberships instead.

Reader Comment on Demographics

"The introduction of a government "safety net" (welfare) in one Western country after another in the 19th Century caused demographic collapse. Everyone thought he could provide for his old age by living off the labor of other people's children. It was a tragedy of the commons."

And now we are seeing the effects. As I mentioned last week, the "increased monetary base causes increased CPI" thesis has sprung a leak, and the inflationists are out of buckets. Clearly there is a different, lurking variable. In fact, an increase in monetary base and a fall in the inflation rate both look like dependent variables of population!

The Avaricious Baby Boomers, a Failure to Reproduce, and Deflation

I said in the comments that,

"I've become very bullish on long bonds after realizing that the natural owners of them (older baby boomers, retirees) have been scared into buying much riskier stuff (SPY index, tech stocks, MLPs) with the mantra about how interest rates are going to go up real soon now."

Commenter Nathan pointed out that,

"It seems like prices in many markets are driven by what present holders of those assets need to rationalize their decisions, not any rational expectations of the future. In particular, baby boomers keep holding their equities and real estate, hoping for greater fools and 'household formation'. It never occurs to them that what they're proposing to younger generations is such a bad deal that many will simply refuse to play along, as they have in Japan."

Which led me to reflect more on Japan and deflation. His comparison to Japan is apt. What happened the U.S. early 2000s bust is that we hit the same worker/retiree inflection point that Japan hit in 1990.

Basically we are on course to follow their trajectory with about a 20 year lag, except that our elites are doing selected things to make the problem worse like spending 5% of GDP on warmongering, and importing hostile illiterates in a misguided attempt to fix the R/W ratio.

Money printing makes no difference. The BOJ has printed oodles of yen since their demographic collapse started - 4x increase in monetary base since 1990.

As Cornelius Vanderbilt would say, "that amounts to nothing." The Nikkei fell 65% anyway during the same time period (75% peak to trough), and - best part - their 10 year bond yield has fallen to 60 bps. Their 30 year yields 1.6%.

Further, the Japanese price index has not changed in 20 years. On a long term view, Japanese CPI increases seem to have stopped right around the time that serious yen printing started.

The "increased monetary base causes increased CPI" thesis has sprung a leak, and the inflationists are out of buckets. Clearly there is a different, lurking variable. In fact, an increase in monetary base and a fall in the inflation rate both look like dependent variables of population!

Japan's Aging Population

Regarding the possibility of a devastating Tokyo earthquake, Vaclav Smil writes,

"[T]he challenge of coping with its consequences would be even greater 20 to 25 years from now, when Japan will be a truly geriatric country. By 2035, Japan will have more people older than 70 years (about 29 million) than people in the prime of their lives, between 20 to 44 years of age. How would such a society cope with the devastation of its capital, largest city, and center of economic, cultural, and educational life?"

Forget about coping with an earthquake - how will they cope with that elderly population?

Lee Kuan Yew Writes About Demographic Collapse in Forbes

"During the 21st century the U.S. could become the slowly aging leader of a rapidly aging world. Singapore’s experience is no different from that of these countries. Our birth rates have been steadily declining. The fertility rate of the Chinese segment of our population is the lowest, 1.08 (2011), with the rate for Indians 1.09 and for Malays 1.64. In other words, the size of each successive generation of Chinese Singaporeans will halve in the next 18 to 20 years."

That is amazing. How will they respond to this? Import a new population? Slowly shutter the country? It is amazingly difficult to encourage populations to have more children, something Singapore is finding out with the slow failure of its financial incentives to have an effect.

Key WSJ Article: "Laffer and Moore: A 50-State Tax Lesson for the President"

Important editorial in today's WSJ with implications about where to live, and own immovable assets:

"Barack Obama is asking Americans to gamble that the U.S. economy can be taxed into prosperity. That's the message of his campaign for the Buffett Rule, which raises income-tax rates on millionaires to a minimum of 30%, and for the expiration of the Bush tax cuts. He wants to raise the highest income tax rate by 20%, double the rate on capital gains, add a new 3.8% tax on all capital earnings, and nearly triple the dividend tax rate."

Also points out that California and Illinois are planning to increase the top marginal rates even more, to 13% and 11% respectively! Meanwhile, "Georgia, Kansas, Missouri and Oklahoma are now racing to become America's 10th state without an income tax."

There's nothing stopping Illinois from entering the same positive-feedback death spiral that killed Detroit, if it makes bad enough decisions. If it does, so much better for the states that are lowering taxes and encouraging productive enterprise. Imagine having other states, besides Alaska, that pay dividends to residents?

Tonight's thought: consider a division of the country into zero income tax states with stingy welfare regimes that productive people flee to, and ultra high income tax (double-digit %) states with crippling regulation that productive people flee from, in the context of Bill Bishop's Big Sort.

Which states' muni bonds do you want to own? Which states do you want to own property in? What if a group of these productive states issued a currency?

New York is a wildcard. New York will do fine so long as it can skim a vig off of the world's investments. However, if the no-tax states were to set up, say, a 100 sq-mile, zero-tax, zero-regulation, caveat emptor enclave for startups, that would be it for foreign ibanks.

Sell your Manhattan apartment at the earliest of serious startups being funded on Kickstarter without VCs, or a major Texas or OKC-based energy company creating an internal ibank that lends and finances new energy companies directly without passing through Wall Street. Imagine if they spent the vig on scientific and feasibility research instead of marketing.