Political Calculations
Unexpectedly Intriguing!
December 12, 2017

Since the end of the first quarter of 2016, the S&P 500 has experienced a relatively stable period of order, where the variation of stock prices with respect to the mean trend curve established from the relationship between stock prices and their trailing year dividends per share has generally followed a standard normal distribution.

When we last reported on the status of the current period of order several months ago, the level of the S&P 500 had dropped to the point where stock prices were within one standard deviation of falling below a level that would indicate that the period of order was at very high risk of breaking down. Today, we can confirm that the S&P 500 has instead reverted back to the mean trend curve that defines its current period of order.

S&P 500 Index Value vs Trailing Year Dividends per Share, 30 September 2015 through 8 December 2017, with period of order since 31 March 2016

So in case you've ever wondered what "reverting to the mean" really means where stock prices are concerned, what has happened with the S&P 500 from 21 August 2017 to 8 December 2017 can be considered to be a textbook example of mean reversion.

And in case you're wondering what it means when stock prices move outside the outer limits described by this kind of analysis, where order really does break down (as opposed to simply being the result of statistical outliers in a continuing trend), the ultimate textbook example involves the ultimate sell signal.

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December 11, 2017

The S&P 500 behaved more as we expected that it would during the first full week of December 2017, with stock prices dipping as investors shifted their forward looking focus to 2018-Q1 in setting current day stock prices.

Alternative Futures - S&P 500 - 2017Q4 - Standard Model - Snapshot on 08 December 2017

But ended up on Friday, 8 December 2017 at a level that would at first appear to be more consistent with their being focused on 2018-Q2. The reason for that has a lot to do with the positive jobs report that came out on Friday, 8 December 2017, which had the official unemployment rate hold steady from the previous month at 4.1%, but which is down a half percent from November 2016. The report was stronger than expected, which appeared to clear the way for the Fed to not just announce that they will hike U.S. short term interest rates this Wednesday, 13 December 2017, but up to three more times in 2018.

The CME Group's FedWatch tool is reflecting that assessment, where after a 100% probability that the Fed will hike rates on this Wednesday (with a 90.2% chance they'll hike them to a target range of 1.25%-1.50%, and a 9.8% chance they'll hike them even higher to the 1.50%-1.75% range), the Fed Funds Rate futures suggest additional hikes in at least the first quarter of 2018 (2018-Q1) and again in the third quarter of 2018 (2018-Q3).

Probabilities for Target Federal Funds Rate at Selected Upcoming Fed Meeting Dates (CME FedWatch on 8 December 2017)
FOMC Meeting Date Current
100-125 bps 125-150 bps 150-175 bps 175-200 bps 200-225 bps 225-250 bps
13-Dec-2017 (2017-Q4) 0.0% 90.2% 9.8% 0.0% 0.0% 0.0%
12-Mar-2018 (2018-Q1) 0.0% 38.6% 54.8% 6.5% 0.1% 0.0%
13-Jun-2018 (2018-Q2) 0.0% 17.9% 44.7% 31.8% 5.3% 0.3%
26-Sep-2018 (2018-Q3) 0.0% 10.3% 32.8% 36.5% 16.9% 3.2%

Since no hike in the Federal Funds Rate would appear to be anticipated for 2018-Q2 at this time, investors have little reason to focus much of their forward-looking attention on this future quarter, which is why we think that they are now primarily focusing on 2018-Q1, where the level of the S&P 500 is still falling within the range that we would anticipate they would be in that situation.

In any case, this upcoming week will be a big one for markets as the Fed acts and also because we'll start getting our first look at what the future holds for dividends through the end of 2018. In the meantime, here are the market-moving headlines that caught our attention during Week 1 of December 2017.

Monday, 4 December 2017
Tuesday, 5 December 2017
Wednesday, 6 December 2017
Thursday, 7 December 2017
Friday, 8 December 2017

The invaluable Barry Ritholtz provides an overview of the positives and negatives for the U.S. economy and markets in the first full week of December 2017.

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December 8, 2017

Randall Munroe is the author of best-selling (and great gift idea) books like Thing Explainer: Complicated Stuff in Simple Words and our favorite, What If?: Serious Scientific Answers to Absurd Hypothetical Questions, who has just recently come up with a creative way to resolve the decades-old debate on which is the better temperature scale: Fahrenheit or Celsius. Munroe presented his solution at xkcd:

The symbol for degrees Felsius is an average of the Euro symbol (€) and the Greek lunate epsilon (ε).

Now, that's the kind of practical genius that we just cannot ignore, so to help facilitate the worldwide adoption of the new Felsius temperature scale, we've built the following tool to convert either degrees Fahrenheit or degrees Celsius into the new degrees Felsius. If you're accessing this article on a site that republishes our RSS news feed, please click here to access a working version of the tool on our site.

Temperature Data
Input Data Values
Temperature
Temperature Units (Degrees ...)

Temperature Conversion Results
Calculated Results Values
The Temperature in Degrees Felsius

Take that, Lord Kelvin!




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December 7, 2017

The City of Philadelphia's tax collections from its controversial tax on sweetened beverages are continuing to fall well short of the levels that the city's politicians desired. For taxes assessed on sales from January 2017 through preliminary data for October 2017, total beverage tax collections in the city are running over 14% below the amount that city officials were counting upon to support their desired level of spending for a new "free" pre-K school programs, to cover a portion of the debt that the city will take on to make physical improvements to parks, libraries and recreation centers, and also to fund benefits for city employees.

Desired vs Actual Estimates of Philadelphia's Monthly Soda Tax Collections, January 2017 through October 2017)

In the chart above, we've projected the amount of tax collections that Philadelphia would need to collect in each month of the year to reach its annual target of $92.4 million if sales of the sweetened beverages distributed in the city followed the seasonal pattern for soft drink distribution in the United States, which we've shown in blue. Meanwhile, we've shown the actual tax collections that Philadelphia's revenue department has taken in from the tax assessed in the indicated months in red. As you can see, the city's actual sweetened beverage tax collections have continually fallen anywhere from 4% to 21% short of the monthly revenue targets needed to meet their annual revenue target.

The closest that Philadelphia has come to hitting its desired level of monthly revenue was for the soda taxes assessed in September 2017 and collected in October 2017, which at $7,567,159, nearly came within $348,000 of the amount that might reasonably have been expected for the month if the city's tax collections were coming in as city officials desired. Unfortunately, that month appears to be an anomaly, according to Philadelphia's Deputy Revenue Commissioner Marisa Waxman:

"This is a new tax with a lot of seasonality and patterns that we’re still learning, so we've never had collections in October before," she said. "There were some circumstances that contributed to this that we think might not repeat. There are other things in there that could repeat. We’ll just have to continue to monitor how this comes in month to month."

Waxman's comments can also be taken as a confirmation that Philadelphia's soda tax collections are not coming in anywhere near as reliably as city officials expected.

Overall, we also find that through October 2017, the total sales of beverages that are subjected to the Philadelphia Beverage Tax are collectively running about 37% below the levels that city officials indicated were occurring before the implementation of the tax.

Estimates of Quantity of Sweetened Beverages [Millions of Ounces] Subject to Philadelphia Soda Tax, January 2017 to October 2017

We should point out that these figures apply to the quantity of beverages that have been subjected to Philadelphia's soda tax, which is not the same as the quantity of beverages that Philadelphians are consuming, where many residents are purchasing drinks outside of the city's limits to avoid the tax, increasing their consumption of alcoholic beverages that are now closer in cost to the taxed soft drinks, or are creatively hacking their way around having to pay it while also getting their sugar fix.

Previously on Political Calculations

Presented in chronological order....

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December 6, 2017

How fast is the world's economy growing?

A Developing World - Source: Canadian Geographic: https://worldmap.canadiangeographic.ca

That's an easy question to ask, but not an easy question to answer. Much of the economic data used to answer that question that we take for granted in what's called the "developed world" is often either absent or of very poor quality when you get to the nations of the "developing world". Worse, the official economic statistics produced by the economic powerhouses of the so-called developing world, such as China and India, are considered to be highly unreliable, which is especially problematic when you consider that these two nations by themselves account for just shy of 36% of the world's population.

That's a lot of people for whom simply adding up national GDP numbers won't produce anything close to an accurate answer in calculating the growth of the world's economy.

Two years ago, we launched a project to develop a global economic indicator, where we looked to the measurement of the concentration of carbon dioxide (CO2) in the Earth's atmosphere as a tool to get better insights into the relative health of the Earth's economy. Here, because most of the carbon dioxide that accumulates in the Earth's atmosphere gets there specifically because of productive human activities, such as the burning of carbon-rich fossil fuels to produce energy, changes in the concentration of CO2 should be correlated with those productive activities.

The following chart shows the level at which those measurements have been recorded at the remote Mauna Loa Observatory in Hawaii, from March 1958 through November 2017.

Parts per Million of Atmospheric Carbon Dioxide in Earth's Atmosphere, March 1958 - November 2017

What we see first is that the level of CO2 in the Earth's atmosphere follows a seasonal pattern, which is smoothed out using a trailing year average. The trailing year average shows a generally rising trend over time, although one where the amount of CO2 in the air sometimes accelerates and sometimes slows, which should correspond to changes in the world's economic growth rate.

"Should" being the operative word, because not all the carbon dioxide that finds its way into the Earth's atmosphere gets there because of human activities. Periodically, large scale natural phenomena are responsible for large quantities of carbon dioxide entering into the air, which makes using atmospheric CO2 as an economic indicator somewhat problematic. For example, during strong El Niño events, lots of additional CO2 that isn't generated through productive human activity gets into the Earth's atmosphere, where the challenge lies in isolating that contribution of atmospheric CO2 from the portion generated from human economic activities after it has been thoroughly mixed in the air.

We've been working on that problem behind the scenes over the last couple of months. Here's how we cracked it.

We started by focusing on the annual seasonal cycle for atmospheric carbon dioxide. The following chart takes the data shown in our previous chart and shows it month by month, where each line in the chart corresponds to an individual year.

Atmospheric Carbon Dioxide Concentration by Month, March 1958 to November 2017

Here, we can quickly see the annual seasonal pattern for atmospheric CO2 measured at the Mauna Loa Observatory, which typically hits its lowest annual value in October each year and reaches its highest annual value in May of each year.

Our next step was to index each month's CO2 value with respect to the level measured in the preceding October, which we expressed as a percentage, where the value for October in each year would be set to 100%. Our next chart shows the result of that math for all the data from October 1958 through November 2017.

Seasonal Variation of Atmospheric Carbon Dioxide Concentration at Mauna Loa [Indexed to Preceding October's Measurement], October 1958-November 2017

We next focused on those years where we know that lots of additional carbon dioxide enters into the Earth's atmosphere as a consequence of natural phenomena like strong El Niño events. Our next chart filters out all years but those that contained the five strongest El Niño events on record, where we've marked the two most recent, 1997-1998 and 2015-2016, which also happen to be the strongest on record.

Seasonal Variation of Atmospheric Carbon Dioxide Concentration at Mauna Loa [Indexed to Preceding October's Measurement] During Strong-to-Very-Strong El Niño Events, October 1958-November 2017

We may be able to use the difference between in the mean seasonal variation and the actual seasonal variation during El Niño to extract their surplus contribution of CO2 into the Earth's atmosphere, which should just leave behind the CO2 contributed through productive economic activity around the world. In the following animated chart, we've illustrated how that would work by showing the unadjusted values of the trailing twelve month average of the year over year change of atmospheric carbon dioxide with respect to the adjusted values for the 1997-98 and 2015-16 El Niño events, all against the backdrop of some of the world's more significant economic events from January 1960 through November 2017.

Animation: Trailing Twelve Month Average of Year-Over-Year Change in Parts per Million of Atmospheric Carbon Dioxide, January 1960-November 2017, with and without contribution of CO2 from 1997-98 and 2015-16 El Niño Events

We still have some refining work to do for our methodology, where we also need to isolate the contribution of older El Niño events to fully update the chart. Never-the-less, for what we've done so far, the results appear to be promising, where in the case of the 2015-16 El Niño event, it looks like we're reasonably close to the best estimates that we've seen for accounting for the full amount of surplus CO2 that was not generated through productive activity.

And that is how we're marking our anniversary this year, with the advancement of a surprisingly viable global economic indicator!

Celebrating Political Calculations' Anniversary

Our anniversary posts typically represent the biggest ideas and celebration of the original work we develop here each year. Here are our landmark posts from previous years:

  • A Year's Worth of Tools (2005) - we celebrated our first anniversary by listing all the tools we created in our first year. There were just 48 back then. Today, there are nearly 300....
  • The S&P 500 At Your Fingertips (2006) - the most popular tool we've ever created, allowing users to calculate the rate of return for investments in the S&P 500, both with and without the effects of inflation, and with and without the reinvestment of dividends, between any two months since January 1871.
  • The Sun, In the Center (2007) - we identify the primary driver of stock prices and describe a whole new way to visualize where they're going (especially in periods of order!)
  • Acceleration, Amplification and Shifting Time (2008) - we apply elements of chaos theory to describe and predict how stock prices will change, even in periods of disorder.
  • The Trigger Point for Taxes (2009) - we work out both when, and by how much, U.S. politicians are likely to change the top U.S. income tax rate. Sadly, events in recent years have proven us right.
  • The Zero Deficit Line (2010) - a whole new way to find out how much federal government spending Americans can really afford and how much Americans cannot really afford!
  • Can Increasing the Minimum Wage Boost GDP? (2011) - using data for teens and young adults spanning 1994 and 2010, not only do we demonstrate that increasing the minimum wage fails to increase GDP, we demonstrate that it reduces employment and increases income inequality as well!
  • The Discovery of the Unseen (2012) - we go where so-called experts on income inequality fear to tread and reveal that U.S. household income inequality has increased over time mostly because more Americans live alone!

We marked our 2013 anniversary in three parts, since we were telling a story too big to be told in a single blog post! Here they are:

  • The Major Trends in U.S. Income Inequality Since 1947 (2013, Part 1) - we revisit the U.S. Census Bureau's income inequality data for American individuals, families and households to see what it really tells us.
  • The Widows Peak (2013, Part 2) - we identify when the dramatic increase in the number of Americans living alone really occurred and identify which Americans found themselves in that situation.
  • The Men Who Weren't There (2013, Part 3) - our final anniversary post installment explores the lasting impact of the men who died in the service of their country in World War 2 and the hole in society that they left behind, which was felt decades later as the dramatic increase in income inequality for U.S. families and households.

Resuming our list of anniversary posts....

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Welcome to the blogosphere's toolchest! Here, unlike other blogs dedicated to analyzing current events, we create easy-to-use, simple tools to do the math related to them so you can get in on the action too! If you would like to learn more about these tools, or if you would like to contribute ideas to develop for this blog, please e-mail us at:

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