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


The real trade deficit ( million 2012 $) increased from $81,558 in February to $ 82,054 in March.  The March observation was between the January and February data points so it was not large enough to generate a significant change in imports  0.58 percentage point contribution to first quarter real GDP growth.   In the first quarter real GDP report the significant contribution of foreign trade to real GDP growth has been interpreted by the administration as a sign of success with its trade policies.  But the underlying real import and export data suggest that it is premature to call  it a trend change.

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In evaluating the trade balance it is important to remember that it is the difference between two very large numbers so that a small change in either imports or exports can generate a large change in the balance.  Recently  real imports have been some 150% of real exports. This implies that even if imports and exports have the same growth rate the trade deficit would still widen.  For the trade deficit to improve, exports need to growth much faster than imports.

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S&P 500 PE

Based on the 5 May 2019 close the S&P 500 PE on trailing operating earnings is 18.25.  That places it at the bottom of my fair value band that is based largely on  long term treasury bond yields.  We can each have out own theories, but it appears to be that the market is correcting on fears of what Trump’s trade war will have on earnings growth.

Figure one

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Expect a core CPI of 2% this year.

My discovery that half the annual increase in the not seasonally adjusted core CPI occcurs in the first quarter and that simply doubling the first quarter increase gives you an amazingly accurate estimate of the December to December reading work again in 2018.

In 2019 it is saying the annual increase in the core CPI will be about 2% — the same as the widely accepted consensus.

Figure 1

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2019 Core CPI

In a low inflation world firms tend to raise prices once a year, typically in the first quarter of the calendar year or their fiscal year.   Because of this very strong seasonal pattern, on a not seasonally adjusted  around 50% of the annual increase in the core CPI —  excluding food and energy — occurs in the first quarter

This very strong pattern gives great insight in to the annual inflation rate. One, is if this year’s first quarter is greater than or less that the prior year’s first quarter, this year’s annual increase will be greater of less than the prior year’s annual increase. This has worked every since year since 1990. Second, just doubling the NSA first quarter rate gives you an amazingly accurate estimate of the annual increase in  the core CPI for that year. In 2018 the first quarter rose 1.20% and the annual increase was 2.16%.  This year the first quarter rose 1.06%.  This implies that the rise in the core CPI should be slightly less in  2019 than  it as in 2018.

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Wage Growth

Based on my wage equation, last January I warned to expect a sharp acceleration in wage growth in 2018.  Now that wage growth has risen       from 2.4% in 2017 to 3.4% in 2018, the same economic variables imply that wage growth may be flattening out.  If wage growth remains near    current levels it will be one less factor pressurizing the Fed to tighten.

One of the key variables driving wages higher a year ago was inflation expectations.  Because there  are no good long run measures of inflation expectations  I use the three year trailing growth in the CPI as a proxy for  inflation expectations.  A year ago that measure was starting to     accelerate, but now it appears to be flattening out and should be an   important  factor limiting wage gains.


The first sign of slower wage growth was the 3 month growth rate of average hourly earnings slipping below the year over year change in this months employment report.


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Effective Tax Rates

Along with fourth quarter  GDP, corporate profits for the the fourth quarter was also reported.  Profits growth was either quite strong or very weak depending on how you looked at them.  On a year over year basis, after tax profits growth was 11% and appeared to be accelerating. However, on a quarter to quarter basis after tax profits actually fell -6.73% (SAAR) in the fourth quarter  and that is after a third quarter annual growth rate of only  3.7%(SAAR).  By comparison after tax profits growth surged 38.4 % (SAAR) and 14.0 % (SAAR) in the first and second quarters, respectively.  Much of this early 2018 growth was due to the tax cut.  But now that the tax cut is behind us, it looks like the Administrations promised strong growth remains just that, a Republican  forecast and we all know how seriously to take them.


After this it looks like a good time to look at the impact of the corporate tax cut on the effective corporate tax cut — taxes as a share of  pre-tax profits.

The effective tax rate fell from around 20% to just over 10%.  That sounds like a big drop, but compared to the historic trend where the effective tax rate has fallen from almost 50% in 1950 to just over 10% now it does not look like such  a massive tax cut after all.  Moreover, as the data shows the big impact appears to be behind us and is unlikely to provide much of a boost to growth in 2019.

It also raises serious questions about the Republican promises to eliminate loopholes and other special arrangements so that the revenue loses from lower corporate taxes would not be significant.  I have not seen them make much of an effort along those line.  But maybe I am missing something and commenters can point out such legislation.

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Trump’s Emergency and the Wall

I presume that Trumps Emergency is strictly political theater as it will be tied up in the courts for the next couple of years.

Trump has no problem with this as he can tell his base that it is working and they will accept his story.

Now I’lljust wait and see the response to this idea.

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Stock Market Valuation

Trump is blaming the Fed for the recent poor stock market performance. For once, he may be right.

The recent market plunge took the stock market PE from the top of my fair value band through the bottom. The last observation is the 14 December close. The fitted PE has is a function of both short and long term yields.  This approach implies that the market is now cheap, but that does not necessarily mean that it is a buy.

Figure 1


Maybe you would prefer a leading indicator approach. In this case real MZM growth ( zero maturity money= M1 +money market accounts). It is obvious that MZM growth is still weakening and signalling that the market PE should contito fall. It is just the simple theory that stock market liquidity and movement are driven largely by monetary policy and right now monetary policy is tight enough to drive the market below the fair value band. Moreover, since MZM  growth is still weakening it implies that the market downdraft is not over.

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