Relevant and even prescient commentary on news, politics and the economy.

Importance of Imports

It is standard analysis to see real and nominal imports as a share of GDP quoted to estimate the importance of imports in the economy. Currently that shows nominal imports are about  15% of GDP and real imports are some 18% of real GDP.

But I suspect that this comparison understates the role of imports in the economy because services are some 45% of GDP but only about 16% of imports.  As my high school algebra teacher was fond of saying, you are adding crabs and apples. Rather, you should compare real goods imports to real goods GDP. On this basis imports are some 46% of GDP, a much larger share than standard analysis shows.  (second chart fixed….Dan)

Comments (2) | |

Quality Spreads

While the yield curve turning negative is getting a lot of attention and seems to be the main excuse for yesterdays stock market drop, there are other financial indicators that are also signaling weaker economic growth ahead.

The primary one is quality spreads as the yield on corporate bonds are rising relative to treasuries.  This is driven by investors fear that in a weak economy, recession environment the risk of corporate defaults rises and bond buyers demand a larger premium to take that larger risk.It is easy to see that quality spreads are driven largely by economic weakness by comparing them to capacity utilization.

 

Comments (9) | |

Long Treasuries vs The Long Wave

Since the early 1990s, I published this chart every month on the back cover of my publication until I retired a couple of years ago.  I thought it was a great piece of marketing to remind readers that I was a long run bull on interest rates.

Readers might not pay much attention or remember claims that I was bullish, but they would pay attention to and remember this.  I even had bond managers walk out over this chart in the middle of my presentation.

Now just felt like a good time to publish it again.

Click on image to enlarge it for better viewing.

 

Comments (6) | |

The Federal Deficit by Presidential Terms

Under Trump the federal deficit has rebounded to some 4.4 % of GDP  — it is the same whether you look at it quarterly or monthly data as this chart does.  The monthly estimate is calculated by Haver Analytics. So much for the tax cut paying for itself.

 

The shaded areas are by Presidential term, not of recessions as is usually the case.  Typically, Republicans leave office with a larger deficit than they inherited while Democrats leave with a smaller one, or a surplus. Of course, this is exactly what “starve the beast” calls for.

Federal Deficit each Presidential Term

Comments (3) | |

THE EPIC JOURNEY OF APOLLO ELEVEN

This is my oldest son the weekend of the Apollo moon landing.

The whole country was glued to their TVs that week.

Figure 1

The TV was about the state of the art 50 years ago and my brother, the photo journalist, took the photo.  In  the pre-digital era he mostly worked in black and white.

Comments (2) | |

S&P 500 P/E

Friday evening the S&P 500 closed at 3013.77, up 20.2 % year to date. But much of that gain is just recovering from the drop in late 2019, as  it is only up some 3.4% from September, 2019.

This is the first time the S&P closed above 3000 and people are wondering if the market is overvalued. The S&P 500 PE is now at 19.6, almost exactly where my model implies it should be.  As the chart shows it is right in the middle of my estimated fair value band just as it was when Trump was elected.  But the PE was 21.3 in November, 2017 as compared to 19.6 now. Both the actual PE and the fair value band declined through 2017  and 2018 and the fair value band has stabilized so far this year.  Interestingly, this means that S&P EPS has been rising faster than the market since Trump was elected. So, aside from the tax cut, investors are not projecting that his economic policies will generate stronger earnings growth.

Figure one

But my model PE is strictly a function of interest rates.  It is an expression of what is the present value of a perpetual stream of earnings growth. You can see how the model said the market was very expensive in the 1990s when investors came to believe that we were in a new era of stronger growth  with out a significant  risk of recession. The early 2000s were just the opposite, when investors feared we were in a new era of permanent stagnation and very weak earnings growth. So the PE was very far below its fair value.

Comments Off on S&P 500 P/E | |

LONG BOND YIELDS

Everybody and their brother has an opinion about the direction of long bond yields so  it should be OK for me to stick my two cents worth in.

This chart of the composite of all long bond yields versus the long wave is one I published every month on the back cover of my monthly publication for over 20 years before I retired a couple of years ago.  Basically, I thought of it as a good way  to show that I was a long term bull on interest rates in a way that money managers would remember. But it did get their attention. The basic message was that on the up-sweep of the long wave, bear market were long and deep while on the down-sweep, bear markets were short and shallow while  bull markets were long and deep.

Figure one

Of course it is always nice to have some basic data to support such a chart and the economic data that seemed to have the best fit over the long run was MZM ( zero maturity money) velocity —

Comments (6) | |