Political Calculations
Unexpectedly Intriguing!
July 16, 2019

We're a little over the halfway point between the Federal Open Market Committee's scheduled meetings, where the Federal Reserve's interest rate-setting body will announce a quarter point rate cut in the Federal Funds Rate at the conclusion of its next two-day meeting on 31 July 2019, its first reduction since December 2008 when it dropped to near-zero.

According to the probabilities indicated by the CME Group's FedWatch Tool, that reduction will be the first of three rate cuts in 2019, which if all are implemented as currently expected, will lower the target range for the interest rate the Fed charges banks to borrow money overnight from today's level of 2.25-2.50% to 1.50-1.75% by the end of 2019.

Using a model developed by Jonathan Wright back in 2006, at today's levels, the Federal Funds Rate combined with the ongoing inversion of the 10-Year and 3-Month U.S. Treasuries indicate a nearly 1-in-10 chance that the National Bureau of Economic Research will someday determine that a national recession began in the United States sometime between 12 July 2019 and 12 July 2020. The Recession Probability Track shows those odds as a 10% probability, which has occurred because of the sustained inversion of the U.S. Treasury yield curve since 23 May 2019.

U.S. Recession Probability Track Starting 2 January 2014, Ending 12 July 2019

The Recession Probability Track is 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.

Because Wright's model was developed using historic data prior to when the Fed adopted its unconventional monetary policy of quantitative easing as the Federal Funds Rate was held at near-zero levels, it doesn't take into account the effects of the reverse of that policy, quantitative tightening, which has been ongoing since May 2014, and which the Fed plans to continue into September 2019.

Measured as the "shadow Federal Funds Rate", several analysts have indicated they believe quantitative tightening would add at least three full percentage points to the nominal Federal Funds Rate if it were incorporated in that interest rate, raising it to an adjusted level of about 5.4%.

When we subsitute that adjusted Federal Funds Rate into our recession odds reckoning tool, which like our Recession Probability Track chart is based on Jonathan Wright's paper, we find the adjusted probability of recession starting between 12 July 2019 and 12 July 2020 is 40%, or rather, a chance of 1-in-2.5.

If you have a particular recession risk scenario you would like to consider, please take advantage of our recession odds reckoning tool. It's really easy, and if it helps, the average yields of the 10-Year and 3-Month Treasuries over the last 90 calendar days ending on 12 July 2019 are 2.28% and 2.32% respectively, while the average effective Federal Funds Rate over the same period is 2.40%.

If you would like to catch up on any of the analysis we've previously presented, here are all the links going back to when we restarted this series back in June 2017.

Previously on Political Calculations


July 15, 2019

At 3,013.77, the S&P 500 (Index: SPX) closed at the highest level in its history on Friday, 12 July 2019, having spent the entire day trading above 3,000 for the first time ever.

Then again, the index has achieved new record high closing values 11 times in the last four weeks. What is more notable is that investors have continued to set their forward-looking focus on 2020-Q1 in setting stock prices...

Alternative Futures - S&P 500 - 2019Q3 - Standard Model, with Redzone Forecast Between 21 June 2019 and 15 July 2019 Assuming Investor Focus on 2020-Q1 - Snapshot on 12 Jul 2019

Even though investors are now expecting the Fed to cut short term interest rates in the U.S. three times in upcoming months, with quarter point reductions expected after the Federal Open Market Committee concludes upcoming meetings on 31 July 2019, on 18 September 2019 and on 11 December 2019.

CME Group FedWatch Tool Probabilities of Federal Funds Rate Changing at Future FOMC Meeting Dates, Snapshot on 12 July 2019

Investor expectations of a fourth quarter point rate cut being announced in 2020-Q1 has been oscillating about the 50% probability mark in recent weeks, with the CME Group's FedWatch Tool indicating the probability of that event being around 35% as of the end of trading on 12 July 2019.

That's where most of the action has been for investors looking forward in time in making their current day investing decisions ahead of the earnings season for 2019-Q3 officially getting underway in the next week, as Fed officials have been 'flooding the zone' in attempting to set future expectations. Here are the market-moving headlines we extracted from the week's news, where you can see the unusually large representation of statements made by the Fed's minions among the regular flow of news on Wednesday and Thursday....

Monday, 8 July 2019
Tuesday, 9 July 2019
Wednesday, 10 July 2019
Thursday, 11 July 2019
Friday, 12 July 2019

Elsewhere, Barry Ritholtz listed 6 positives and 6 negatives he found among the week's major market and economy-related news. Barry also celebrated the fifth anniversary of his Bloomberg Radio Masters In Business - if you've been looking for a podcast focused on business and finance topics to tune in during your daily commute, do check it out!

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July 12, 2019

From 3Blue1Brown, who generated "12 oddly satisfying minutes" of animations using pure Fourier series animations:

But what is a Fourier series? That takes twice as long to explain, but if you follow the link, you'll see some of the math behind the animations featured in the video above.


July 11, 2019

The toll of the U.S.-China tariff war continued to grow in May 2019, with the gap between the pre-trade war trend and the trailing twelve month average of the total valuation of goods and services directly traded between the two nations widening to $8.3 billion for the month.

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

Since both nations first slapped tariffs on each others goods back in March 2018, the cumulative loss in the value of goods exported between both nations now totals $42.9 billion.

The year-over-year growth rate of each nation's exports to each other continues to fall in negative territory, which in previous occurrences, has coincided with periods of sharply slowing economic growth or recessions.

Year Over Year Growth Rate of Exchange Rate Adjusted U.S.-China Trade in Goods and Services, January 1986 - May 2019

The charts above are based on international trade data reported by the U.S. Census Bureau, which were recently updated to include May 2019. A Reuters poll of China's exporters for June 2019 indicates that the decline in China's exports extends far beyond just the U.S.:

China’s exports likely fell in June as weakening global demand and a sharp hike in U.S. tariffs took a heavier toll on the world’s largest trading nation, a Reuters poll showed.

Imports are expected to have fallen for a second straight month, pointing to continued weakness in domestic demand and highlighting the need for Beijing to roll out more economic support measures.

If Friday’s trade data are in line with the downbeat forecasts or worse, it could spark concerns about a sharper-than-expected slowdown in China and the risk of a global recession.

China’s June exports are expected to have declined 2 percent from a year earlier, according to the median estimate of 34 economists in a Reuters poll, compared with a 1.1% gain in May....

Some analysts had attributed the unexpected rise in shipments in May to a rush by Chinese exporters to beat additional U.S. tariffs being threatened by Washington.

China's economy is likely to turn in its lowest economic growth numbers for the last 30 years in 2019, while one of China's leading exporters indicates the tariff war is taking a heavy toll on Chinese manufacturers as firms seek to move production to other nations to avoid the tariffs.


Board of Governors of the Federal Reserve System. China / U.S. Foreign Exchange Rate. G.5 Foreign Exchange Rates. Accessed 3 July 2019.

U.S. Census Bureau. Trade in Goods with China. Accessed 3 July 2019.

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July 10, 2019

A month ago, we projected that California's total preliminary Point-In-Time Count for its homeless population would fall within a range between 149,000 and 155,000. With updated reporting of the 2019 census of California's homeless population now covering 35 of 40 regions within the state, we can now update that projection which we believe will likely now fall within the top half of that range, between 153,400 and 155,400.

Estimated Homeless in California in 2017, 2018 and Projected for 2019, Update Through 9 July 2019

The five areas that have not yet reported their 2019 Point-In-Time homeless count figures include the Colusa-Glenn-Trinity tri-county region, El Dorado County, Mendocino County, Monterey-San Benito counties, and Napa County.

Assuming that these five remaining regions for which preliminary data is not yet available will have zero change from their previous estimates of their homeless population, the minimum number of homeless in California will rise to 153,400 after rounding to the nearest hundred. If these five regions have the same 19% increase recorded in the other 35 regions within the state, the number of homeless in California will rise to 154,400 (the number indicated on the chart above). If 154,400 is the midpoint of a reasonable range for the preliminary count to now fall, the top end of that range would slightly increase from our previous estimate of 155,000 to 155,400.

Based on past history, we believe the homeless counts for Los Angeles County and San Francisco will be revised downward, as analysts make corrections for double-counting and other errors in the preliminary figures reported for these high population areas. We continue to anticipate the final estimate of California's homeless count in 2019 will exceed 150,000.


For historic data, the U.S. Department of Housing and Urban Development provides an Excel Spreadsheet with data from the annual Point-In-Time Estimates by Continuum Of Care from 2007 through 2018, where this data was last updated on 11 December 2018.

To the best of our knowledge, other than our analysis, there still isn't any centralized reporting for the 2019 Point-In-Time counts of California's homeless populations, which are still being tallied. We obtained the data for each the 35 Continuums of Care covering the following California counties that have presented their preliminary estimates for 2019 from the following linked sources: Alameda, Alpine-Inyo-Mono, Amador-Calaveras-Mariposa-Tuolumne, Butte, Contra Costa, Fresno, Madera, Humbolt, Imperial, Kern, Kings, Tulare, Lake, Los Angeles, Marin, Merced, Orange, Placer-Nevada, Riverside, Sacramento, San Bernardino, San Diego, San Francisco, San Joaquin, San Luis Obispo, San Mateo, Santa Barbara, Santa Clara, Santa Cruz, Shasta-Siskiyou-Lassen-Plumas-Del Norte-Modoc-Sierra, Solano, Sonoma, Stanislaus, Sutter-Yuba, Tehama, Ventura, and Yolo.

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