Political Calculations
Unexpectedly Intriguing!
April 24, 2019

Back in 2010, we introduced a new way to visualize how out of balance the U.S. government's spending had become with respect to the typical income earned by U.S. households.

To do that, we plotted the U.S. government's spending per household against median household income, but that wasn't all. We also estimated how high federal spending could be with respect to the household income measure to keep the government's budget in balance, which we featured as the "Zero Deficit Line".

Want to see how that looks with eight additional years of data? Here you go!...

U.S. Government Spending Per Household Versus Median Household Income, 1967-2017

The chart now covers a five decade long period from 1967 through 2017, where we're not yet able to present the data for 2018 because the U.S. Census Bureau won't publish its estimate of household income and median household income for that year until September (to be fair, they just collected that data last month!)

Although not as bad as in 2009, the U.S. government's spending is still pretty far out of whack, holding well above the level the Zero Deficit Line indicates would be affordable for typical American households.

But we notice that the ZDL isn't necessarily capturing the full story, which we can see when we plot the same U.S. government spending per household and the government's tax revenues per household against Median Household Income.

U.S. Government Spending and Tax Collections Per Household Versus Median Household Income, 1967-2017

The difference between the Zero Deficit Line and U.S. government spending per household isn't capturing the full extent to which that spending exceeds the levels that would be affordable for American households because tax revenues have not kept pace with the ZDL since 2015. That's mainly because of what the New York Times described as the "most important least-noticed economic event of the decade", which coincidentally had also escaped the contemporary notice of the New York Times, which was very heavily invested in boosting their preferred successor to President Obama at the time, for whom that real economic distress would be a defeating distraction.

Two years later, they finally acknowledged it and called it an "invisible recession", or a mini-recession, but it really wasn't all that invisible at the time it was happening if you knew where to look for it. It was very good news when it was finally clear it was ending.

The bad news however is that the lagging effect of that event on tax revenues means that the gap between excessive spending and the Zero Deficit Line has grown wider than it indicates. When the data for U.S. households in 2018 becomes available later this year, we'll revisit the ZDL again.

References

U.S. Census Bureau. Current Population Survey. Annual Social and Economic Supplement. Historical Income Tables. Table H-5. Race and Hispanic Origin of Householder -- Households by Median and Mean Income. [Excel Spreadsheet]. Issued 28 August 2018. Accessed 28 August 2018.

White House Office of Management and Budget. Historical Tables, Budget of the U.S. Government, Fiscal Year 2020. Table 1.1 - Summary of Receipts, Outlays, and Surpluses or Deficits (-): 1789-2024. [PDF Document]. Issued 11 March 2019. Accessed 11 March 2019.

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April 23, 2019

Published last week, data for February 2019 saw the combined direct trade loss between the U.S. and China expand to $5.2 billion, as the trailing twelve month average of the value of trade between the two nations has shrunk as a result of the tariff war that began on 22 March 2018.

Combined Value of U.S. Exports to China and Imports from China, January 2008 - February 2019

Since the growth of trade between the U.S. and China over time tends to grow at a steady pace outside periods of economic recessions (such as in 2008-2009) or slowdowns (such as 2015-2016), that gap is what we measure when we compare the counterfactual of the trade growth that would likely have occurred between the two nations if the linear trend that existed before March 2018 continued without interruption with how the combined value of both nations' exports and imports to each other has evolved since the U.S.-China trade war began. For February 2019, that means the combined value of goods directly traded between the U.S. and China is nearly 9% less than would be the case if the two nations had avoided entering into their tariff war.

For the 12 month period from March 2018 through February 2019, that expanding gap represents an estimated cumulative reduction of $20.6 billion worth of direct annual trade between the U.S. and China.

The year-over-year growth rate of U.S. imports from China has dropped into negative territory in recent months, which in the absence of the trade war, would indicate a deterioration in the relative health of the U.S. economy. A similar pattern for the year-over-year growth rate of U.S. exports to China has existed since late 2017, coinciding with the Chinese economy's decline in relative health over that time.

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

The impact of the tariff war between the U.S. and China has been to amplify these negative indications in the year-over-year growth rate measure.

References

Board of Governors of the Federal Reserve System. China / U.S. Foreign Exchange Rate. G.5 Foreign Exchange Rates. Accessed 17 April 2019.

U.S. Census Bureau. Trade in Goods with China. Accessed 17 April 2019.

U.S. Census Bureau. U.S. Trade Online. Accessed 17 April 2019. 

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April 22, 2019

If investors are in any rush to push the S&P 500 (Index: SPX) above the record high closing value of 2,930.75 it set back on 20 Setpember 2019, they didn't betray any sign of it during the Good Friday holiday-shortened third week of April 2019, as the index mainly drifted sideways during the week.

Alternative Futures - S&P 500 - 2019Q2 - Standard Model with Annotated Redzone Forecast - Snapshot on 19 Apr 2019

On the plus side, we've finally reached the end of our redzone forecast period, which we developed over 14 weeks ago. The following chart shows the seemingly remarkable result, where every daily closing value for the S&P 500 falls within the forecasted range.

Alternative Futures - S&P 500 - 2019Q2 - Standard Model with Annotated Redzone Forecast - 21 Dec 2018 to 18 Apr 2019

We say "seemingly remarkable" because we broke with our previous practice of simply drawing a red-shaded box indicating the forecast on the spaghetti forecast chart generated from our dividend futures-based model of how stock prices work that never changes over time, regardless of changes in future expectations. Here, because of the sheer amount of time we were seeking to bridge in compensating for the "echo" of past volatility that arises from our model's use of historic stock prices as the base reference points from which it projects into the future, we set our redzone forecast up this time to automatically update as future expectations changed.

Starting with the assumption that investors would largely be focused on 2019-Q1 over much of this period, and later on 2020-Q1 after 2019-Q1 came to an end, we anchored one end of our experimental redzone forecast range to the level of the S&P 500 at the close of trading on Friday, 11 January 2019. We then fixed the other end of the range to what our dividend futures-based model forecast projected the level of the S&P 500 would be on 22 April 2019, provided that investors would be setting stock prices in accordance with the future expectations associated with the distant future quarter of 2020-Q1.

As those future expectations have changed over the last 14 weeks, so has the trajectory of our redzone forecast range, which has continually fluctated from week to week. Fourteen weeks later, every single point of the actual trajectory of the S&P 500 falls within the range defined by how we introduced our assumptions back on 14 January 2019.

Fortunately, since we're now out of the period where the past volatility of stock prices affects the accuracy of our model, we can finally stop, where the model will better communicate how far forward in time investors are focusing as they set current day stock prices.

Meanwhile, for a week where the market didn't move very much, there was still quite a lot of noise for investors to absorb, as evidenced by the major market-moving headlines of the week.

Monday, 15 April 2019
Tuesday, 16 April 2019
Wednesday, 17 April 2019
Thursday, 18 April 2019

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April 18, 2019

1929 Mercury Dime - Source: U.S. Commission of Fine Arts - https://www.cfa.gov/about-cfa/design-topics/coins-medals/mercury-dime

Have you ever found a U.S. dime minted before 1965 in your change?

We ask, because 1964 was the last year in which U.S. coins with a face value of 10 cents or more were produced by the U.S. Mint were mostly made out of silver [1]. During the next 10 years, the price of silver rose, then skyrocketed in the mid-to-late 1970s, giving Americans a strong incentive to pluck any these silver coins out of circulation [2] because they became worth more than their face values.

By the 1980s, it was extraordinarily rare to find any pre-1965 silver coin in your change. Today, it has become exceedingly rare.

But next week, it may become a just a bit more commonplace.

As part of National Coin Week, which runs from 21 April 2019 through 28 April 2019, coin dealers across the U.S. plan to return up to one million vintage or collectible coins back into circulation, where they may very well turn up in your change. What they hope will be The Great American Coin Hunt will be on!

Not all the coins they put back into circulation in this Willy Wonka-fashion will be silver. The dealers will release a variety of coins dating back as far as the 1800s into the wild, so to speak, where anyone paying cash and getting change back may be in for a neat surprise.

If that's you, happy hunting!

Notes

[1] Before 1965, U.S. dimes, quarters, and half-dollars were minted from an alloy known as "junk silver", which is 90% silver and 10% copper.

[2] For an anecdotal history of the disappearance of silver-based coinage in the U.S., check out this discussion thread at the Metal Detecting Forum.

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April 17, 2019

From time to time, we test out hypotheses that make for interesting discussion. For example, let's consider the impact of two recent 737 crashes on Boeing's stock price (NYSE: BA).

Here, we had the idea that if we compared Boeing's stock price with that of another company whose fortunes are closely tied to Boeing, we could perhaps get an indication of how investors are pricing the company's potential legal liability for the Lion Air Flight JT610 crash on 29 October 2018 in Indonesia, which killed 189 people, and the Ethiopian Airlines Flight ET302 crash on 10 March 2019, which killed 157 passengers and crew, by comparing Boeing's stock price with that of Spirit Aerosystems (NYSE: SPR). The following chart shows the trajectory of both companies' stock prices from 15 October 2018 through 12 April 2019, where we've also indicated the timing of the two crashes.

Boeing and Spirit Aerosystems' Stock Prices, 15 October 2018 through 12 April 2019

This comparison is particularly relevant because Spirit Aerosystems manufactures the fuselage of Boeing's 737 MAX aircraft. Our hypothesis was that because the cause of the two recent Boeing 737 MAX crashes have been attributed to faulty sensors and software malfunctions, Boeing's stock would show a relatively greater decline than Spirit Aerosystems, where because the fuselage is a mechanical structure, we reasoned that Spirit would only be exposed to reductions in Boeing's production of the 737 MAX, while Boeing would bear the additional burden of legal liability related to the two crashes linked to the sensor and software failures.

It sounds plausible, and in the initial reaction of both companies' stock prices to each crash, it also looks plausible, but there is some strange synchronization going on between the stock prices of the two companies, which you can see in the next chart as we've tracked each company's stock price as a percentage of the peak market closing values both companies simultaneously reached on 1 March 2019.

Boeing and Spirit Aerosystems' Stock Prices as Percentage of Their Peak Values (Both on 1 March 2019), 15 October 2018 through 12 April 2019

It's no surprise to find that the two companies' stock prices are closely synchronized to each other, with their changes over time typically falling within a few percentage points of each other. It's also not strange to see that Boeing's share price did indeed bear a heavier burden than Spirit Aerosystems' stock price did in the immediate aftermath of both 737 MAX crashes.

What is a bit strange is how they've gone about recoupling to each to other's performance after each crash event. Following the Lion Air crash, we find that Boeing's stock price surged after 27 November 2018 to catch up to the level of Spirit Aerosystems' stock within the matter of a week. Which kind of makes sense because at that time, it seemed that Boeing would avoid having exposure to any additional legal liability from that crash.

But that pattern was reversed after the Ethiopian Air crash, where Spirit Aerosystems' stock price was the one that moved to recouple with Boeing's relative stock price performance after 2 April 2019, which it did by dropping down to Boeing's level. We suspect that may have been speculation on the part of investors that production of the 737 MAX aircraft would be reduced as news that the grounding of the troubled aircraft would extend longer than expected emerged. Although Boeing had resisted it, the situation with so many aircraft on the ground and order cancellations forced its hand as the production cut announcement for the 737 MAX finally came on 8 April 2019.

Boeing should still has greater exposure to legal liability from the crashes, so it will be interesting to see how its relative stock price performance evolves over time as those costs become better quantified. As long as it does, we should see it as a persistent relative underperformance when compared with Spirit Aerosystems' stock price.

At least until the legal issues are finally in Boeing's rear view mirror. We'll see how that hypothesis works in practice.

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