Political Calculations
Unexpectedly Intriguing!
November 16, 2018

The universe is both stranger and more fascinating than all but a few can imagine. Bad Astronomy's Phil Plait just had that kind of realization after reviewing a paper with 59 co-authors, a group of astronomers and astrophysicists known as the GRAVITY team, who peered deep into the heart of the Milky Way galaxy to make an extraordinary discovery.

I read quite a few scientific journal papers every week, seeing which ones might make a good fit for the blog. They’re always interesting, and of course some have more ground-breaking results than others. But you can count on the fingers of one hand how many times one has made me exclaim out loud upon reading it.

I just read one where I exclaimed out loud.

In fact, I may have exclaimed an expletive out loud — “holy [synonym of feces]!” — when I read the abstract of this particular paper.

Why? Because in the paper, a team of astronomers show that they have observed a blob of dust sitting just outside the point of no return of a supermassive black hole, where the gravity is so intense that this material is moving at thirty percent the speed of light. And this wasn’t inferred, deduced, or shown indirectly. No: They measured this motion by literally seeing the blobs move in their observations.

Better still, there's video, assembled from actual images of the region they studied, as can be seen in the following presentation that zooms in on that region of space to reveal those images, then zooms in even closer via an animation of the orbiting gas for a really close-up view of what observations and astrophysics says is happening just outside of the edge of the black hole at the core of the Milky Way.

The hot "blob of dust" appears to be orbiting the black hole about once every 31 minutes. At 30% of light speed, that dust would be moving at more than 201 million miles per hour as it revolves around the black hole.

By comparison, the Sun, which is much farther away, is moving at speeds over 514,000 miles per hour (828,000 kilometers per hour) around the same black hole, where it will take about 230 million years to complete its orbit around the black hole at the focal point of the Milky Way galaxy.

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November 15, 2018

Earlier this year, we marked the occasion when a relative period of order appeared to end in the S&P 500 and a new period of chaos seemed set to take hold in the market.

We say "appeared to end", because order returned to the S&P 500, where a stable relationship between the daily closing value of the index and the index' trailing year dividends per share that had begun on 31 March 2016 subsequently resumed. In retrospect, what we had initially thought to be a sign of order breaking down in the stock market proved to be an outlier event in light of how stock prices behaved in the following months.

That's not the case today, where we can show that relative period of order in the stock market has much more definitively broken down following the onset of the third Lévy flight event of 2018, where the first two events represent a really aggressive reversion to the established mean of the previous period of order. The following chart shows what that looks like against the backdrop of a statistical equilibrium chart.

S&P 500 Index Value vs Trailing Year Dividends per Share, 30 September 2015 Through 14 November 2018, with Relative Period of Order from 31 March 2016 Through 11 October 2018

We mark the recently completed relative period of order as having run from 31 March 2016 to 11 October 2018. To put this period into a larger context, the following chart shows each major relative period of order and punctuated period of chaos from December 1991 through October 2018.

S&P 500 Average Monthly Index Value vs Trailing Year Dividends per Share, 
December 1991 to October 2018

If you'd like to get the data for this second chart, it's taken directly from the historical data we provide through our S&P 500 At Your Fingertips tool, where we make all the monthly data from January 1871 through the present available at no charge!

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November 14, 2018

The city of Philadelphia is continuing to experience shortfalls in the monthly revenues it collects from its controversial soda tax. As a result of those ongoing shortfalls, Philadelphia Mayor Jim Kenney's Rebuild initiative is being significantly scaled back from the levels that city officials have promised city residents.

The following chart shows the amount of revenue that the city has collected through the Philadelphia Beverage Tax assessed in the months of January 2017 through August 2018. In the chart, the blue "Desired" line shows the amount of tax collections that city officials originally expected to collect throughout 2017, while the red "2017" line shows how much the city actually collected from its soda tax in each month of that year. The red 2017 line subsequently became the city's expected revenue for its soda tax in 2018, whose actual level of revenues are indicated by the green "2018" line.

Desired vs Actual Estimates of Philadelphia's Monthly Soda Tax Collections, January 2017 through August 2018

Through August 2018, Philadelphia is running about $1.6 million short of its expected revenue levels for the calendar year, and about $10.5 million below its original revenue expectation for the first eight months of collections for its soda tax.

City officials passed Philadelphia's soda tax into law by promising to use 100% of the money it would collect to fund "free" pre-Kindergarten programs in the city, community schools, and the mayor's Rebuild initiative, which would fund repairs and improvements to city parks, libraries, recreation centers and playgrounds.

With the city's soda tax collections persistently falling short of expected levels, one or more of these spending programs would have to pay the price by being scaled back, where the city's Rebuild initiative appears to have become the designated loser.

That much became evident last month when Mayor Kenney began walking back promises to fund $500 million worth of improvements to the city's public infrastructure.

The glowing "First 1,000 Days" report [pdf] released Oct. 1 by Mayor Jim Kenney contained 15 mentions of Rebuild, the most expensive and highest profile initiative of Kenney's first term. But unlike past mentions of the heralded program, these didn't include the $500 million price tag that the administration has used consistently since it introduced the program in 2016.

"Through the Administration’s signature infrastructure initiative Rebuild, we're investing hundreds of millions of dollars in our neighborhoods by renovating our aging recreation centers, playgrounds, parks, and libraries," the report reads.

The subtle adjustment to “hundreds of millions” may seem innocuous yet it portends an intentional shift that could result in fewer dollars reaching neighborhoods hungry for functional, decent places to play and learn.

Philadelphia is reliant upon the taxes it collects through its soda tax to support the borrowing it needs to fund the Rebuild initiative. With those revenues falling over 17% short of the city's original expectations, the mayor has scaled back the city's planned commitment for the Rebuild initiative from $500 million to $348 million, a 30% reduction. The difference between the percentage for the city's soda tax revenues and its funding commitment confirms that the Rebuild program is bearing a disproportionately larger share of Philadelphia's failure to collect its desired level of revenue through its soda tax.

That outcome could have been avoided if only Philadelphia's residents were more willing to pay the city's soda tax instead of engaging in tax avoidance behaviors. It's as if they don't care enough about what city officials want....

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November 13, 2018

The U.S. Federal Reserve boldly took no action to increase short term interest rates in the U.S. at the conclusion of its 7-8 November 2018 meeting, leaving them at their current target rate of 2.00% to 2.25%, the level to which they had set them back in September 2018.

The risk that the U.S. economy will enter into a national recession at some time in the next twelve months now stands at 1.9%, which is up by roughly three-tenths of a percentage point since our last snapshot of the U.S. recession probability from late-September 2018. The current 1.9% probability works out to be about a 1-in-54 chance that a recession will eventually be found by the National Bureau of Economic Research to have begun at some point between 8 November 2018 and 8 November 2019.

That small increase from our last snapshot is mostly attributable to the Fed's most recent quarter point rate hikes on 26 September 2018. Since then, the U.S. Treasury yield curve has very slightly flattened, as measured by the spread between the yields of the 10-Year and 3-Month constant maturity treasuries, which has only contributed a very small portion of the increase in recession risk in the last six weeks.

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 8 November 2018

We continue to anticipate that the probability of recession will continue to rise through the end of 2018, since the Fed is expected to hike the Federal Funds Rate again in December 2018. As of the close of trading on Friday, 9 November 2018, the CME Group's Fedwatch Tool was indicating a 76% probability that the Fed will hike rates by a quarter percent to a target range of 2.25% to 2.50% at the end of the Fed's next meeting on 19 December 2018. Looking forward to the Fed's 20 March 2019 meeting, the Fedwatch Tool indicates a 53% probability that the Fed will hike U.S. interest rates by another quarter point at that time. Looking even further forward in time, the Fed is expected to hold rates steady for a while, then hike them by an additional quarter point in September 2019.

If you want to predict where the recession probability track is likely to head next, 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 and, barring significant events, our next update will be in December 2018.

Previously on Political Calculations

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November 12, 2018

The big news last week, aside from the U.S. midterm elections, which apparently are still going on in some places, was the stock market’s response to the return of political gridlock on Capitol Hill, where stock prices rallied strongly enough on the day after the election that they completed the fourth Lévy flight event of 2018, as investors fully returned their forward-looking attention to 2019-Q1 after having devoted all their attention to 2019-Q3 in the previous week.

Alternative Futures - S&P 500 - 2018Q4 - Standard Model with Redzone forecast assuming investors focusing on 2019-Q1 from 7 November 2018 through 7 December 2018 - Snapshot on 9 Nov 2018

Since our dividend futures-based model uses historic stock prices as the base reference points from which we project future potential values for the S&P 500, the recent Lévy flight events have significantly skewed our model’s projections in the period from 7 November 2018 through 7 December 2018. To compensate for what is, in effect, the echo of past volatility in our model's forecasts for the future the S&P 500, we've added a new redzone forecast to our regular spaghetti forecast chart for the S&P 500, where we've assumed that investors will maintain their focus on 2019-Q1 over this period of time.

Now, just because we've assumed that doesn't mean they will. If they don't, then our first potential confirmation that they have shifted their attention toward a different point of time in the future will come as the actual trajectory of the S&P 500 moves outside the rectangular red-zone that we've indicated on the chart. Given recent history and the Fed’s autopilot inclination to keep hiking interest rates well into 2019, even though the U.S. economy is expected to significantly slow (particularly in the third and fourth quarters), the most likely alternative focus point for investors will continue to be 2019-Q3.

Our thinking is that investors will be largely focused on 2019-Q1 during the next month because of the change in political control of the U.S. House of Representatives in early 2019 will keep investors concerned about what policies may come out of Washington D.C. during the first quarter. As we've seen in previous years, those potential policy changes can greatly influence how corporate boards set their dividend policies before the end of 2018, although we would expect this effect to be much less this year than in years where one political party has taken control of both houses of Congress and the White House.

That’s about the extent to which politicians can affect the stock market. The good news is that politicians are mostly impotent otherwise in their ability to affect the stock market, which is why we don’t bother paying much attention to their antics in our analysis!

Monday, 5 November 2018
Tuesday, 6 November 2018
Wednesday, 7 November 2018
Thursday, 8 November 2018
Friday, 9 November 2018

Elsewhere, Barry Ritholtz celebrated the end of all the robocalls, emails, doorbell rings, and political advertising as a positive in this week's succinct summary of the week's major economy and market-related events. That’s a political motion we’re happy to second!

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