Political Calculations
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August 14, 2018

The third quarter of 2018 is nearly half over, which makes it a good time to see how the number of dividend cuts that have been announced over the previous six weeks compare with the same points of time in the third quarter of 2017 and also the previous two quarters of 2018!

Let's start with the year-over-year comparison of the third quarters of 2017 and 2018 from our two near-real time sources for these dividend declarations.

Cumulative Announced Dividend Cuts in U.S. by Day of Quarter in 2018, Snapshot 2018-06-27

Compared to 2017-Q3, the pace of dividend cuts announced so far in the current quarter of 2018-Q3 is running well behind, which represents an improved situation for publicly traded companies in the U.S.

Likewise, when we compare 2018-Q3 against both 2018-Q1 and 2018-Q2, we find that dividend cut announcements in the third quarter of 2018 is so far keeping pace with what was recorded during the first quarter, but is slower than what we saw during the second quarter. Again, that's good news.

Cumulative Announced Dividend Cuts in U.S. by Day of Quarter, 2018-Q2 vs 2017-Q2, Snapshot 2018-06-27

Through Friday, 10 August 2018, we've recorded the following 17 dividend cut announcements for 2018-Q3.

Tallying up the 2018-Q3 list of dividend cuts to date, over half are firms (9) in the oil and gas industries, six are financial firms or Real Estate Investment Trusts (REITs), one (R.R. Donnelley & Sons) is a provider of business services and one last one (Pentair) may not really count as a true dividend cut, where the company recently span off its electrical products division into a new dividend-paying company called nVent Electric (NYSE: NVT).

[We haven't confirmed that the combined dividend paid out by both companies equals or exceeds Pentair's previous dividend payout, which is why we're still including the dividend cut announcement for Pentair in our tally of dividend cuts.]

All in all, the relative absence of dividend cut announcements is a positive indication for stock market investors.

Data Sources

Our near-real time sampling of dividend cut announcements is obtained from the following two sources. While we seek to capture 100% of such announcements, they often represent just a fraction of the total announcements for the U.S. stock market, which we report on in our Dividends by the Numbers series!

Seeking Alpha Market Currents. Filtered for Dividends. [Online Database]. Accessed 10 August 2018.

Wall Street Journal. Dividend Declarations. [Online Database]. Accessed 10 August 2018.


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August 13, 2018

The second full week of August 2018 was mostly uneventful for the S&P 500 (Index: SPX). From Monday, 6 August 2018 through Thursday, 9 August 2018, the index teased the possibility of topping its previous high record of 2,872.87 that was set back on 26 January 2018.

And then, for lack of a better description, Turkey happened, and the S&P 500 retreated by 0.7% on Friday, 10 August 2018 to close the week at 2,833.28.

Alternative Futures - S&P 500 - 2018Q3 - Standard Model with Redzone Forecast for 2019Q1 Focus between 20180808 and 20180911 - Snapshot on 10 Aug 2018

To be fair, Turkey didn't so much happen as it finally started catching up to what has been happening to the country under the hands of its increasingly dictatorial ruler over the past five years, where the collapse of its currency on Friday, 10 August 2018 sent shock waves through the world's equity and emerging markets. Emerging markets, because of an elevated risk of contagion not seen since Greece's economy imploded earlier in the decade. Equity markets, because of the exposure of financial institutions to that contagion.

That's a short summary of the view from 30,000 feet. Here are the main market-moving headlines we noted for Week 2 of August 2018.

Monday, 6 August 2018
Tuesday, 7 August 2018
Wednesday, 8 August 2018
Thursday, 9 August 2018
Friday, 10 August 2018

Looking at the bigger picture, Barry Ritholtz found that there were more negatives than positives in the week's economy and markets news.

Sharp-eyed readers will note that we've added one of our redzone forecasts to the spaghetti forecast chart we use to anticipate the future for the S&P 500 based on our dividend futures-based model, which we do to account in part for the volatility in the historic stock prices that we use as the base reference points from which we project future stock prices.

Here, we're assuming that investors will continue to split their forward-looking focus between 2018-Q4 and 2019-Q1 in setting stock prices in the period from 8 August 2018 to 11 September 2018, but will tend to more heavily weight that more distant future quarter in setting their expectations. We've also drawn the new redzone forecast more narrowly than we did earlier in the quarter, so that it reflects the historically typical level of volatility that we've seen in stock prices during the past seven decades.

Given current market circumstances, that new redzone forecast may be drawn too narrowly, where we may see the trajectory of the S&P 500 move outside of that range without necessarily confirming a true shift in the forward-looking focus of investors. On the plus side, if that does happen, we'll have a nice visual confirmation that stock prices are experiencing extreme volatility.

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August 10, 2018

When most people see a map of the world, more often than not, it's based on the Mercator projection, which keeps all the lines of latitude horizontal, but warps the distances between the lines of longitude so that the farther from the equator you get, the more distorted the presentation of the features being mapped.

While that's useful for navigation, it does lead to some really big and all too common misconceptions about the true relative size of certain geographical features, like countries or continents. RealLifeLore explains in the following video:

If you want to move countries around to compare next to each other, you can at The True Size Of. Type in your country or countries of interest, then relocate it on the map to see how it really measures up in an overlay or a side-by-side comparison.

And if you want a real challenge, try reconstructing Pangaea!

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August 9, 2018

If you consider at a long enough history of the North American West, you'll find that its story is one that is punctuated by severe, prolonged periods of drought.

By a "long enough history", we're referring to the thousands of years before the existence of the Americas was known to anyone outside of the Americas, where new research indicates that large regions of what is now part of the United States experienced multiple, decades-long droughts.

In the August issue of Physics Today, climate scientists Toby Ault and Scott St. George share a pair of startling research findings. Between roughly 800 and 1500 CE, the American West suffered a succession of decades-long droughts, much longer than anything we’ve endured in modern history. And statistical models suggest that, as the climate warms, such megadroughts are increasingly likely to return.

How can scientists be so sure about the duration and extent of droughts that happened long before the era of instrument-based precipitation records? As Ault and St. George explain, the annual growth rings of ancient trees contain a rich paleoclimatic record of precipitation and soil moisture patterns. The width of a tree ring gives clues as to how well nourished the tree was in a given year. The map shows four western US megadroughts predicted from tree-ring data.

The interesting part of their work came when the authors ran into a roadblock in using General Circulation Model (GCM) simulations to determine how the periods of North American megadroughts that are encoded in the historical record via tree rings, underwater tree stumps, archaeological artifacts and cores taken from sand dunes began, where they turned to mathematical modeling using empirical data to gain more insight into these events.

Unfortunately, the usual tools for unraveling the origins of megadrought have significant limitations. The history of megadrought in the western US represents just one realization of a vastly complex and chaotic system. We don’t have alternative histories to compare it with. GCM simulations afford us the flexibility to test different forcing scenarios, but they have shortcomings. Although some transient climate simulations produced by GCMs can now simulate more than a thousand years of climate evolution, that’s still too short to produce a statistically meaningful sample of megadroughts. Furthermore, many state-of-the-art GCMs still struggle to correctly simulate variability in the tropical Pacific Ocean, whose El Niño–Southern Oscillation exerts a strong influence on western drought.

Recently the two of us and several of our colleagues tried to work around those obstacles by using a statistical model to test whether megadroughts can occur in the western US simply by chance. Our strictly empirical model had only two inputs: soil moisture estimates based on observational records of temperature, precipitation, and other relevant variables; and ocean surface temperatures from instrumental measurements. It did not directly include any information from tree rings or other natural drought indicators.

We “trained” the model using data from the last half of the 20th century, which meant it did not include the influence of big eruptions, solar changes, and other climate forcings from more than a few decades ago. We also removed any trends that were potentially related to global warming. Because the model was simple and computationally efficient, we could produce thousands of simulations, each of which described month-by-month changes in the drought severity index across the American West with about 100 km spatial resolution over a period of 1000 simulated years.

Had our simulations produced no megadroughts, we would have concluded that those events are possible only when Earth’s climate undergoes a lasting and dramatic change. As shown in figure 3, however, our model produced simulated megadroughts that looked very much like the real thing. They were just as long, widespread, and severe as the worst event inferred from tree rings. The finding implies that megadroughts can occur in the western US even in a 20th-century-like climate—it would be merely a matter of time.

Since it overlaps much of the data that influenced Ault and St. George's study, we can get a sense of what the cost of a megadrought might be from the National Oceanic and Atmospheric Administration (NOAA) data on major weather-related economic losses, which lists 25 major drought events within the United States since 1980 where the annual estimated losses exceeded $1 billion. Altogether, these large droughts totaled an accumulated economic loss of $157.3 billion in unadjusted U.S. dollars. The NOAA indicates that the inflation-adjusted loss totaled $241 billion in terms of 2018 U.S. dollars.

During this period, the years from 2011 through 2014 represent an event that would qualify as a megadrought in terms of its scope, spanning numerous western states, and its severity. During this period of time, cumulative economic losses exceeded $56.4 billion, or about $62.4 billion in 2018 dollars, which works out to be a little over a quarter of all the annual billion dollar-plus inflation-adjusted economic losses attributed to the drought conditions that have been recorded since 1980. The following four animated maps depict the evolution of that drought over the years from 2011 through 2014.

Animation: U.S. Drought Monitor, Weekly, 2011 Animation: U.S. Drought Monitor, Weekly, 2012
Animation: U.S. Drought Monitor, Weekly, 2013 Animation: U.S. Drought Monitor, Weekly, 2014

As you might imagine, the agricultural sector of the U.S. economy bore the greatest brunt of these losses, accounting for anywhere from 55% to 75% of all the drought-related economic losses from 2011 through 2014. The following map helps illustrate where those accumulated nominal losses were the greatest during this period, which depending upon the size of the state's economy, could represent several percentage points of its GDP.

This period is also interesting in that farmers and ranchers who were negatively impacted by the widespread drought conditions during this period did not receive any financial relief from the U.S. government to cover their losses in the period from 1 October 2011 through 14 April 2014, because of the expiration of disaster relief provisions in the 2008 Farm Bill, where a new farm bill wasn't signed into law until 7 February 2014 because of budget debates between President Obama and the U.S. Congress in Washington D.C. Consequently, economic losses during these years were unnecessarily elevated over what they might otherwise have been, where the retroactive financial relief provided by the 2014 Farm Bill came too late to avoid the full magnitude of the losses that were incurred.

In that political sense, the United States and numerous other nations around the world still share something in common with the Roman Empire, where the fate of its political leaders often depended upon the amount of rainfall that ancient farms received.

The animated drought maps also highlight another factor that limited the losses in some states, like California in 2014, that also experienced severe drought conditions: irrigation. The 2011-2014 drought-related economic losses were primarily concentrated in states where the irrigation systems supporting agriculture were either underdeveloped or were overwhelmed by the severity of the drought conditions that were experienced. The ability of irrigation systems to mitigate against drought conditions makes them a vital component to the modern economy.

Perhaps irrigation will rank 52nd in Tim Harford's list!

Previously on Political Calculations

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August 8, 2018

When we last considered the state of trade between the U.S. and China, we anticipated that we would see the year over year growth rate of exchange rate-adjusted value of the goods and services transacted between the two nations pick up in June 2018, as international shippers strove to beat the clock for when a new round of tariffs imposed by both nation's on each others goods went into effect in early July 2018.

Sure enough, there was indeed a small pickup in those growth rates, with U.S. exports to China accelerating to a positive value, ahead of a smaller increase in the growth rate of China's exports to the United States.

Year Over Year Growth Rate of Exchange Rate Adjusted U.S.-China Trade in Goods and Services, January 1986 - June 2018

One of the things that we were primed to expect from mainstream news coverage is that shippers were rushing to get U.S. soybeans to China before the tariff clock finished counting down.

A ship carrying U.S. soybeans is steaming toward northern China in a race to beat a 25 percent tariff.

Peak Pegasus is expected to arrive in Dalian on Friday, the same day that China is scheduled to impose tariffs on imports from the U.S., according to shipping data compiled by Bloomberg and a person familiar with the matter. If it arrives as scheduled, it should be able to clear customs before the tariffs are imposed, according to the person, who asked not to be identified because they’re not authorized to speak to the media. Ship-tracking data currently shows it arriving at about 5 p.m. local time.

The Peak Pegasus would likely have been the last cargo ship to try to successfully beat China's tariff clock (update: it didn't make it, where it didn't finally dock until over a month later), but it would have been far from the only ship doing so, where others would already have completed their cargo runs during the month of June 2018. Since we've been tracking what had been a U.S. trade success story with respect to China's importation of U.S. soybeans for years, we were set up to capture the impact that this kind of tariff-avoidance activity would have.

What we found was... nothing that stood out in any meaningful way from the seasonal pattern for U.S. soybean exports to China for every June since 2012.

Estimated Bushels of Soybeans Exported from the United States to China per Month, January 2012 to June 2018

If anything, the level of U.S. soybean exports to China during the year-to-date of 2018 is consistent with what we saw in the first half of 2017.

So we took a step back and considered the state of all of the United States' soybean exports to the world. The following chart shows the trailing twelve month value of those exports from December 2002 through June 2018, where we've broken out the figures for those that have gone to China and those that have gone to the "Rest of the World".

Trailing Twelve Month Value of U.S. Soybean Exports to the World and to China, December 2002 to June 2018

By tracking the trailing twelve month value of U.S. soybean exports, we're able to minimize the impact of annual seasonal variation in the data, which allows us to more easily pick up on changing trends. As you can see in this chart, the level of soybean exports to China really isn't doing anything much out of the ordinary for the last six years, but something unusual is happeneing with U.S. soybean exports to the rest of the world. During the last two months for which we have data, they have picked up considerably.

The next chart visualizes our estimate of the number of bushels of U.S. soybean exports being delivered to the world, excluding China, where we find a remarkable shift in the seasonal pattern.

Estimated Bushels of Soybeans Exported from the United States to the World Excluding China per Month, January 2012 to June 2018

Somebody in the world has decided to step up their importation of mass quantities of U.S. soybeans, and after a little digging in the U.S. Census Bureau's international trade database, we found that Egypt, Mexico, Pakistan, and the Netherlands were the leaders in that remarkable year over year growth for what is typically the slowest time of the year for U.S. soybean exports.

This change is likely being driven by China's decision to buy up as many soybeans as they can from Brazil and from Argentina, which are just past their Southern Hemisphere harvest, where soybean prices in those nations have spiked in response to China's increase in demand, at the expense of U.S. soybeans, whose price had been falling until recently.

That combination of price changes driven by China's new soybean sourcing strategy has shifted the direction of U.S. soybean exports. And is doing so well ahead of when U.S. soybean farmers will begin harvesting their crops in September, which is traditionally when U.S. soybean exports to China begin rising to their annual peak values through the end of the year.

All in all, a pretty remarkable and surprising shift in U.S. soybean exports!

References

Board of Governors of the Federal Reserve System. China / U.S. Foreign Exchange Rate. G.5 Foreign Exchange Rates. Accessed 3 August 2018.

U.S. Census Bureau. Trade in Goods with China. Accessed 3 August 2018.

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Welcome to the blogosphere's toolchest! Here, unlike other blogs dedicated to analyzing current events, we create easy-to-use, simple tools to do the math related to them so you can get in on the action too! If you would like to learn more about these tools, or if you would like to contribute ideas to develop for this blog, please e-mail us at:

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