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

WARNING: another “debt ceiling debacle” is looming, and could cause nearly immediate recession

WARNING: another “debt ceiling debacle” is looming, and could cause nearly immediate recession

It’s time to start to get seriously worried about another “debt ceiling debacle.” In 2011, the GOP refused to authorize a “clean” debt ceiling hike. The hike in the debt ceiling, for those who may not know, is necessary for the US government to pay debts that *it has already incurred.*

In 2011, as a result of the impasse, US creditworthiness was downgraded from AAA to AA. Consumer confidence plummeted:

Note the next largest spike downward occurred during the government shutdown at the beginning of this year.

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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.

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Climate change economics

Via Evonomics, Steve Keen critiques Norhaus’s model for predicting economic damage per degree of average temperature rise….nerdy, and includes graphs and math, but worth a look.

By Steve Keen

This piece is part of a series from Steve Keen, Climate Change and the Nobel Prize in Economics: The Age of Rebellion. In the previous post, Keen noted the contrast between the urgency that Extinction Rebellion sees about limiting global warming to no more than 1.5 degrees, and Nordhaus’s conclusion that the gap between the benefits of mitigating global warming and the costs is maximized at a 4 degree increase in global temperature. In this post, he delves into DICE itself.

DICE stands for “Dynamic Integrated model of Climate and the Economy”. It’s the mathematical model from which Nordhaus derives the results noted in the previous figures.

DICE is based on the Neoclassical long term growth model devised by the mathematical prodigy Frank Ramsey in 1928 {Ramsey, 1928 #5029}. This is the same foundation as the mainstream RBC (“Real Business Cycle”) and DSGE (“Dynamic Stochastic General Equilibrium”) macroeconomic models that completely failed to anticipate the 2008 Global Financial Crisis.

Nordhaus’s Damage Function is the first substantive graphic in the DICE manual, and one look at it (see Figure 8) should give anyone—even Climate Change Deniers (CCDs)—cause for concern. Even if Anthropogenic Global Warming were a myth, even if the temperature rise was being caused by the Sun, would it really be true that a 5 degree increase in the average temperature of the globe would only reduce global GDP by 5 percent?

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Does Turkish Lira Decline Mean Turkey Leaves NATO?

Does Turkish Lira Decline Mean Turkey Leaves NATO?

Probably not, but Turkey is about to receive Russian S-400 missiles against US demands.  More signifigantly the US will kill high level US F-35 agreements, and will not fly US planes over Turkey if it uses the Russian systems.  This threatens Turkish membership in NATO.

The immediate result of this in financial markets has been a substantial decline of the Turkish lira over the last several weeks.  While pushing off the US has costs, there will be gains from favoring Russia, from Russian tourist business to other economic deals, as well as cooperation with Russia not only in Syria, but also with respect to Iran, where both Turkey and Russia disagree with US policy to pull out of the JCPOA nuclear agreement with Iran, which has led to a very bad state.

More deeply we see the limits of the weltenschaaung that Trump put forward last September at the UN GA to massive laughter by many other  national leaders, a moment not known to most Americans while unprecedented, the idea of super nationalism. Now he is facing the outcome of his folly on these matters: both Putin and Turkish leader Erdogan agree with him on this nationalist baloney, but now they are allying against him and the US. This shows that the end of this approach is not international cooperation through international organizations like the UN.  It is nationalist competition and rivalries leading to warfare.

Oh, and Erdogan seems to be imitating Trump also on economic policy, although he is playing a weaker hand, with the Turkish economy’s problems one of the reasons the US Fed is looking at lowering interest rates, not only a supposed ally, but one of the G20 nations whose economic problems are serious enough to draw the attention of the US Fed.

Barkley Rosser

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Initial claims positive to start July, but trend in continuing claims the weakest in 9 years

Initial claims positive to start July, but trend in continuing claims the weakest in 9 years

I have started to monitor initial jobless claims to see if there are any signs of stress.My two thresholds are:

1. If the four week average on claims is more than 10% above its expansion low.
2. If the YoY% change in the monthly average turns higher.

Here’s this week’s update.

Initial jobless claims last week were 209,000. This is in the lower part of its range for the past 18 months. As of this week, the four week average is 9.2% above its recent low, and at 219,250, is 1,500 lower than this week last year:

This remains positive.

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Real average and aggregate wages improved in June

Real average and aggregate wages improved in June

Now that we have the June inflation reading, let’s finish out our week focusing on the labor market.

First of all, nominal average hourly wages in June increased +0.2%, while consumer prices increased +0.1%, meaning real average hourly wages for non-managerial personnel increased +0.1%. Together with upward revisions to prior months, this brings real wages up to 97.2% of their all time high in January 1973:

On a YoY basis, real average wages were up +1.6%:

On that score, this morning’s readings include this take by Prof. James Hamilton at Econbrowser indicating that the Phillips curve (the trade-off between inflation and employment) is still alive, together with this guest post by David Branchflower at Talking Points Memo on Jerome Powell’s acknowledgement that the Fed (and many others) failed to appreciate that we were not at full employment in 2016 as they began to raise rates, and stating that the evidence

shows that, now, wage growth is driven not by unemployment but by underemployment, which has still not returned to pre-recession levels. That explains the weak wage growth we see today, and why the U.S. is not yet at full employment.

This has been my point of view as well, and it gives me the opportunity to run a graph I haven’t updated in quite awhile – average hourly wages of non-managerial workers (minus 2.5% for easier observation] vs. the U6 underemployment rate [subtracted from 10% so that lower rates show as positives]. This shows that, following recent recessions, underemployment has had to fall below 10% before wage growth stops decelerating:

Last month I raised a concern that real aggregate wages had decelerated sharply this year, writing that “[w]hen we take the information in the above graph and chart the YoY% change, we see that real aggregate wage growth has typically decelerated by 1/2 or more from its 12 month peak just at the onset of recessions, although there have been 3 false positives coincident with slowdowns.” Well, with June’s revisions that concern has disappeared for now:

Finally, with the improvement in June, real aggregate wages – the total amount of real pay taken home by the middle and working classes – are up 29.2% from their October 2009 low:

For total wage growth, this expansion is solidly in third place, but behind the 1960s and 1990s, among all post-World War 2 expansions; while the *pace* of wage growth has been the slowest except for the 2000s expansion.

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The Condition Of North Korean Conventional Weapons

The Condition Of North Korean Conventional Weapons

This is based on essentially gossip, or if you prefer, a rumor.  I have been dining in Washington again and someone there who is in fact both well known and very well informed, but whom I shall not name, made a comment about the state of conventional weapons in DPRK and also said that this has not been publicly known.  According to this person their condition is much worse than publicly believed.  So out of date and out of condition are they  that supposedly North Korea can no longer  seriously threaten Seoul with a conventional attack (as has long been taken for granted as being possible and looming over the situation there).

The supposed implication of this, if indeed it is true (which it may not be, and this is simply not easily checked on), would be that the DPRK needs its nuclear weapons more than we have thought and will be even less willing to give them up than has been thought, not that many of us have taken too seriously the idea that they would be willing to give them up.  Indeed, there have been recent rumblings out of Washington, denied by the administration, that Trump may be willing to return to the position of earlier administrations and cease trying to get DPRK to give up those weapons while trying to put some limits on the program instead.  Needless to say, Trump has had nothing but ridicule for this position when it seemed to be that of Obama, but if he does it, well, this will sort of be like calling NAFTA the worst trade deal ever and then negotiation a new NAFTA that is only slightly different from it and proclaiming it to be the best trade deal ever.

Barkley Rosser

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The Rise of Global Innovation by US Multinationals

The Rise of Global Innovation by US Multinationals

Lee G. Branstetter, Britta Glennon, and J. Bradford Jensen of the Peterson Institute for International Economics provide an interesting discussion of the risks and opportunities from the following:

Total US R&D spending as a share of GDP increased slightly from 2.5 percent in 1999 to 2.7 percent in 2016.2 Multinationals are an important driver of aggregate R&D spending in the United States.3 Their share of total US R&D spending was 57 percent in 2015.4 US MNCs play a disproportionately important role in driving innovation within the United States. At the same time, US MNCs have dramatically increased their overseas R&D expenditures. Figure 1 shows that US MNCs’ foreign R&D expenditures increased from nearly $15 billion in 1997 to over $55 billion in 2015. In some industries, the growth of overseas R&D has been especially striking. R&D expenditures by overseas affiliates in professional, scientific, and technical services increased by more than a factor of 18 between 1999 and 2014, and the ratio of overseas R&D to domestic R&D by multinationals in this industry has increased from under 10 percent in 1999 to over 40 percent in 2015. While US MNCs’ foreign R&D expenditures have increased dramatically, they still conducted about 83 percent of their R&D in the United States in 2015 (down from 92 percent in 1989).

I wish to add one more wrinkle – that being the transfer pricing implications from these observations and the latest from the IRS:

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May JOLTS report is weak, consistent with last month’s weak jobs report

May JOLTS report is weak, consistent with last month’s weak jobs report

The jobs report one month ago was poor, so as expected the JOLTS report for May, released this morning, followed suit.

To review, because this series is only 20 years old, we only have one full business cycle to compare. During the 2000s expansion:

  • Hires peaked first, from December 2004 through September 2005
  • Quits peaked next, in September 2005
  • Layoffs and Discharges peaked next, from October 2005 through September 2006
  • Openings peaked last, in April 2007

As shown in the below graph (normed to 100 as of May 2018):

As shown above, in today’s report, all of the above series, as well as job openings, declined month over month. Additionally, the only series that were higher compared with one year ago were job openings (+2.8% but significantly off its November 2018 high) and quits (+2.5%)

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