Tuesday, February 26, 2019

Happy Birthday and Déjà Vu All Over Again

I am trying something new this week. To be honest, it is mostly because I am lazy and there wasn’t that much to write about this week. Second, I wanted a chance to underscore my brilliance with respect to my past thinking. Third, I am approaching a blog birthday of nine years. Some of you have been reading my stuff for 9 years. Wow – you are true gluttons for punishment. Finally, I have a very wise friend who suggested this to me. And no, that friend is not Jack Daniels.

Below is the link to a piece I wrote in March of 2010. The full title of that post is The Whack-a-Mole Recovery or Good News is Bad New Until the Good News Really is Good News. I do have a way with words, don’t I?

The reason I chose that post for this little experiment is because that’s where the dart hit the board. No, not really, I am not allowed to have pointed objects anymore.  I chose it because it shows how the same themes show up over and over. Nine years is, apparently,  not enough time for us to move on to something new. Its like no time has elapsed. We are saying the same things over and over!

Back then we were worried that the Fed would drive up interest rates and hurt the economy. Back then we were worried that the economy would not sustain a recovery. Back then we were very worried about dis-functional government and a large government debt. 

And so on. But I don’t want to steal the whole show here.

Just take out your bottle of JD and slowly pour it over a huge ice cube into your favorite whisky glass. Enjoy.

Tuesday, February 19, 2019

The Macro 10 in the Era of Trump

I thought it might be an interesting exercise to look at some key US data stretching back to early 2017. When I use the word "early", I am communicating the idea that the exact date of comparisons might differ a bit for each of the 10 measures of the economy. Some are daily data from the second week of February. The others are mostly monthly data -- sometimes January to January sometimes February to February The main idea is that I am trying to compare early 2017 to early 2019.

Maybe you will be surprised. I don't know. There's no real story here. As always, the economy's strength is measured in many ways, and sometimes these measures conflict with each other. Let's try it anyway. Maybe I should have added more items than the 10 I chose. For example, I have not included the government debt or government spending or any measures tied to Gross Domestic Product. These are generally quarterly data and we won't have that information until April.
  • The top of the table presents two key exchange rates. Over this two-year time period the dollar rose against both currencies -- the yen by 3.1% and the euro by 6.2%. 
  • Interest rates on government bonds have oscillated but been pretty stable. The rate on a 10-year government bond was unchanged. The 30-year rate rose from 2.4% to 2.6%.
  • Both the inflation rate and the unemployment rate declined. The decline in the unemployment rate from 4.7% to 4% was probably more meaningful than the small decline in the inflation rate. 
  • Employment rose by 3.4% ending up at 150.5 million persons. 
  • The price of a barrel of crude oil fell to a little less than $53, declining about 5%.
  • Stock markets did quite well. The Dow Jones Average was up almost 22%; the S&P 500 by 17%.
Seems like a yawner to me. What do you think? Is our economy falling apart? Do you see red flags on the horizon? True, I didn't put everything in the table. But you have to admit that these 10 indicators cover a lot of territory. Do you have a better top 10?

2017 2019 Change
Yen per dollar 113.2 109.7 -3.1
Dollars per euro 106.4 113 6.2
10 Year Treasury 2.4 2.6 0.2
30 Year Treasury 3 3 0.0
Inflation Rate*# 2.1 1.9 -1.2
Unemployment Rate* 4.7 4 -0.7
Employment 145.7 150.6 3.4
Crude Oil 55.68 52.71 -5.3
S&P 500 2316 2708 16.9
Dow Jones 20,620 25,106 21.8
*Change in the percent
The remaining changes are percentage changes
#The inflation rate is the rate over the past 12 months in February

Tuesday, February 12, 2019

Are US Financial Assets Getting Riskier?

A critical yet almost secret set of global macro statistics has to do with global financial flows. When is the last time you heard the Five debating global financial flows? The truth is these financial flows are cooler than a large chocolate-covered Dairy Queen at midnight after a night at the Grill.

So let’s start at the beginning. God created heaven and the earth. No, not that far back. We are used to getting international statistics. Even President Trump talks about the trade deficit. We import goods and services from other countries. You might buy an extra cool BMW in Indianapolis but the car was probably made in Germany. That’s called a US import. The US sells goods and services to people all over the world. Goods and services produced here and sold abroad are called US exports. If a person in Riga is sipping a cool JD on the rocks, then the US exported that glorious drink to Latvia.

If US imports are greater than US exports we call that a trade deficit. Even Nolan knows about trade deficits, and he is only 5.9 years old. We read about trade deficits all the time. Every paper reports monthly changes in trade deficits, and I've even seen trade deficit written on a bathroom wall.

Trade deficits are the beginning but not the end of trade. We also trade financial things like bonds, stocks, real estate, and parts of companies. Already, I see you napping, Tuna. But please stay awake. Remember the Dairy Queen reference above. This stuff is going to blow your shorts off. Okay – Tunas don’t wear shorts.

Nowadays, the financial surplus and the change in the financial surplus are the big sharks in town. Note the following:

  • A trade deficit means money flows out of the US.
  • A financial surplus means that money flows back into the US.
  • What goes up must come down – and what goes out must come back in.
It's pretty simple. If we buy a bunch of BMWs we have to send dollars abroad to buy them. When we sell J&D to Latvians, dollars come back to the US. But if we buy more BMWs than we sell JD, then some of the money stays abroad.

Aside from using those dollars as wallpaper in German bratwurst stands, those extra dollars find their way back to the US when foreigners buy US stocks, bonds, etc. And when it comes back like that it creates a international financial account surplus.

We don’t yet have fourth quarter data but I can tell you these changes happened from the third quarter of 2017 to the third quarter of 2018:

  • Financial outflows from the US declined from $374b to $132b.
  • Financial inflows into the US declined from $504b to $152b.
  • Net financial inflows went from a net inflow of $130b to a net inflow of $20b.

What do we learn from this? First during that year, both financial inflows and outflows declined. One could say there was less international financial trade in 2018 than in 2019. Second, the decline in inflows was much larger than the decline in outflows and thus the net amount of money coming back into American financial accounts fell by more than $100b. The majority of this decline came in what is labelled Portfolio Investment in funds shares and debt securities. Another significant decline came from ta reduction in Bank Loans to foreigners.

There are two reasons for this decline in financial trading. First, the US trade deficit in September of 2018 was only about $20 billion larger than in 2017. Thus, we needed less financial inflow to cover the dollar outflow caused by the trade deficit. Second, it might be a warning that foreigners are becoming less interested in US financial assets. Maybe US assets are getting riskier, and foreigners would rather buy financial investments elsewhere.

Now you are experts on international trade. Please send money or JD to me ASAP.

Tuesday, February 5, 2019

War on Poverty

I want to tread very lightly today. Writing about poverty is a lot like writing about legalizing pot – people can get very heated up about it, and the topic has more angles than an I.M. Pei building.

More than likely we can’t even agree on a proper definition of poverty. Below I paste a standard government definition of poverty now apparently used by both the Census and the Office of Management and Budget. I want to start our conversation today with some data and some simple points. You can, if you so desire, add and subtract as you see fit.

I will begin with some points about wars and then move on to some data. You can take it from there.  

The simple point about war is that you usually want to win it. When I played the card game War with my brother, I never won but I definitely wanted to win. Of course, countries sometimes get into real wars and lose. But I doubt that was the purpose. And so it goes with the war on poverty. One would think that Lyndon B. Johnson had in mind reducing the number of poor people in America. Even if he couldn’t reduce the number of poor people, I suspect he would have said he wanted the poverty rate to fall over time. The poverty rate is the percentage of people in a population who are poor.

And so we turn to the data. It is from the US Bureau of the Census and the full citation is below. The most remarkable numbers are the number of poor people from 1959 to 2017. The number of poor people in 1959 were 39,490. In 2017 the number was 39,698. War on poverty? Hmmm. More poor people in 2017 than in 1959.

But, you say, the population has grown enormously since 1959. We need to look at the poverty rate. So, let’s do that. In 1959, the rate was 22.4% of the population. That was very high but by 1969 it was down to 12.1% of the population. One might have proclaimed victory over poverty insofar as the years from 1959 to 1969 go.

But guess what? The rate in 2017 was 12.3%. In the almost half a century since 1969, the rate did not fall again. Despite all the programs we have put in place in those 48 years, we still have the same percentage of our population in poverty.

One might argue that 12% means success. We can’t really do much better than that. But judging from the cries for increasing poverty programs, many people must think that 12% is not a good number. People want it lower than that. The war on poverty has not, apparently, been won in the last 48 years.

The poverty rate did not stay at 12.3% in all those years. The poverty rate was generally lower in expansion years. It was as low as 11.1%, for example, in 1973. During recessions the rate increased. In 2010, it hit 15.1% of the population. So since around 1969, we have a poverty rate that has been anchored at about 12% but rises and falls cyclically.

I went to an Organization for Economic Cooperation and Development (OECD) website and found a comparison of poverty rates across 40 countries for 2017. The USA had the third highest poverty rate, only better than Costa Rica and S.Africa. Apparently other countries have found ways to do better.  (https://data.oecd.org/inequality/poverty-rate.htm )

So what? My conservative friends would say many things. The threshold definition of poverty is pretty high – around $30,000 today -- and that doesn’t even include support from some welfare programs. They might say that the poor today are much better off than the poor yesterday. They would argue against taxing the rich more to continue or expand the war on poverty. My liberal buddies would argue otherwise. They would point out that people are really hurting, and our definition of poverty does not include people who might be a smidge over the line, yet suffering similar consequences.

My question is this. Is it not possible to do better with the money we use now to help people in poverty? Is it not possible to better understand the real and structural factors that move people into poverty temporarily and those that “sentence” them to unending poverty? Is there a difference between programs that make poverty tolerable and those that end it? I have a feeling that if we quit shouting at each other we might actually be able to understand the enemy in the war and do a better job of actually winning the war. A stalemate seems so wrong.

Poverty Definition: Following the Office of Management and Budget's (OMB) Statistical Policy Directive 14, the Census Bureau uses a set of money income thresholds that vary by family size and composition to determine who is in poverty. If a family's total income is less than the family's threshold, then that family and every individual in it is considered in poverty. The official poverty thresholds do not vary geographically, but they are updated for inflation using the Consumer Price Index (CPI-U). The official poverty definition uses money income before taxes and does not include capital gains or noncash benefits (such as public housing, Medicaid, and food stamps).