Political Calculations
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June 23, 2017

Summer 2017 is turning out to be something of a disappointment at the cineplex. So, with that thought in mind, we're going to do what millions of teens this summer are doing and turning to YouTube for the kind of fun that used to come with Hollywood's biggest blockbusters, but which seems to be in too short of supply this summer. Enjoy!...

But wait, we have a double feature!

In other, important entertainment news, Hollywood director Joel Schumacher has finally apologized for Batman and Robin, which almost completely counteracted all that was good at the movies in the summer of 1997.

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June 22, 2017

We're almost to the end of 2017-Q2, so we'll take one last snapshot of how the pace of dividend cuts being reported in our ongoing real-time sampling are stacking up for the calendar quarter. First, here's how the second quarter of 2017 compares with the preceding quarter of 2017-Q1:

Cumulative Announced Dividend Cuts in U.S. by Day of Quarter in 2017, 2017-Q1 and 2017-Q2, Snapshot on 2017-06-21

As of 21 June 2017, the number of dividend cuts announced during 2017-Q2 is slightly higher than what was reported in 2017-Q1, with 44 in the current quarter's sample as compared to the previous quarter's 41 as of the same relative point of time in the quarter.

But 2017-Q2 is well behind the year ago quarter of 2016-Q2's total of 59 dividend cut announcements through the similar point of time in the quarter....

Cumulative Announced Dividend Cuts in U.S. by Day of Quarter, 2016-Q2 vs 2017-Q2, Snapshot on 2017-06-21

All in all, the number of dividend cuts in the quarter are consistent with recessionary conditions being present in the U.S. economy.

In our sampling, about 41% of the firms announcing decreases in their dividend payments to their shareholding owners are in the oil and gas sector of the U.S. economy, which follows from the reduced revenues they're earning with reduced oil prices in the global market.

There is also a high percentage of financial firms and real estate investment trusts in the mix, which combine to account for 25% the total. The remaining firms come from seven different industries, most notably chemical producers that produce agricultural fertilizers, where that industry accounts for 11% of the sampled 44 dividend cutting firms during in the quarter.

Data Sources

Seeking Alpha Market Currents. Filtered for Dividends. [Online Database]. Accessed 21 June 2017.

Wall Street Journal. Dividend Declarations. [Online Database]. Accessed 21 June 2017.

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June 21, 2017

The U.S. government passed a unique milestone in May 2017, where it has now cumulatively borrowed more than $1 trillion from the public since President Obama was sworn into office in January 2009, just so it can loan the money back out to Americans who need to borrow money to go to college in the form of Federal Direct Student Loans.

Money Borrowed by the U.S. Government to Finance the Federal Direct Student Loan Program, FY 1998 (October 1997) through FY 2017 (May 2017)

President Obama is directly responsible for this state of affairs. After being sworn into office on 20 January 2009, his first major domestic policy act was to sign the American Recovery and Reinvestment Act of 2009 into law on 17 February 2009 in an attempt to jump start a U.S. economy that had fallen into deep recession. Better known as the "Stimulus Bill", the act boosted the subsidy amount and quantity of Pell Grants paid to low and middle income-earning Americans attending college, but not by enough to cover more than one-third of the average annual cost of a university education, where American students who received these grants would then have to make up the difference through taking out student loans that are subsidized by the U.S. government.

Then, on 30 March 2010, President Obama signed the Health Care and Education Reconciliation Act of 2010, which resulted in the U.S. government taking over the student loan industry from the private sector.

President Barack Obama signed a law Tuesday that he said will end subsidies for banks that guarantee federal student loans, saving $68 billion over 11 years by making loans directly through the U.S. Department of Education. 

The overhaul of the student loan industry is part of the Health Care and Education Reconciliation Act of 2010, which was passed by Congress to reform the nation's health care system. 

According to the White House, starting July 1 all federal student loans will be direct loans administered through private companies that have performance-based contracts with the DOE. 

At present, the law appears set to fail on delivering these promised savings to U.S. taxpayers. For that portion of the story, please scroll down and click through!...

Previously on Political Calculations

U.S. Student Loan Implosion - We looked at the Federal Direct Student Loan program from the perspective of the student borrowers, where $137 billion worth of loans that have come due are either delinquent (more than 90 days without any payment being made) or are in default (more than 270 days without any payment being made).

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June 20, 2017

How likely is it that the U.S. economy will go into recession sometime in the next year?

The combination of rising short term interest rates and falling yields for long term bonds is often considered to be a harbinger of recession in the U.S. economy. And with the Fed having left its Zero Interest Rate Policy behind while the yields on long-term U.S. Treasuries have been falling in recent weeks, we thought it was time to dust off the version of the Recession Probability Track visualization tool that we introduced in September 2007 to indicate the odds that the U.S. economy would be in recession up to a year later.

Back then, the historical data we showed in our Recession Probability Track indicated that the odds of a recession beginning in the next year had already peaked back at 50% back on 4 April 2007, which is to say that it was signaling that there was at least even odds of the U.S. having a recession begin by 4 April 2008. As it turned out, the National Bureau of Economic Research determined that the U.S. economy expanded all the way through December 2007, before beginning to contract into recession in January 2008, where what we now call the "Great Recession" is considered to have begun in December 2007, coinciding with the peak of the preceding period of economic expansion, marking Month 0 of the recession that would last until the NBER determined that it bottomed in June 2009.

The last time we showed the Recession Probability Track was 6 November 2008. Just over a month later, the Fed would implement its Zero Interest Rate Policy, which would render the Recession Probability Track useless as a recession prediction tool for the next 7 years, until the Fed stopped holding its thumb on the zero end of the scale in December 2015.

Today, some four small interest rate hikes later, the Fed can still be considered to be applying pressure at that end of the scale, but not so much as to prevent the Recession Probability Track from registering a non-zero probability....

Recession Probability Track, 2 January 2014 through 19 June 2017

At 0.17%, we find that there's very little probability of what the NBER might someday declare to be a full-blown recession breaking out in the U.S. economy sometime between now and 19 June 2018. At least, not one propositioned on Jonathan Wright's yield curve-based recession forecasting model, which factors in the one-quarter average spread between the 10-year and 3-month constant maturity U.S. Treasuries and the corresponding one-quarter average level of the Federal Funds Rate. If you'd like to do that math for yourself, we have also built a very popular tool to help with that!

That doesn't mean however that the U.S. economy might escape without experiencing some level of distress. As we saw from mid-2014 through 2016 in oil and gas production states in particular, along with some other states whose major industries are linked to the health of that sector of the economy, it is possible for some degree of significant economic contraction to occur without leading to a national recession.

For other takes on the same data trends and what it might mean for the prospects of a U.S. recession, be sure to check out Kevin Erdmann's thoughts on the flattening yield curve and Joshua Brown's perception that flattening is not threatening, as well as Mike Shedlock's contrarian speculation from a month ago.

Finally, we should also note that China has seen its yield curve invert in recent months, where our recession forecasting tool has become increasingly popular among readers there, even though it wasn't specifically designed to consider China's economic situation and history, so we don't know how well it might work for assessing that nation's recession odds.

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June 19, 2017

The Federal Reserve surprised no one with the announcement that its Federal Open Market Committee (FOMC) had voted to hike U.S. short term interest rates by a quarter point.

For our dividend futures-based model for forecasting the S&P 500, investors appeared fully focused on 2017-Q2 in setting stock prices on the day of the Fed's announcement, which given the influence that the Fed has over the future expectations of investors, was to be expected.

Alternative Futures - S&P 500 - 2017Q2 - Standard Model - Snapshot on 16 June 2017

But what happened after that is somewhat telling. Although the top line number for the value of the S&P 500 didn't change much, the action of stock prices in the days following the announcement combined with the week's major economic news (and to be honest, in the weeks preceding the announcement) suggest a division within the component companies that make up the index has intensified over what we observed in Week 1 of June 2017.

Where there that gets interesting is that what the S&P 500 is communicating about the expected timing of the Fed's next rate hike action is very different from what other futures-based models are communicating.

Our model suggests that investors are currently betting on 2017-Q4 as the likely timing for the Fed's next rate hike, currently giving about a 72% probability of that being the case, with the remainder banking on the Fed taking action in 2017-Q3. CME Group's Fedwatch model however is currently giving almost the opposite odds between the two quarters, with an 84% probability that the FOMC will act to hike its Federal Funds Rate at the conclusion of its 20 September 2017 meeting.

Update 2:30 PM EDT: We stand corrected, where we appear to have gotten our wires crossed in reading the FedWatch FFR futures! According to CNBC, "Market expectations for a September rate hike are just 13 percent, according to the CME Group's FedWatch tool." That's a lot closer to what the dividend futures are telling us.

It will be fun to watch how both indicators evolve over the next several weeks. From the perspective of our dividend futures-based model, it will take some substantial good economic news to boost the odds that the Fed will next hike interest rates in September 2017, which would be accompanied by a decline in stock prices. Conversely, if that news is bad and the Fed is compelled to delay its next action until later in 2017, then the S&P 500 would find itself drifing sideways to slightly higher in the weeks ahead.

Right now, we think that the context of the current market environment from the major market news stories of the second full week of June 2017 are supporting what dividend futures appear to be anticipating for the future for the S&P 500, but here they are so you can judge for yourself.

Monday, 12 June 2017
Tuesday, 13 June 2017
Wednesday, 14 June 2017
Thursday, 15 June 2017
Friday, 16 June 2017

For a succinct summary of the week's positives and negatives for the economy, be sure to check out Barry Ritholtz' latest!

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