Political Calculations
Unexpectedly Intriguing!
May 25, 2016

Not long ago, we came across a data source that provided over 150 years worth of nominal price data for wheat crops grown in the U.S., which we recently visualized.

But more than that, it also provided some very remarkable data on the production of wheat over the 15 decades from 1866 through 2015. Data that captures the story of great advances that have been made in U.S. agriculture over the last 60 years, which is what we'll explore and visualize today!

First up, let's consider the amount of wheat that is harvested annually. The following chart counts up the thousands of bushels of wheat that were harvested from 1866 through 2015 in just one state, which has gone from nearly 1,292,000 bushels in 1866 to figures that have consistently ranged between 200 and 388 times that figure over the last 40 years.

Wheat Production [Thousands of Bushels], 1866-2015

At the same time, over the period since 1909 when data for the number of acres planted is available, we see that the gap between potential and actual wheat production has narrowed. The next chart shows what we'll call the harvest efficiency of the acreage of wheat planted each year, which we calculate as the percentage of acres harvested to acres planted.

Efficiency of Wheat Crop [Acres Harvested per Acre Planted], 1909-2015

In this chart, we see that U.S. farmers have become better over time in avoiding major crop losses, often as a consequence of severe droughts, where the trend is clearly one of great improvement. At the same time, the most recent years show that the amount of volatility in annual harvest efficiency has become greatly reduced during just the past 20 years, which is especially remarkable given that 2012 saw the most severe drought conditions across much of the wheat producing section of the United States since the 1950s.

But here's the real story that's hidden in this data: the rapid rise of the yield of wheat per acre. From 1866 through the mid-1950s, the typical yield for harvested wheat ranged between 9 and 20 bushels per acre. After 1955 however, it has risen to where it now ranges between 24 and 48 bushels per acre.

Yield of Wheat Crop [Bushels per Acre Harvested], 1866-2015

There is one big factor behind this change, and a lot of other factors that have combined to produce this result. The big factor is the development of infrastructure for irrigating crops, which are estimated to have increased the yield of wheat by 18 bushels per acre in the years since 1955. By minimizing losses to periodic drought conditions, the expansion of irrigation technology to improve wheat crop yields largely accounts for the reduction of volatility in annual harvest efficiency.

At the same time, an ongoing series of incremental improvements in other agricultural technologies, including seed genetics, seed treatments, fertilization methods and improving harvesting methods, have all combined to incrementally increase the yields of wheat harvested over time.

Those rising yields have also produced another benefit. Increasing yields and efficiencies has made it possible for wheat farmers to reduce the amount of acreage they plant.

Wheat Production [Thousands of Acres Planted], 1909-2015

In 2015, farmers planted 9,200,000 acres of wheat, just slightly more than the 9,112,000 acres of wheat that were planted over a century earlier in 1914. In 1914, wheat farmers harvested 172,750,000 bushels of wheat, which for that year, represented a record bumper crop. In 2015 however, wheat farmers harvested 321,900,000 bushels of wheat - over 1.8 times as much - in a year where the amount of wheat harvested was well below the average of the last 40 years.

That increase in productivity has allowed land that had been tied up in farming wheat to be used to grow other crops or to be used for entirely different purposes.

And it's not just wheat. Many other crops have seen even greater improvements in their yields and harvest efficiency.

These changes have also all happened as dramatically fewer Americans are employed in agriculture. In 1900, an estimated 41% of the entire American workforce were employed on farms. A century later, that figure had fallen below 2%. As of December 2015, some 1.5% of all working Americans are employed in agriculture.

Data Source

U.S. Department of Agriculture. National Agricultural Statistics Service. Northern Plains Regional Field Office. Kansas Wheat History. [PDF Document]. Last Updated: October 2015. Accessed 7 May 2016.

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May 24, 2016

On Monday, 16 May 2016, the U.S. Treasury updated its accounting of the national origins of the major foreign holders of debt issued by the U.S. government through the end of March 2016, the halfway point of the federal government's fiscal year. With that new information, we can update our visualization of all the money that the U.S. federal government has borrowed and currently owes through the end of March 2016.

Spring 2016: To Whom Does the U.S. Government Owe Money?

In the chart above, we've grouped Belgium and Ireland together, next to the pairing of Mainland China and Hong Kong, because major banks in these nations have been increasingly acting as intermediaries for China's total holdings of U.S. government-issued debt securities. Along with a number of banks in the United Kingdom, which have served a similar role in recent years, we believe that a good portion of China's ownership of U.S. Treasuries is being incorrectly attributed to these nations.

Meanwhile, Brazil's holdings have fallen over the past year, as falling oil prices and falling exports to China have taken a toll on the South American nation's economy. Back in 2011, we had noted the rise of Brazil's holdings of U.S. Treasuries were an indication that it was a rising world power. Those holdings peaked in 2014 and since then, Brazil's status has faded along with its economic and now political challenges.

But perhaps the biggest news in the U.S. Treasury's updated data is that discontinued its previous grouping of "oil exporters" as a single category, instead presenting the U.S. Treasury holdings of Saudi Arabia, United Arab Emirates, Kuwait, and others individually for the first time since it began reporting the data in 1974. Of these nations, Saudi Arabia had the largest holdings at $117 billion, accounting for 0.6% of the total public debt outstanding for the U.S. government.

Much of those holdings were accumulated in the time from when oil prices began surging in 2004 until global oil prices began falling dramatically in mid-2014.

Like China however, many of Saudi Arabia's actual holdings of U.S. government-issued debt securities are likely being attributed to other nations. Since Saudi Arabia recently threatened to sell off $750 billion worth of U.S. Treasuries and other assets, which suggests the nation maintains most of these assets in non-direct accounts based in other nations.

Data Sources

Federal Reserve Statistical Release. H.4.1. Factors Affecting Reserve Balances. Release Date: 2 April 2015. [Online Document]. Accessed 15 May 2015.

U.S. Treasury. Major Foreign Holders of Treasury Securities. Accessed 15 May 2015.

U.S. Treasury. Monthly Treasury Statement of Receipts and Outlays of the United States Government for Fiscal Year 2015 Through March 30, 2015. [PDF Document].

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May 23, 2016

Quite a lot has happened since we last commented on the S&P 500 and the news events that influenced it during the first part of the third week of May 2016. In short, the following major events happened:

  • More officials at the U.S. Federal Reserve indicated that they were likely to hike interest rates at their upcoming June 2016 meeting.
  • The minutes of the Fed's April meeting released during the week confirmed that the Fed is actively considering that move.
  • The Fed appears to have quietly launched a new round of quantitative easing (QE).

Following what happened over the preceding several days, U.S. investors appear to have focused on 2016-Q3 in setting the level of the S&P 500. Our alternative futures chart shows how the rest of Week 3 of May 2016 played out for the S&P 500.

Alternative Futures - S&P 500 - 2016Q2 - Standard Model - Snapshot on 2016-05-20

Here are the more significant headlines from the rest of Week 3 of May 2016 that caught our attention:

Wednesday, 18 May 2016
Thursday, 19 May 2016
Friday, 12 May 2016

The Fed's net increase in its holdings of Mortgage Backed Securities (MBS) is reminiscent of the actions it took in 2012, when it became clear that the U.S. economy was beginning to slide toward recession during the summer of 2012, where the Fed's first action in QE 3.0 was to begin making large MBS purchases to further stimulate the nation's real estate market.

The Fed's intervention at that time succeeded in preventing the U.S. economy from falling into recession before the November 2012 elections, but following the elections, the Fed was forced to expand its QE efforts to offset the negative impact from the U.S. government's fiscal policies, where large tax increases desired by President Obama on all working Americans were set to take effect on 1 January 2013.

As we saw in 2012, the Fed's new MBS purchases should have little effect, if any, on U.S. stock prices. They are really a way to partially offset the full impact of its next planned interest rate hike, which they will now likely announce on 15 June 2016, but which will be implemented in 2016-Q3, which is why investors are focusing on this future quarter.

On a final note, we think that there is a pricing anomaly in the CBOE's implied forward dividends contract for S&P 500 in the second quarter of 2016 (CBOE: DVJN), which suddenly jumped in value from 113.00 to 116.40 on Wednesday, 18 May 2016, which has been sustained over the last several trading days. (You can estimate the amount of ordinary dividends that will be paid out for the S&P 500 during 2016-Q2 by dividing the value of these contracts by 10).

Since that large increase hasn't also shown up in the implied forward dividends for 2016-Q3 (CBOE: DVST), 2016-Q4 (CBOE: DVDE) and 2017-Q1 (CBOE: DVMR), which would confirm that the change is the result of a sustained improvement in the expectations for future dividend payments, it instead suggests that something unusual is going with the DVJN contract.

That is something that is possible because these contracts are periodically very thinly traded, which allows such pricing anomalies to occasionally develop. It will be interesting to see how long that situation might persist.

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May 20, 2016

Every three months, we take a snapshot of the expectations for future earnings in the S&P 500 at approximately the midpoint of the current quarter, right about the time that earnings season has ended for the U.S. stock market.

Today, we'll confirm for the sixth time in a row that the earnings recession that began in the fourth quarter of 2014 has continued to deepen.

Forecasts for S&P 500 Trailing Twelve Month Earnings per Share, 2010-2017, Snapshot on 19 May 2016

In the chart above, we confirm that the trailing twelve month earnings per share for the S&P 500 has continued to fall from the levels that Standard and Poor had projected they would be back in February 2016. And November 2015. And for that matter, what they had forecast they would be back in August 2015, May 2015, February 2015 and in November 2014.

According to S&P's projections, the S&P 500's trailing year earnings per share will not return to the level they were in August 2014 until the fourth quarter of 2016, which is to say that S&P is anticipating an extraordinarily robust earnings recovery.

While that's not impossible, some back of the envelope math suggests that the most likely path that would enable such a recovery to occur for the S&P 500's earnings situation would involve the rapid escalation of oil prices back above the $100 per barrel mark, which would enable the earnings recovery of the U.S.' distressed oil production industry. That would mean that oil prices would have to more than double from the level they are at this writing.

Alternatively, that result could also be obtained if the relative value of the U.S. dollar were to plunge by 50% or more.

Both scenarios however are very unlikely. Which is a good thing because if either thing happened, it would be very bad news for the U.S. economy.

Data Source

Silverblatt, Howard. S&P Indices Market Attribute Series. S&P 500 Monthly Performance Data. S&P 500 Earnings and Estimate Report. [Excel Spreadsheet]. Updated 12 May 2016. Accessed 19 May 2016.

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May 19, 2016

Last year, on 20 August 2015, a four year long period of order in the U.S. stock market came to a crashing end.

S&P 500 vs Trailing Year Dividends per Share, 30 June 2011 to 20 August 2015, with Period of Order lasting beginning on 4 August 2011 and ending on 20 August 2015

What has happened since then?

After the initial shock, which ended on 26 August 2015, order briefly returned to the S&P 500, but only through the end of 2015.

S&P 500 vs Trailing Year Dividends per Share, 30 June 2015 to 18 May 2016, with Period of Order lasting beginning on 26 August 2015 and ending on 31 December 2015

As yet, not enough time has passed to determine whether order has returned to the U.S. stock market following the disruptive noise event of January-February 2016. But if you're the type who needs something to worry about, compare the path that stock prices followed in the period from 30 June 2015 through 17 August 2015 to the path that stock prices have taken from 31 December 2015 through 18 May 2016.

So what do you think comes next?

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