Political Calculations
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December 11, 2018

In recent years, U.S. exports have typically peaked in the months of October through December because these months coincide with the harvesting of the U.S. soybean crop, which has become the nation's single largest export product to China.

But not in 2018, because of the retaliatory tariffs that China's government has placed upon U.S.-grown soybeans as part of its trade war strategy with the U.S., which have led China's soybean buyers to effectively boycott the 2018 crop. The following chart shows the dramatic plunge in the year-over-year rate of growth in the value of U.S. exports to China that is a direct consequence of China's trade war strategy.

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

In the absence of the trade war, such a plunge into negative growth territory would be a clear indication that China's economy is experiencing deep recessionary conditions. China's economy is indeed decelerating and appears to be facing a growing threat of deflation that would be consistent with some degree of contraction occurring within the country's economy, but we believe the negative impact indicated in the chart is being exaggerated by the impact of China's tariffs on U.S. goods.

Perhaps a better question to ask is why don't we see a similar phenomenon develop in response to the tariffs imposed by the U.S. on the goods that China exports to the United States? The chart above confirms that the rate of growth of value of goods that the U.S. is importing from China is positive, which suggests that U.S. tariffs are having very little impact on U.S. demand for goods produced in China.

The answer to that question has a great deal to do with the strategy the U.S. has pursued in selectively imposing tariffs on Chinese goods. Benedikt Zoller-Rydzek and Gabriel Felbermayr of the European Netork for Economic and Fiscal Policy Research (econPOL) have analyzed the U.S. government's tariff strategy and found a strong explanation for the apparent lack of impact (emphasis ours):

On September 24th 2018, the United States introduced import tariffs on a wide range of Chinese products. The tariffs will affect US imports from China with a value that exceeds USD 250 billion - around 50% of all imports. In this analysis we show that, contrary to public opinion, the greatest share of the tariff burden falls not on American consumers or firms, but on Chinese exporters. We calibrate a simple economic model and find that a 25 percentage point increase in tariffs raises US consumer prices on all affected Chinese products by only 4.5% on average, while the producer price of Chinese firms declines by 20.5%. The US government has strategically levied import duties on goods with high import elasticities, which transfers a great share of the tariff burden on to Chinese exporters.

Altogether, these estimates suggest that Chinese firms are paying for about 75% of the additional cost that the U.S. government's tariffs have added on top of the cost of Chinese produced goods, insulating U.S. consumers from paying the full cost of the U.S.-imposed tariffs. That additional cost is then contributing to the increased level of economic distress that has gained ground in China's economy throughout much of 2018.

That is why the 90-day truce on new tariffs negotiated between China Premier Xi and U.S. President Trump, shaky though it may be, is still a big deal. Since the deal, China's government has indicated it would allow the following steps to be taken:

We'll have more to say on that last story in the very near future, where we think that the story is being driven in part by the backfiring of one aspect of the Chinese government's trade war strategy.

We'll close with an update to our chart showing the overall impact of the U.S.-China trade war to date to the overall level of goods and services traded between the two nations.

Combined Value of U.S. Exports to China and Imports from China, January 2008 - October 2018

Through October 2018, the gap between the pre-trade war trend and the trailing twelve month average of the value of goods exchanged between the U.S. and China has widened to $1.6 billion, which has primarily been driven by China's effective boycott of U.S.-grown soybeans.

References

Board of Governors of the Federal Reserve System. China / U.S. Foreign Exchange Rate. G.5 Foreign Exchange Rates. Accessed 7 December 2018.

U.S. Census Bureau. Trade in Goods with China. Accessed 7 December 2018.

U.S. Census Bureau. U.S. Trade Online. Accessed 7 December 2018.  

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December 10, 2018

There was one major economic event that occurred last week and it shifted the forward-looking focus of investors, sending stock prices sharply downward as a result.

That event was the partial inversion of the U.S. Treasury yield curve that took place on Tuesday, 4 December 2018. A yield curve inversion occurs whenever the yield, or interest rate, of a longer term bond or note issued by the U.S. Treasury Department falls below the level of a shorter term bond or note. This kind of event is often associated with an increased likelihood of an economic recession in the future, when businesses can expect to experience falling levels of earnings and cash flow, which is why stock prices would fall in the current day even though any economic distress is only in the potential outlook for the future and is not as yet guaranteed.

For a quick recent history of the Treasury yield curve, check out TheFirsh's two-minute long animated chart of the curve's history since 1990. Recessions followed within 1-2 years of significant yield curve inversions that occurred in 1989-90, 2000 and 2006-07 (the animation ends at the end of November 2018, so it doesn't capture the latest inversion).

Yield Curve's 28 years in 2 minutes [OC] from r/dataisbeautiful

On Tuesday, 4 December 2018, the yield of the 5-year Treasury dropped to be lower than the yields of the 2-year and 3-year notes. Although the amount by which the 5-year note dropped below the 2 and 3 year notes is small, the negative implications of the event were amplified thanks to the highly influential New York Fed branch president John Williams, whose unfortunately timed and tone-deaf hawkish comments promising additional short-term interest rate hikes well into 2019 prompted investors to shift a significant portion of their attention beyond 2019-Q1 to the more distant future quarters of 2019-Q3 and 2019-Q4, where the expectation is already well established that these quarters will experience a significant deceleration in the growth rate of dividends.

At a time when investors are sensitive to the potential for economic distress ahead, a Fed branch president announcing that they think the Fed should keep hiking interest rates well into 2019 is the equivalent of pouring gasoline onto a small campfire in a dried-out, under-maintained, underbrush-thick section of California's state forests. It's a stupid own-goal, on par with one of former Fed Chair Ben Bernanke's bigger mistakes.

That was all it took to send stock prices sharply lower through the end of the first week of December 2018. The S&P 500 broke out of the final portion of our red-zone forecast, where we had assumed that investors would largely remain focused on 2019-Q1 through 7 December 2018, where we find that investors have instead shifted a little over 50% of their forward-looking focus toward 2019-Q3 or 2019-Q4 (there's not much difference in where the level of the S&P 500 would be for investors focusing on either future quarter). It's early, but it's looking like we're seeing the fifth Lévy flight event of 2018.

Alternative Futures - S&P 500 - 2018Q4 - Standard Model with Redzone forecast assuming investors focusing on 2019Q1 from 7 November 2018 through 7 December 2018 - Snapshot on 8 Dec 2018

That explains how and why the level of the S&P 500 got to where it is as of the end of Week 1 of December 2018. We've also come to the end of our redzone forecast period, where out of 20 days where the market was open (markets were closed on Wednesday, 5 December 2018 to mark the passing of former U.S. President George H.W. Bush), the S&P 500 closed within our forecast range on 10 of those days.

While our redzone forecast turned out to be wrong for 50% of the actual observations, the lowest level of accuracy we've ever achieved over a forecast period, it proved to be very useful in detecting when investors shifted their forward-looking attention away from 2019-Q1 toward other more distant future quarters during the past month. We can also confirm that stock prices are not following the echo of October 2018's market volatility.

While the Treasury yield curve inversion was the most significant, market-moving event of the first week of December 2018, other stuff happened too, where the stuff we think is worth noting is listed below....

Monday, 3 December 2018
Tuesday, 4 December 2018
Thursday, 6 December 2018
Friday, 7 December 2018

Meanwhile, Barry Ritholtz reviewed the week's major economy and market-related news and divided it up into its positives and negatives. Unfortunately, he missed the developing yield curve inversion as the week's biggest market-driving negative, but he picked up on other factors that we didn't cover. This week is a good example of why it's beneficial to take in a range of analytical viewpoints!

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December 7, 2018

Biomimicry is an approach to developing new inventions and technologies that is inspired by the natural "solutions" to practical problems that plants and animals have evolved over eons, where human designers seek to replicate those solutions.

Via Core77, we learned of a Kickstarter project by London-based design studio Animaro to develop a kinetic clock concept that is directly inspired by how some flowers open and close each day as part of their daily circadian rhythms. The following video shows Animaro's Solstice kinetic clock in action:

At this writing, the project has five days left to go, but it has already cleared its minimum funding threshold and will be made, with deliveries estimated to begin in June 2019.

We'll close with Loren Lewis' A day in the life of a Morning Glory, which shows off some of the natural inspiration for the Solstice kinetic clock.

Previously on Political Calculations

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December 6, 2018

According to Sentier Research, median household income in the United States increased to $63,220 in October 2018, a 0.3% increase over the firm's estimate of $63,007 for September 2018. The following chart shows the nominal (red) and inflation-adjusted (blue) trends for median household income in the United States from January 2000 through October 2018. The inflation-adjusted figures are presented in terms of constant October 2018 U.S. dollars.

Median Household Income in the 21st Century: Nominal and Real Estimates, January 2000 to October 2018

The single biggest takeaway from this chart is the growth streak that median household income has achieved during 2018. Since nominal median household income last saw a downtick in December 2017, in both nominal and inflation-adjusted terms, the income earned by the typical American household at the middle of the distribution of income in the United States has now set new record high values in each of the last ten months.

At the same time, the year-over-year growth rate of median household income in the United States has started setting record high values as well, in nominal if not inflation-adjusted terms. The next chart shows this data from January 2001 through October 2018.

Median Household Income in the 21st Century: Year Over Year Growth Rate, January 2001 to October 2018

At a year-over-year growth rate of 6.3%, October 2018 has recorded the fastest year-over-year growth for nominal median household income over Sentier Research's entire data series, which only extends back to January 2000 for their signature monthly household income data.

Analyst's Notes

Don't you hate running into a limit like that? What if we could telescope the estimates for monthly median household income to go further back in time?

That's something we can do, where we simply need to apply the alternative method we developed for estimating monthly median household income in the U.S. that we developed to fill the gap for this data when Sentier Research suspended their income data reporting in the months between May 2017 and March 2018.

The following chart illustrates the model we can use to estimate median household income in the era before Sentier Research's coverage begins, where the relationship provided by the data from January 2000 through March 2015 (shown in orange), is what we would test out with the monthly data that precedes Sentier Research's estimates.

Trailing Year Average Annualized Wage and Salary Income per Capita versus Median Household Income, January 2000 to October 2018

But there's a problem. We don't have any monthly median household income estimates before January 2000 to check our results against to assess the accuracy of our estimates. Instead, we will have to rely upon the annual estimates of median household income that the U.S. Census Bureau has been reporting since 1967.

In using that data, we would expect to have a larger error in our estimates than we have had with Sentier Research's monthly estimates, simply because we're estimating income at intermediate points of time from when the Census Bureau samples its annual data. But we reasoned that so long as we can produce estimates using our alternate method that fit within the error range our estimates have with the annual data over the period where we can cross-check it with Sentier Research's estimates, we should be able to produce reasonably accurate results.

So that's what we did. We found the results for our alternate method, which is based on actual data from January 2000 through March 2015, can reliably estimate monthly median household income all the way back to January 1986.

Median Household Income, Nominal and Real Estimates, January 1986 to October 2018

We didn't have to stop there, except that we found that the differences between our modeled results and the U.S. Census Bureau's annual median household income estimates grew unacceptably large in the period preceding January 1986.

We later identified the reason why. The survey that the U.S. Census Bureau used to collect income data from American households underwent a significant revision that was implemented in March 1987, where the data reported for the 1986 calendar year was both the first to be based entirely on households selected from the 1980 Census-based sample design rather than the 1970 Census-based sample, and also a larger number of smaller sampling areas. The March 1987 survey was also the first to collect a more detailed level of household income data for higher income earning households, but that impact would be relatively minor compared to the other changes in the survey's methodology.

As we saw with the effects on reported median household income following the March 2015 revision to the U.S. Census Bureau's income survey, the Census Bureau's estimates for the period preceding 1986 are very different from what came after - the accuracy of the model we developed based on the available monthly data we have from January 2000 through March 2015 breaks down.

In any case, what we've done is enough to nearly double the amount of data that's available to describe the trajectory of median household income in the U.S. on a monthly basis, which we can now provide from January 1986 through the present. And if we keep working at it, where we have some ideas for how to telescope the analysis even further back in time, we may be able to get all the way back to 1959 - nearly a decade before the Census Bureau even began reporting its annual estimates of median household income.

And that's how we're celebrating our anniversary today! [If you want summarized links to our data sources and references, keep scrolling down past the "anniverary" section.]

Celebrating Political Calculations' Anniversary

Our anniversary posts typically represent the biggest ideas and celebration of the original work we develop here each year. Here are our landmark posts from previous years:

  • A Year's Worth of Tools (2005) - we celebrated our first anniversary by listing all the tools we created in our first year. There were just 48 back then. Today, there are nearly 300....
  • The S&P 500 At Your Fingertips (2006) - the most popular tool we've ever created, allowing users to calculate the rate of return for investments in the S&P 500, both with and without the effects of inflation, and with and without the reinvestment of dividends, between any two months since January 1871.
  • The Sun, In the Center (2007) - we identify the primary driver of stock prices and describe a whole new way to visualize where they're going (especially in periods of order!)
  • Acceleration, Amplification and Shifting Time (2008) - we apply elements of chaos theory to describe and predict how stock prices will change, even in periods of disorder.
  • The Trigger Point for Taxes (2009) - we work out both when, and by how much, U.S. politicians are likely to change the top U.S. income tax rate. Sadly, events in recent years have proven us right.
  • The Zero Deficit Line (2010) - a whole new way to find out how much federal government spending Americans can really afford and how much Americans cannot really afford!
  • Can Increasing the Minimum Wage Boost GDP? (2011) - using data for teens and young adults spanning 1994 and 2010, not only do we demonstrate that increasing the minimum wage fails to increase GDP, we demonstrate that it reduces employment and increases income inequality as well!
  • The Discovery of the Unseen (2012) - we go where so-called experts on income inequality fear to tread and reveal that U.S. household income inequality has increased over time mostly because more Americans live alone!

We marked our 2013 anniversary in three parts, since we were telling a story too big to be told in a single blog post! Here they are:

  • The Major Trends in U.S. Income Inequality Since 1947 (2013, Part 1) - we revisit the U.S. Census Bureau's income inequality data for American individuals, families and households to see what it really tells us.
  • The Widows Peak (2013, Part 2) - we identify when the dramatic increase in the number of Americans living alone really occurred and identify which Americans found themselves in that situation.
  • The Men Who Weren't There (2013, Part 3) - our final anniversary post installment explores the lasting impact of the men who died in the service of their country in World War 2 and the hole in society that they left behind, which was felt decades later as the dramatic increase in income inequality for U.S. families and households.

Resuming our list of anniversary posts....

Data Sources for Median Household Income From January 1986 Through October 2018

U.S. Bureau of Economic Analysis. Table 2.6. Personal Income and Its Disposition, Monthly, Personal Income and Outlays, Not Seasonally Adjusted, Monthly, Middle of Month. Population. [PDF Document, Online Database (via Federal Reserve Economic Data)]. Last Updated: 28 November 2018.

U.S. Bureau of Economic Analysis. Table 2.6. Personal Income and Its Disposition, Monthly, Personal Income and Outlays, Not Seasonally Adjusted, Monthly, Middle of Month. Compensation of Employees, Received: Wage and Salary Disbursements. [PDF Document, Online Database (via Federal Reserve Economic Data)]. Last Updated: 28 November 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 Database (via Federal Reserve Economic Data)]. Last Updated: 14 November 2018.

References for Median Household Income From January 1986 Through October 2018

Sentier Research. Household Income Trends: January 2000 through May 2017, March 2018 through October 2018. [Excel Spreadsheet with Nominal Median Household Incomes for January 2000 through January 2013 courtesy of Doug Short]. [PDF Document]. Accessed 25 September 2018. [Note: We've converted all data to be in terms of current (nominal) U.S. dollars to develop the analysis presented in this series.]

U.S. Census Bureau. Historical Income Statistics. Table H-5.  Race and Hispanic Origin of Householder--Households by Median and Mean Income:  1967 to 2017. [Excel Spreadsheet]. Accessed 5 December 2018.

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December 5, 2018

November 2018 marked a generally solid and otherwise unremarkable month for the U.S. stock market's dividend payers. And with that being the case, we took advantage of the opportunity to do some minor rework to the main charts we present in our "Dividends by the Numbers" series.

Starting with our chart showing the monthly number of dividend increases and reductions!...

Number of Public U.S. Companies Increasing (Blue) or Decreasing (Red) Their Dividends, January 2004 through November 2018

The main change here is that we're revising the threshold for the number of dividend reductions that corresponds to recessionary conditions being present in the U.S. economy. This change reflects the addition of a number of oil and gas royalty trusts (mainly related to new oil shale drilling firms) whose stocks began publicly trading circa 2011-2012, and whose dividends are paid out monthly as a fixed percentage of their earnings rather than being set independently.

That latter operating characteristic adds some additional noise to the number of dividend increases reported each month and, given their usually much lower quantity, quite a lot of additional noise to the number of dividend cuts announced each month.

To compensate for the much increased level of noise in the number of dividend cuts announced each month since January 2012, we've raised the threshold indicating recessionary conditions being present in the private sector of the U.S. economy from 10 to 25. Our next chart zooms in on just the lower portion of the first chart to focus only on the reported number of dividend cuts.

Number of Public U.S. Companies Decreasing Their Dividends Each Month, January 2004 through November 2018

Following the so-called "Great" Recession, an elevated number of dividend cuts has been associated with two main phenomena: economic distress or changes in tax policies. Economic distress is self-explanatory, where when the business environment for companies dims to the point where they struggle to earn profits or to sustain the cash flow needed to pay out dividends to their shareholders, dividends get cut, which is what makes this measure a very simple indicator of the health of the economy.

Meanwhile, because influential shareholders have the ability to control the timing and amount of dividends they might receive, changes in tax policy can also have a visible effect on the number of dividend cuts announced each month, where this impact typically occurs in the final quarter of a calendar tax year and the first quarter of the next tax year.

That's enough discussion on the changes we've made to the presentation of our charts. Let's get to the numbers behind November 2018's dividend metadata!...

  • 3,724 U.S. firms declared dividends in November 2018, an increase of 70 over the 3,654 recorded in October 2018. That figure is also an increase of 206 over the number recorded in November 2017.
  • In November 2018, some 92 U.S. firms announced they would pay an extra, or special, dividend to their shareholders, an increase of 54 over the number recorded in October 2018. That figure is also a decrease of 17 from the total recorded in November 2017.
  • 165 U.S. firms hiked their dividend payments to shareholders in November 2018, a decrease of 7 from the number recorded in October 2018, which is a decrease of 20 from the 185 dividend rises announced in November 2017.
  • A total of 20 publicly traded companies cut their dividends in November 2018, an increase of 7 over the number recorded in October 2018 and a decrease of 2 from the 22 recorded in November 2017.
  • Just 1 U.S. firm omitted paying their dividends in November 2018, a decrease of 1 from the number recorded in October 2018. That figure is also a decrease of 5 from the number of firms that omitted paying dividends back in November 2017.

The changes to the charts aren't the only change we're introducing this month. We've also added a level of artificial intelligence to automate the reporting of these monthly figures. Because Ironman is slowly becoming A.I. (but is already self-aware!)

We'll drill down to do more analysis of the firms that announced dividend cuts in November 2018 later in the month.

References

Standard and Poor. S&P Market Attributes Web File. [Excel Spreadsheet]. Accessed 3 December 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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