Political Calculations
Unexpectedly Intriguing!
March 25, 2019

The big news for the S&P 500 (Index: SPX) in the third week of March 2019 was the inversion of the U.S. Treasury yield curve on Friday, 22 March 2019, where for the first time since 2007, the yield of the 10-Year T-note dropped below the level of the 3-Month T-bill.

Historically, that has been an omen for the onset of recessions in the U.S. economy, and may be again, though at this point, it mainly reflects the spread of what has been a significant deterioration in the global economy, particularly in China and, where new developments were concerned on Friday, 22 March 2019, in the Eurozone. Given that timing, the recent decline of the U.S. 10-Year Treasury could perhaps be interpreted as a flight-to-quality, where U.S. treasuries look to be a relative safe haven for international bond investors.

Regardless, that global development represents a negative headwind for the U.S. economy, which sent stock prices notably lower for the week. After having ridden along the upper edge of our redzone forecast range, we find that the level of the S&P 500 has now dropped well back within it.

Alternative Futures - S&P 500 - 2019Q1 - Standard Model with Annotated Redzone Forecast - Snapshot on 22 Mar 2019

We're looking more at the deterioration in the global economy than we are at the U.S. economy as a leading explantion for Friday's market decline because investors had the opportunity earlier in the week to react to news that the outlook for the U.S. economy would likely be worse than previously expected when the Fed sigificantly lowered its economic forecasts and surprised investors that it would end its quantitative tightening policies by September 2019. Stock market investors had more than ample time to react negatively to that news, and yet, did not change stock prices meaningfully when that news came out on Wednesday, 20 March 2019.

In a world where we've routinely documented major stock price movements beginning within a two-to-four minute window of when investors responded to news they weren't expecting, it was an eternity before Friday's negative reaction to other news came about - in this case, several hours before the market opened, sending stock prices lower from the outset.

That's why we pay attention to the market-moving news headlines, which you'll notice have nothing to do with a man named Mueller!

Monday, 18 March 2019
Tuesday, 19 March 2019
Wednesday, 20 March 2019
Thursday, 21 March 2019
Friday, 22 March 2019

The Big Picture's Barry Ritholtz picks out six positives and negatives from the week's other markets and economy news, where the man named Mueller shows up in both categories. We're at the end of one era and the beginning of another for the kind of useless political noise we'll need to filter out.

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March 22, 2019

It's Friday, it's been a long week, and what better way to go into the weekend than with a bit of fun recently featured at Reddit on the intersection of math and cows!

Cow Math Functions

If you want more, we'll point you toward Vincent Pantaloni's twitter feed, where he compares cow math to dance notation.

Previously on Political Calculations

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March 21, 2019

As expected, with the U.S. economy decelerating, the U.S. Federal Reserve held interest rates steady, indicating that it would maintain its target range of 2.25%-2.50% for the Federal Funds Rate through the rest of 2019.

The risk that the U.S. economy will enter into a national recession at some time in the next twelve months has risen to 6.2%, which is up by nearly two-and-a-half percentage points since our last snapshot of the U.S. recession probability in late-January 2019. The current 6.2% probability works out to be about a 1-in-16 chance that a recession will eventually be found by the National Bureau of Economic Research to have begun at some point between 20 March 2019 and 20 March 2020, according to a model developed by Jonathan Wright of the Federal Reserve Board back in 2006.

The Fed's decision to hold the Federal Funds Rate steady through the rest of 2019 comes as indications that the established global economic slowdown has finally reached the U.S. economy, causing a portion of the Treasury yield curve to invert, with the yields of mid-term Treasuries dropping below the yields of short-term Treasuries, even as the Fed has stopped increasing the Federal Funds Rate.

The Recession Probability Track shows where these two factors have set the probability of a recession starting in the U.S. during the next 12 months.

U.S. Recession Probability Track Starting 2 January 2014, Ending 20 March 2 2019

The Fed also indicated it would begin slowing its policy of reducing its holdings of U.S. government-issued debt securities in May 2019 and stop reducing its quantitative tightening policy altogether in September 2019. Many bond market investors have cited this policy's role in creating a more contractionary monetary environment than would otherwise exist if the Fed had only been increasing the level of the Federal Funds Rate, where the so-called shadow Federal Funds Rate is effectively higher than the nominal Federal Funds Rate, contributing to the slowdown in the U.S. economy.

If you would like to get in on the game of predicting the odds of recession starting in the U.S., please take advantage of our recession odds reckoning tool, which like our Recession Probability Track chart, is also based on Jonathan Wright's 2006 paper describing a recession forecasting method using the level of the effective Federal Funds Rate and the spread between the yields of the 10-Year and 3-Month Constant Maturity U.S. Treasuries.

It's really easy. Plug in the most recent data available, or the data that would apply for a future scenario that you would like to consider, and compare the result you get in our tool with what we've shown in the most recent chart we've presented. The links below present each of the posts in the current series since we restarted it in June 2017.

Previously on Political Calculations


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March 20, 2019

Earlier this year, the U.S. Transportation Security Administration (TSA) made a bit of a splash in the news when the agency claimed to have intercepted a record number of firearms at U.S. airport security checkpoints for the third consecutive year.

We wondered how that compared with previous years, so we mined through historical data reported by the TSA since 2001, going back to the federal government agency's origins in the aftermath of the 11 September 2001 terrorist attacks. The following chart reveals what we discovered.

Number of Firearms Intercepted at U.S. Airport Security Checkpoints, 2002-2018

One of the things that stood out immediately in the historical data is that the TSA appears to have massively inflated its originally reported counts of the number of firearms it claims to have intercepted at U.S. airport security checkpoints in the years of 2005 through 2007, which it subsequently revised substantially downward. Comparatively smaller upward revisions were made for the years of 2008 and 2009.

What we haven't been able to find is any official explanation for why the TSA was so far off on its counts during any of these years, where in the case of 2005, they were off by 1,557, originally claiming to have intercepted 2,217 firearms, where the revised count was reduced to 660.

Meanwhile, the original count for 2006 was 2,075, which was off by 1,254 firearms from the revised count of 821. The original count for 2007 was 1,416, which was subsequently revised downward by 613 to 803.

The agency appears to have used a consistent definition of what constitutes a firearm throughout all these years, so we can rule out any changes in what might have been erroneously counted as an intercepted firearm as an explanation. To date, the TSA has not responded to our inquiry seeking an explanation for the revisions to what appears to be its greatly inflated annual intercepted firearm counts during these years.

We think that the TSA's reported data for more recent years is more reliable, which we can validate through other sources. For example, in 2017, the TSA obtained $1.45 million in civil penalties from gun-carrying travelers in an estimated 4,096 cases, which roughly aligns with the 3,957 firearms the agency reported intercepting in that year. [The difference in number could be attributed to the delayed processing of cases from 2016.]

On a side note, the vast majority of these cases appear to be incidents where the traveler simply forgot they had a firearm in their carry-on luggage. These cases are not considered to be serious violations, where the average civil penalty paid per case processed in 2017 was $354. Travelers may pack firearms in their checked baggage, provided they are packed in a TSA-approved manner and are declared when the bags are checked in for a flight.

Perhaps the easiest and lowest-cost way to reduce the number of intercepted firearms would be for the TSA to post more prominent warnings at airport luggage check-in counters and outside its security checkpoints at major airports, where the agency should also provide a secure, monitored space to allow law-abiding passengers to safely transfer firearms to their checked baggage.

References

U.S. Transportation Security Administration. TSA Year in Review. [2011, 2012, 2013, 2014, 2015, 2016, 2017, 2018]. Accessed 13 February 2019.

U.S. Bureau of Transportation Statistics. Prohibited Items Intercepted at Airport Screening Checkpoints. [Online Database]. Accessed 13 February 2019.

U.S. Bureau of Transportation Statistics. Table 2-16: Prohibited Items Intercepted at Airport Screening Checkpoints. [Online Text]. Accessed 13 February 2019.

U.S. Department of Transportation Office of Airline Information. T-100 Domestic Market Data. [Online Database]. Accessed 13 February 2019.

Kunkle, Frederick and Harden, John D. TSA goes for guns and money. Washington Post. [Online Article]. 18 October 2018.

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March 19, 2019

New home sales in the U.S. continued their negative growth trajectory in January 2019, the data for which was finally published last week after having been delayed by the partial U.S. government shutdown earlier this year.

Since that report came out shortly after we analyzed the relative affordability of new homes sold in the U.S. through the end of December 2018, we thought it might be more worthwhile to look at what that new trend means for U.S. homebuilders (covered by a variety of exchange traded funds, including BBRE, FREL, FRI, FTY, IARAX, ICF, ITB, IYR, JRS, KBWY, NRO, PKB, PPTY, PSR, RFI, RIF, RNP, RORE, RQI, RWR, SCHH, URE, USRT, VNQ, WREI, XHB, and XLRE, to name just a handful) and the nation's GDP, for which new home sales are a significant contributor.

We've presented the trailing twelve month average for the market cap of new home sales in the U.S. from January 1976 through January 2019 in the following chart, where we confirm that new home sales peaked in March 2018 and have since been on a downward trend, falling back to levels last recorded in late 2016.

Trailing Twelve Month Average New Home Sales Market Capitalization, January 1976 through January 2019

The following chart presents the year-over-year growth rate of the trailing twelve month average of the U.S. new home sales market capitalization from January 2000 through January 2019, where we confirm that new home sales in the U.S. have become an economic headwind, showing negative year-over-year growth rates since they last peaked in March 2018.

Year Over Year Growth Rate of Trailing Twelve Month Average New Home Sales Market Capitalization, January 1976 through January 2019

The last time a similar trend existed in the U.S. new home market was shortly after the first housing bubble began deflating in early 2006.

The new residential sales data on which these first two charts are based is limited in that the U.S. Census Bureau only reports national median and average sales prices, while its data for the number of new homes sold is provided nationally and for major regions of the United States. From that data, it appears that the West region of the U.S., which includes Alaska, Arizona, California, Colorado, Hawaii, Idaho, Montana, Nevada, New Mexico, Oregon, Utah, Washington, and Wyoming, is seeing the most significant sales declines, while the Northeast and Midwest are seeing smaller drops, and growing sales in the South region, which have partially offset the declines recorded in the other regions.

Zillow makes its existing homes sales data for many of these states available however, which provides a better idea of the home sales trends are developing at a more local level, where we can assume that new home sales will generally track along with existing home sales. We've done that for the states in the West region for which Zillow provides data in the following chart.

Since March 2018, the total aggregate transaction value of existing home sales (the equivalent of market cap) for the West region states covered by Zillow's data has fallen by 14%, with California contributing 58% of the overall decline. The following list reveals that most but not all West region states covered by Zillow's data showed a decline in this measure since March 2018.

  • Alaska (-8.4%)
  • Arizona (-9.2%)
  • California (-15.7%)
  • Colorado (-21.1%)
  • Idaho (+1.0%)
  • Nevada (+2.0%)
  • Oregon (-15.5%)
  • Utah (-12.1%)
  • Washington (-14.3%)

While California has contributed the largest overall decline to the West region's home sales, it has only seen the second largest percentage decline. Colorado's much smaller real estate market has seen the aggregate value of its home sales drop by over 21% since March 2018.

The sales declines follow 30-year conventional mortgage rates rising above 4.2% in February 2018. They had last been at that level in March 2017, which coincidentally marks the peak for when the last significant percentage decline in existing home sales took place in the West region.

After that peak, mortgage rates went on to fall to 3.81% in September 2017, before rising slowly to climb just above the 4% level in January 2018 and then jumping to reach 4.33% in February 2018. Mortgage rates continued to rise until reaching 4.87% in November 2018, and then began to decline once more after the Federal Reserve abruptly changed its established monetary policy of steady, autopilot interest rate hikes at the end of that month.

We'll review the recent trends for home sales in other regions in the near future.

References

U.S. Census Bureau. Census Regions of the United States. [PDF Document]. Accessed 25 April 2016.

U.S. Census Bureau. New Residential Sales Historical Data. Houses Sold. [Excel Spreadsheet]. Accessed 15 March 2018. 

U.S. Census Bureau. New Residential Sales Historical Data. Median and Average Sale Price of Houses Sold. [Excel Spreadsheet]. Accessed 15 March 2018. 

U.S. Department of Labor Bureau of Labor Statistics. Consumer Price Index, All Urban Consumers - (CPI-U), U.S. City Average, All Items, 1982-84=100 [Online Application]. Accessed 15 March 2018. 

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