Saturday, July 30, 2016

John Hinderaker Once Again Proves His Economic Stupidity

     It’s been a blissfully long time since John Hinderaker of Powerline has written about economics.  I believe we can thank the presidential election for that.  He broke his long silence earlier this week with his post Economists for Clinton.  I’m sure most of his readers believe he brilliantly skewered the work of Mark Zandi.  But to anyone who is even slightly familiar with economics, it once again conclusively demonstrated that Mr. Hinderaker is an economic idiot.

     First, let’s understand the parties involved.  The Powerline blog contains the following biography of Mr. Hinderaker:

John H. Hinderaker practiced law for 41 years, enjoying a nationwide litigation practice. He retired from the practice of law at the end of 2015, and is now President of Center of the American Experiment, a think tank headquartered in Minnesota.

Mr. Hinderaker lives with his family in Apple Valley, Minnesota. He is a graduate of Dartmouth College and Harvard Law School. During his career as a lawyer, he was named one of the top commercial litigators and one of the 100 best lawyers in Minnesota, and was voted by his peers one of the most respected lawyers in that state. He was repeatedly listed in The Best Lawyers in America and was recognized as Minnesota’s Super Lawyer of the Year for 2005.

Mr. Hinderaker is an Ivy League educated litigator who had a successful courtroom practice.  Curiously absent is any mention of economics.  That’s because, even if he took courses in college, it wasn’t part of what he did for a living.  Instead, he went to court.   

This is a very different background that Mr. Zandi’s.  The following is from his Moody’s page:

Mark M. Zandi is chief economist of Moody’s Analytics, where he directs economic research. Moody’s Analytics, a subsidiary of Moody’s Corp., is a leading provider of economic research, data and analytical tools. Dr. Zandi is a cofounder of the company, which Moody’s purchased in 2005.

Dr. Zandi’s broad research interests encompass macroeconomics, financial markets and public policy. His recent research has focused on mortgage finance reform and the determinants of mortgage foreclosure and personal bankruptcy. He has analyzed the economic impact of various tax and government spending policies and assessed the appropriate monetary policy response to bubbles in asset markets.


Dr. Zandi conducts regular briefings on the economy for corporate boards, trade associations and 
policymakers at all levels. He is on the board of directors of MGIC, the nation’s largest private mortgage insurance company, and The Reinvestment Fund, a large CDFI that makes investments in disadvantaged neighborhoods. He is often quoted in national and global publications and interviewed by major news media outlets, and is a frequent guest on CNBC, NPR, Meet the Press, CNN, and various other national networks and news programs.


Dr. Zandi earned his B.S. from the Wharton School at the University of Pennsylvania and his PhD at the University of Pennsylvania. He lives with his wife and three children in the suburbs of Philadelphia. 

Dr. Zandi is also Ivy League educated, but he has a doctorate in economics.  His Moody’s page has a link to a large number of testimonies, studies and writings on the economy.  Using the Daubert standard (which I’m sure Mr. Hinderaker is more than a little familiar with), any court would accept Mr. Zandi’s testimony as that of an expert in economics.  Mr. Hinderaker’s … not so much.

     Let’s turn to Mr. Hinderaker’s “analysis,” where he first tries to discredit Dr. Zandi by referencing his work on the 2009 stimulus.  Conservatives love to post the following chart, which shows the then hoped path unemployment would take as a result of the 2009 spending package.  

But the problem with the stimulus was that it was too small as demonstrated by Dean Baker and Paul Krugman (both would also easily pass the Daubert test).  Both used basic math to illustrate their points.

     Next, Hinderaker makes the following unsubstantiated assertion:

Later versions of the same chart traced the ongoing failure of the “stimulus” to perform anywhere near the level that was promised by Obama’s economists and, apparently, Mr. Zandi. Perhaps Mr. Zandi still believes in the magical “multiplier effect” that was in vogue in the 1960s, and somehow transformed government spending into a growth vehicle exceeding all others. Most economists wised up long ago.

Perhaps Mr. Hinderaker should read the 2013 paper, Growth Forecast Errors and Multipliers, published by the IMF, which reached the exact opposite conclusion:

This paper investigates the relation between growth forecast errors and planned fiscal consolidation during the crisis. We find that, in advanced economies, stronger planned fiscal consolidation has been associated with lower growth than expected, with the relation being particularly strong, both statistically and economically, early in the crisis. A natural interpretation is that fiscal multipliers were substantially higher than implicitly assumed by forecasters. The weaker relation in more recent years may reflect in part learning by forecasters and in part smaller multipliers than in the early years of the crisis.

Or perhaps he should read the section on Multiplier Models in the 10th edition of Paul Samuelson’s textbook Economics.  Either way, he’ll learn that his basic assertion is 100% wrong.

     Mr. Hinderaker has no business writing about economics.  He’s a slightly above-average political commentator who has a long and documented history of reaching the exact wrong economic conclusion.  As I’ve documented, Powerlines’ entire economic analysis for 2014 was 100% wrong.  This won’t stop him, of course.  Because while he’s been fundamentally wrong he also has the litigators ego, which means he won’t admit to his being this bad.


Weekly Indicators for July 25 - 29 at

 - by New Deal democrat

My Weekly Indicator post is up at The sharp bifurcation between leading and coincident indicators continues, but with one important longer term set of indicators turning more sharply negative.

Friday, July 29, 2016

Don't Sweat the Weaker 2Q GDP Just Yet

This report is really about an investment slowdown.  Household spending, which accounts for 70% of US growth, was strong and rebounded from a weak 1Q:

All three categories of spending -- durable goods, non-durable goods and services -- increased at their strongest Q/Q pace in 4 quarters.  This is confirmed be the last few real retail sales figures:

     In contrast, business investment declined at the sharpest rate in 4 quarters:

Why is this happening?  The oil market slowdown is a primary contributor:

Mining production (which includes oil extraction) declined 21% in the last year, which is bound to have a negative impact on equipment investment (the red bar 2 graphs up) .   

     Non-residential structural investment (blue line above) has declined in 6 of the last 8 quarters.  I haven't found a good explanation for this, although this graph of capacity utilization may provide part of the answer:

Overall utilization has been declining since the mid-1990s; it has peaked at lower levels for each of the last 2 expansion.  If an economy is using fewer real estate resources, it needs less real estate.  This also ties into the secular stagnation theory, part of which states that a knowledge/technology-based economy needs fewer real estate resources, leading to a lower amount of physical investment. 

     Interestingly enough, residential investment (the purple bar above), which had been a strong contributor to growth, declined M/M as well.  This is the first drop for this category since the 1Q14.  It does make more sense which you consider that housing starts and building permits have moved sideways for the last year or so: 

     It's doubtful we'll see a strong pick-up in non-residential structural investment due to the low rate of capacity utilization and shift towards an intellectual capital economy.  However, since the start of the year oil has rebounded in price, implying we've at least seen a bottom in the pace of equipment investment.  And the housing market continues to grow: existing home sales just hit a 9-year high and  the new home market is very tight:

The above graph plots new home sales (red line, left scale) and the months of supply of new homes (blue line, right scale).  It shows that while new home sales have been increasing since 2011, the months of supply have been holding steady.  While this is positive for prices (and new home builder profits) it may eventually lead to a shortage.  Ultimately, this means we have a higher probability of additional residential investment, reversing this quarter's contraction.

     Ultimately, it's looking more and more like the U.S. economy has shifted into a lower but ultimately steady pace of growth.


Bonddad's Friday Linkfest

The data skews left.   Also, notice that Spain and Greece -- both of which had truly terrible recessions -- still have incredibly high unemployment rates, which is partly responsible for the still high unemployment rate.

Weekly Chart of the IEV ETF

5-Year Chart of the euro/dollar

The Bank of Japan said it would double its annual purchases of equity funds to ¥6tn as it launched a modest additional stimulus that disappointed markets and sent the yen soaring to ¥103.5 against the dollar.

The central bank kept overall asset purchases unchanged at ¥80tn ($762bn) a year and held interest rates at minus 0.1 per cent.

But in a signal that further action is possible at its next meeting in September, Haruhiko Kuroda, the governor, ordered a “comprehensive assessment” of the economy and the effectiveness of BoJ policy.

The BoJ’s decision suggests it is concerned about sliding inflation but wants to play for time, letting Shinzo Abe, the prime minister, launch a new fiscal stimulus — likely to amount to ¥5tn-¥8tn — before taking any big monetary decisions.

Thursday, July 28, 2016

Apartment renters finally catch a break

 - by New Deal democrat

Together with the new high in single family home sales, the big decline in median asking rents in the second Quarter finally is double-barreled good news in this most leading sector of the economy.

This post is up at

Bonddad's Thursday Linkfest

New Orders

 New orders for manufactured durable goods in June decreased $9.3 billion or 4.0 percent to $219.8 billion, the U.S. Census Bureau announced today. This decrease, down two consecutive months, followed a 2.8 percent May decrease. Excluding transportation, new orders decreased 0.5 percent. Excluding defense, new orders decreased 3.9 percent. 

Capital Goods

Nondefense new orders for capital goods in June  decreased $8.2 billion or 11.3 percent to $64.8 billion.  Shipments decreased $1.0 billion or 1.3 percent to $71.8 billion. Unfilled orders decreased $7.0 billion or 1.0 percent to $700.5 billion. Inventories decreased $1.1billion or 0.6 percent to $169.6 billion. 

5-Year Chart of Durable Goods Orders and Capital Goods Numbers

1-Year Chart of the XLIs

1-Year Chart of the XLI/SPY Ratio

Valuation of the 10 Largest XLI Members 

Change in gross domestic product (GDP) is the main indicator of economic growth. GDP was estimated to have increased by 0.6% in Quarter 2 (Apr to June) 2016 compared with growth of 0.4% in Quarter 1 (Jan to Mar) 2016.

Output increased in 2 of the main industrial groupings within the economy in Quarter 2 2016. Services increased by 0.5% and production increased by 2.1%. In contrast, construction decreased by 0.4% and agriculture decreased by 1.0%.

GDP was 2.2% higher in Quarter 2 2016 compared with the same quarter a year ago.

Chart from the ONS 1Release 

1-Year Chart of the EWU ETF

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

1-Year Chart of the 30-2 spread

1-Year Chart of the 10-2 Spread

Wednesday, July 27, 2016

Bonddad's Wednesday Linkfest

Sales of new single-family houses in June 2016 were at a seasonally adjusted annual rate of 592,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 3.5 percent (±23.9%)* above the revised May rate of 572,000 and is 25.4 percent (±27.9%)* above the June 2015 estimate of 472,000.

5-Year Chart of New Home Sales 

1-Year Chart of the Homebuilder's ETF

Valuation of the 10 Largest Homebuilders by Market Capitalization (Finviz)

Oil Price Are Moving Lower

1-Year Candleglance Charts of the Larger Energy Sector ETFs

Valuation of the 10 Largest XLE Members (Finviz)

The Irish Central Bank has reduced its forecasts for economic growth in response to the UK’s Brexit vote, predicting a “negative and material” impact “both in the short-run and the longer-term”.

The bank said the overall economic outlook for the Republic “remains broadly favourable,” but revised its growth forecasts by 0.2 per cent and 0.6 per cent for 2016 and 2017 “relative to a no-Brexit baseline”.

Tuesday, July 26, 2016

Bonddad Tuesday Linkfest

Here is the problem: Facebook and Google built successful, wildly profitable businesses because they have figured out a way to make money on digital content without actually getting into the messy, expensive business of producing it. Verizon, on the other hand, is buying up assets that require huge investments in exactly that. AOL owns The Huffington Post, TechCrunch, and a wide variety of digital video assets. Under Mayer, Yahoo poured millions into original content, hiring Katie Couric and producing television shows like Community. This stuff does not come cheap, and once you make it, there’s no guarantee that people will watch it or advertisers will want to be associated with it.

Three and a half years ago I wrote The Future's so Bright .... In that post I outlined why I was becoming more optimistic. It is time for another update!

For new readers: I was very bearish on the economy when I started this blog in 2005 - back then I wrote mostly about housing (see: LA Times article and more here for comments about the blog). I started looking for the sun in early 2009, and recently I've been more optimistic.

Here are some updates to the graphs I posted 3+ years ago.  Several of these graphs have changed direction since that original post.  As example, state and local government employment is now increasing, and household deleveraging is over (as predicted).

Nearly 90 percent of companies in the S&P 500 Index that have changed previously disclosed expectations for future earnings have raised the target, among those that reported results between June 1 and July 21, according to data compiled by the bank. That’s the highest since 2010 and near the upper end of a range dating back to December 2003, analysts led by Chief U.S. Equity Strategist Lori Calvasina wrote in a report on July 22.

The Dollar Catches a Post-Brexit Bid

Before Brexit, the dollar was moving toward the 93 level.  However, post-Brexit, it has clearly caught a safety bid, rallying almost 4%.

Emerging markets have in turn become a favoured asset class as sovereign bond yields have plunged across the globe, with some $13tn of debt trading with a sub-zero yield. Investors say the market has been buoyed by the attractive rates offered on riskier debt alongside the expectation that global monetary policies will remain loose.

Funds invested in emerging market debt counted $4.9bn of inflows in the past week, eclipsing a weekly record set earlier this month and lifting the haul since the year began to more than $16bn.

Weekly Chart of the Emerging Market Bond ETF

Monday, July 25, 2016

Forecasting the 2016 election economy: the "Bread and Peace" model says . . .

 - by New Deal democrat

About a year ago, I started a series wherein I made use of various leading indicators to forecast the economy as it would exist leading up to Election Day.  Various economic measures have been used, including:
  • Douglas Hibbs' "Bread and Peace" model
  • Nate Silver's highest correlated economic data
  • Real aggregate wage growth
  • GDP (really, whether or not there is a recession) in Q3 of the election year
  • The Index of Leading Indicators through Q1 of the election year
Rather than discuss all of these in one gargantuan post, let me discuss each in turn.

Today, let's see what the "Bread and Peace" model forecasts.  This model singularly focuses on real disposable personal income per capita, and overweights each quarter closest to election day, through the quarter we are in now.  Here's what I concluded then:

"We don't know what it's values will be for the next year.  What we can say is that, *IF* real disposable personal income per capita continues to grow at the average rate it has since the beginning of 2013, it will be approximately +8.6% on election day, and the "Bread and Peace" model will favor a Democratic victory with the nominee receiving somewhere on the order of 53%-54% of the vote."

In fact, in 2012, Hibbs called for Obama to only receive about 47% of the vote.  After the election, the data was revised to show a surge in Q2 and Q3 of 2012, which was close to Obama's actual vote.  Here's real disposable personal income per capita for Obama's first term:

And here is the final result of Hibbs' model:

In general for the incumbent party's candidate to win, we would want to see real disposable personal income per capita growing at a rate in excess of 1% per year, and especially in the final year.  Here's what the graph looks like through May, normed to 100 as of Q1 2013:

The good news for Democrats is that real disposable personal income per capita has been increasing at a fairly steady clip of about 2% per year during Obama's 2nd term, and is currently up about 7.5%.. Should it continue to grow for one more quarter at a similar clip, that will put it at 8%, forecasting a lopsided Hillary Clinton victory.

There is a fly in the interpretation ointment, though.  The budget deal in 2011 temporarily decreased Social Security withholding through 2012, meaning that real disposable personal income rose strongly in 2012 -- and then plunged in January 2013.  If we use Q2 2012 as our starting point, then real disposable personal income has only risen about 4% in the lsat 4 years -- calling for a result no better tha Obama's 2012 victory and actually closer to a dead heat.

Bonddad's Monday Linkfest

From Bonddad: I'm back from traveling on business last week.

Weekly Sector Performance from Stockcharts

Despite hitting a record high, sector performance was largely negative: two of the three leading sectors were defensive.  

US Sectors Relative Rotation Graph from Stockcharts

Health care (XLV) is now the only sector leading the SPYs over the last 10 weeks.

This downward march of interest rates has occurred prior to and after QE programs and is therefore not the result of central bank tinkering. Rather, it is the result of far bigger global market forces. One interpretation of this movement (based on the expectation theory of interest rates) is that the market expects future short-term interest rates to be increasingly lower. As Tim Duy notes, the Fed is fighting against this force and is unlikely to win. Put differently, interest rates are being suppressed by market forces despite the Fed's best efforts. The Fed will not be able to raise interest rates this year and maybe even next year.

This combination of rising dividends and falling profits has created a situation that at one time I didn't believe I'd ever see outside a recession: a historically normal payout ratio for the U.S. stock market. For the entire run of DividendInvestor, I've been complaining about low yields and payout ratios. The median payout ratio for the post-World War II period is 50%, but since the tech bubble, this metric has scraped new low: just 29% at the 2011 nadir. But with the numerator (dividends) of the payout ratio continuing to rise since third-quarter 2014 and the denominator (earnings) falling, a big shift took place in a hurry. In the four quarters through the first quarter of 2016, the payout ratio of the S&P 500 has reached the 50% mark: normal at last!


Is the Golden Era of Dividend Growth Over?
Several factors are conspiring to thwart dividend growth, explains Morningstar DividendInvestor editor Josh Peters.
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By Josh Peters, CFA | 07-25-16 | 06:00 AM | Email Article
This article was published in the June 2016 issue of Morningstar DividendInvestor. Download a complimentary copy of DividendInvestor here.
About the Author Josh Peters, CFA, is a portfolio manager for Morningstar’s Investment Management group and edits the monthly newsletter Morningstar® DividendInvestorSM.Contact Author | Meet other investing specialists
It's provocative and possibly dangerous to call an end to an era, but I'm going to give it a try: The golden age of dividend growth is over.
Maybe you didn't even know that there had been a golden age of dividend growth, but I trace its start to 2003, when tech bellwether  Microsoft (MSFT) declared its first-ever cash dividend and the federal government brought the tax rate on dividend income in line with long-term capital gains, ending the latter's long advantage. In 32 of the 49 quarters between the first quarter of 2003 and the first quarter of 2015, the year-over-year growth rate for dividends per share for the S&P 500 has been at least 10%: frequent enough for investors to treat double-digit dividend growth as normal, something that can be taken for granted.
History illustrates just how golden this golden age has been. There was that nasty stretch from the fourth quarter of 2008 to the first quarter of 2010 in which dividend payments shriveled at the fastest pace since the Great Depression. The nadir came in the third quarter of 2009, with dividends down 24.1% year over year. Some of that decline reflected dividends that had been raised too much in the preceding boom, particularly in the banking industry. The plunge also made it easier for double-digit growth to return as corporate profits and dividends recovered; only in the third quarter of 2012 did the S&P's quarterly dividend payment reach a new high.

But even with the horrors of 2008–09 in our data, the 12-year growth rate in dividends (adjusted for inflation) has averaged an extraordinary 5.9% a year, edging out even the growth experienced in the post-World War II boom.

Why is the golden age over? It's not just that dividend growth has already slumped, though it clearly has. In the first quarter of 2016, S&P 500 dividends per share rose only 4.6%, the weakest advance in nearly six years. The energy sector can be blamed for much of the weakness, including cuts by  Kinder Morgan (KMI) (which, robbing investors of $3.4 billion annually, is nearly a full percentage point of drag on dividend growth for the S&P 500 by itself) and  ConocoPhillips (COP) ($2.4 billion). But many other dividends that are reasonably secure aren't rising as fast as they used to.
Dividend Select stalwart  Procter & Gamble (PG) is as good an example of this phenomenon as any. Its dividend increase for 2016, despite marking 60 years of uninterrupted growth, was merely 1%. As recently as 2014, P&G's dividend was growing at a 7% annual clip. But years of dividend growth that outpaced gains in earnings per share lifted the company's payout ratio above 70%, at which point it would have been reckless to keep jacking up the dividend in the absence of EPS growth. Since P&G's EPS growth has been clobbered by negative currency effects, a heretofore gratifying rate of dividend growth had to tumble.
Similar forces are at work in the market at large. The price level of the S&P 500 may be within 3% of its all-time high, but trailing-12-months earnings per share, computed under generally accepted accounting principles, have dropped 18% since peaking in the third quarter of 2014. In the same span, dividends per S&P share have risen 14%.

This combination of rising dividends and falling profits has created a situation that at one time I didn't believe I'd ever see outside a recession: a historically normal payout ratio for the U.S. stock market. For the entire run of DividendInvestor, I've been complaining about low yields and payout ratios. The median payout ratio for the post-World War II period is 50%, but since the tech bubble, this metric has scraped new low: just 29% at the 2011 nadir. But with the numerator (dividends) of the payout ratio continuing to rise since third-quarter 2014 and the denominator (earnings) falling, a big shift took place in a hurry. In the four quarters through the first quarter of 2016, the payout ratio of the S&P 500 has reached the 50% mark: normal at last!


Also, and perhaps more important, most of the top payers of dividends today already look about as generous as they ought to be. Of the $411 billion of annualized dividends I estimate for the S&P 500, half is paid by just 37 firms. Some could legitimately afford to pay more without starving their businesses for growth capital or paying too much to be sustained through the next economic downturn, but I can call out only a few ( Oracle (ORCL), Comcast, and  Medtronic (MDT)) for being too stingy for their risk profiles. By contrast, an Apple or  Gilead Sciences (GILD) could pay more, but with less certain futures for profits, perhaps they shouldn't.

Finally, there is the matter of corporate earnings growth, the ultimate wellspring of dividend increases. Forget about the next couple of quarters: Consensus earnings estimates for the back half of 2016 are as preposterously high as ever. What can we expect for actual corporate earnings growth over the long run?

Daily Chart for Verizon and Yahoo