Political Calculations
Unexpectedly Intriguing!
July 21, 2014

A new noise event rattled the markets on Thursday, 17 July 2014, when news broke that a Malaysian Airlines commercial jet had been shot down over eastern Ukraine, potentially by Russian-backed separatists. That act caused stock prices to drop below the level they would otherwise be, assuming that investors are now focused on 2015-Q2 (the quarter the Fed will likely hike interest rates from their current near-zero levels) in setting today's stock prices.

Our expectations/accelerations chart shows the negative impact upon stock prices with respect to the change in the growth rate of dividends expected in that future quarter.

Change in Growth Rates of Expected Future Trailing Year Dividends per Share with Daily and 20-Day Moving Average of S&P 500 Stock Prices, as of 2014-07-18

While stock prices rallied strongly back on Friday, 18 July 2014, in reality, the negative noise generated by the missile attack on Malaysian Airlines Flight MH17 event is still present in the market and is keeping stock prices from rising as high as their fundamental relationship with their expected future dividends indicates that they would otherwise be.

That is evident from the relative position of the trajectory of stock prices with respect to the trajectory they would be taking if not for the negative impact of the terrorist act.

Alternative Futures for S&P 500, 30 June 2014 - 30 September 2014 (Without Echo Effect), Snapshot on 18 July 2014

What this chart indicates is that the perception of investors of the event's potential negative impact on their expectations for the future did not worsen from the previous day, as the gap that opened up in response to the event did not widen. By that same token, the outlook of investors did not meaningfully improve either, as the gap between projected trajectory and actual trajectory did not close on 18 July 2014.

As of the close of market trading on Friday, 18 July 2014, investors were in a holding pattern as more information about the attack becomes known and its potential impact upon their expectations of the future can be assessed. Depending upon what they learned over the weekend, there is a potential for a significant difference between the value the market closed at and the value at which it will open later this morning (21 July 2014) to develop.

And you'll know what they thought of what they learned over the weekend by whether the gap between our forecast and actual stock prices widens or narrows.

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July 18, 2014
Cultural Landscape

If you are a leader, the example you set means everything.

Because it is the people in charge who have the responsibility for setting the priorities for those who work for them and also for shaping the environment in which they will do so. It is the people in positions of leadership who, by their policies and example, provide both the official and unspoken guidance that the people who work for them will follow in determining how they will act. Even when the boss is away - the cultural landscape they establish remains in effect.

In business, it's called "corporate culture". And it plays a massive role in how successful an organization can be. Especially during times of adversity, when challenges can become overwhelming in the absence of a solid organizational culture that can deal with them in a coherent, competent fashion.

As a case study of how important that aspect of leadership is and how much it is missed when it is lacking, let's consider a day in 2014 when the news of the death of 295 people aboard a Malaysian Airlines 777 commercial airliner became known around 11:30 AM EDT and how U.S. President Barack Obama handled it.

Here, we observe a large degree of disengagement on the part of President Obama that day, particularly after the news of the tragedy had become widespread. The White House press pool traveling with President Obama on that fateful day offered the following tidbit nearly an hour and a half after the news first broke:

At approximately 12:50 pm, the motorcade stopped at the Charcoal Pit, a popular, established restaurant just north of Wilmington, Del. Known for its burgers and sundaes. Obama shook hands and mingled with many of the diners, stopping at one point to pick up seven-month old Jaidyn Oates, and pose for a photo.

He invoked Vice Presiident [sic] Biden’s name a few names, noting to some diners, “Me and Joe, we share shakes all the time,” and to others, “Biden told me the burgers are pretty good.”

Just before hugging another young girl, whose mother lifted her across the booth to hug the president, Obama asked, “Do you give good hugs?”

At 1:01 pm Obama declared, “I’m starving!” He sat down to eat with Tanei Benjamin, who wrote the president a year ago. The president ordered a 4-ounce “Pit special,” which is burger with fries. He asked for it to be done medium well, and to have lettuce and tomato. He also asked for a water with lemon.

About an hour after lunch, President Obama finally noted the tragedy, inserting the following comments in a planned speech:

President Barack Obama offered his first public comments on Thursday about the Malaysia Airlines plane that crashed over Ukraine, saying his first priority is to find out whether there were any Americans on board the flight.

“Obviously, the world is watching reports of a downed passenger jet near the Ukraine border,” Obama said in brief comments before a planned speech in Delaware. “And it looks like it may be a terrible tragedy.”

Right now, we’re working to determine whether there were American citizens on board. That is our first priority. And I directed my national security team to stay in close contact with the Ukrainian government,” Obama said. “The United States will offer any assistance we can to help determine what happened and why. And as a country, our thoughts and prayers are with all the families of the passengers, wherever they call home.”

For the sake of context, here's the video of President Obama's remarks so you can appreciate how disengaged President Obama's first comments on the tragic events of 17 July 2014 really were, as the President gave them before going on to say that "it is great to be in the state that gave us Joe Biden":

Meanwhile, it was confirmed very early after the incident occurred that the lives of Americans had been claimed in the crash. In fact, the first reports of that fact were breaking at the same time President Obama was stopping for lunch, even though it would be some time for the exact number and their names were known.

But wait! Weren't there responsible people back at the White House to whom the President might have delegated the task of keeping up on tragic events as they occur? While President Obama's initial reaction was oddly disconnected, surely there were others that President Obama had placed into positions of authority who were on top of what the the President truly needed them to be doing.

Well, judge for yourself - our site saw the following site traffic at 9:08 AM PDT, or rather, 12:08 PM EDT, shortly after more extended news reports of the downing of the Malaysian 777 were hitting the airwaves:

Political Calculations - Executive Office of the President - Site Traffic on 17 July 2014

Amazing the priorities that some have when commercial jetliners are shot down from the sky.

That odd level of extreme disengagement was also observed at other government agencies, including the State Department:

President Barack Obama is setting a very bad example of leadership. And it's showing all across the executive branch of the U.S. federal government.

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July 17, 2014

Who are the major holders of debt issued by the U.S. federal government going into the summer of 2014?

The answer is presented graphically below:

Summer 2014: To Whom Does the U.S. Government Owe Money?

On the whole, there haven't been many changes since our previous edition. We see that the debt reported to be held by Belgium is still considerably inflated over historic levels, as this nation's banks would appear to have acted on behalf of Russian interests seeking to place their U.S. government-issued debt holdings in non-Russian financial institutions ahead of and in the months following Russia's actions to seize control of Crimea from Ukraine.

Tapering the Federal Reserve's Quantitative Easing Program

Our special area of focus on this update of our irregular series on the ownership of the U.S. national debt looks at the role of the Federal Reserve's Quantitative Easing (QE) programs as the central bank of the U.S. has gone from holding a low of $478.7 billion in U.S. government-issued debt securities on 18 June 2008 up to an astounding $2,414.8 billion on 28 May 2014. As of that date, the Federal Reserve held a a combination of $2,370.7 billion in U.S. Treasury securities and $44.1 billion in debt securities issued by other federal government agencies.

The Federal Reserves holdings of these securities now accounts for 13.8% of all the total public debt outstanding for the U.S. federal government, which totals $17.490 trillion as of 31 May 2014. On 1 January 2014, the U.S. national debt stood at $17.352 trillion, of which the Federal Reserve held some $2.266 trillion, or 13.06%.

The Federal Reserve also holds some $1,648 billion in mortgage-backed securities, which are primarily issued by government-backed entities, including the Government National Mortgage Association (Ginnie Mae), which is owned by the U.S. federal government, and the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), which are nominally private institutions, but which have been operating under government conservatorship since 2008. Although these government-backed entities issue mortgage-backed securities, their role is to collect and bundle the mortgages of U.S. homeowners and firms for the money they've borrowed into pools, which are then securitized and traded on the open market - it is not money borrowed by the U.S. Treasury or federal government agencies.

The Federal Reserve began its most recent round of QE government-issued debt buying in the fourth quarter of 2012, which it began doing to keep the U.S. economy from falling into a full-fledged recession at the time. Beginning in January 2014, the Federal Reserve has been steadily reducing the amounts its QE purchases every six weeks, as it believes the risk of falling into recession has diminished.

Even though the Federal Reserve has been reducing its purchases of U.S. government-issued debt securities since the beginning of 2014, as of 28 May 2014, it has boosted its net holdings of the federal government's liabilities by $148.8 billion. Meanwhile, the U.S. federal government borrowed an additional $138.1 billion from 1 January 2014 through 28 May 2014.

Or rather, the Federal Reserve has acquired 107.7% of the net new debt that has been issued by the U.S. Treasury and other federal government agencies during the first five months of 2014.

That's possible because of two factors. First, with the bills for U.S. federal income taxes coming due on 15 April 2014, the federal government experiences a surge of tax revenue during this part of the year, which can be enough to allow it to run a short-term surplus, reducing its need to borrow money during this period of time.

Second, the Federal Reserve is displacing other entities that lend money to the U.S. government, who are seeing their share of debt issued by the U.S. government fall as the debt they hold matures. That allows the U.S. Treasury to roll over a portion of the existing national debt and borrow more money, in this case, from the Fed, which doesn't show up as a net increase in the overall size of the national debt.

And that is how the U.S. Federal Reserve can lend more money to the U.S. federal government than the U.S. government appears to have borrowed, even as the Fed is reducing the amount it lends to the government!

Data Sources

Federal Reserve Statistical Release. H.4.1. Factors Affecting Reserve Balances. Release Date: 5 July 2013. [Online Document]. Accessed 16 July 2014.

U.S. Treasury. Major Foreign Holders of Treasury Securities. Accessed 16 July 2014.

U.S. Treasury. Monthly Treasury Statement of Receipts and Outlays of the United States Government for Fiscal Year 2013 Through May 31, 2014. [PDF Document].


July 16, 2014

There are two Californias. There is one where adults (Age 20 and over) are gaining jobs at a rate that's slightly faster than was the case in the years before the December 2007-June 2009 recession in the U.S.

Labor Market for Adult (Age 20+) Californians, January 2005 through May 2014

And there is the one where teens (Age 16 to 19) are falling further and further behind in the job market.

Labor Market for Teenage (Age 16-19) Californians, January 2005 through May 2014

Notes and Observations

The data in both charts is the trailing twelve month average for non-seasonally adjusted data. Taking the trailing year average of this data allows us to account for the effect of seasonality in the data.

California increased its minimum wage from $6.75 per hour to $7.50 per hour on 1 January 2007. The effect upon teens in the labor market was minimal since California's economy was still growing, which allowed employers to somewhat offset the 11% increase at the time. That said, instead of keeping pace with the job market for adults, we see that the employment situation for California's teens basically flatlined during 2007. We also see that the number of employed teens began falling in the months prior to the minimum wage increase, as employers anticipated the hike.

California increased its minimum wage from $7.50 per hour on 1 January 2008. Once again, the job market for adults was little affected, with the number of employed Age 20+ Californians growing through July 2008 before finally being negatively impacted by economic contraction and its associated deflationary pressures.

By contrast, the employment situation for Californians teens began deteriorating rapidly after the higher minimum wage was imposed, with the rate of decline in the number of employed teens in the state not decelerating until September 2010 - one year and three months after the recession in the U.S. ended, before beginning to decline at a much slower pace.

Meanwhile, adult Californians saw their job market turn around months earlier, growing at a pace similar to that from before the recession through July 2011, then at a faster pace afterward.

The job market for teens in California didn't bottom out until January 2012, then began recovering at a much slower pace than that for adults. That slow rate of improvement lasted through December 2013. Since January 2014, the trailing twelve month average for the number of employed teens in California has been falling in the months in advance of the state's next minimum wage hike from $8.00 per hour to $9.00 per hour on 1 July 2014.

Throughout all this time, California has been home to one out of 8 teens in the United States. In January 2005, one out of 10 employed teens in the U.S. lived and worked in California. In May 2014, one out of 12 employed teens in the U.S. lived and worked in California.

Americans between the ages of 16 and 19, by the way, make up approximately 25% of all individuals who earn the minimum wage in the United States.

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July 15, 2014

How many dividend paying companies are there in the S&P 500?

Through 9 July 2014, we count 425 companies among the components of the S&P 500 that currently pay cash dividends to shareholders. Our chart below shows how their number has changed since 1980, which we note is largely in response to how the U.S. federal government has set the tax rates for both dividends and capital gains.

Dividend Paying Companies in the S&P 500, 1980-2014

In terms of the most recent trend, 85% of the companies in the S&P 500 are now paying dividends, up from the 70.2% that were in 2002, the last full year before the tax rates for both dividends and capital gains were once again set to be equal to one another.

Factors Affecting the Number of Dividend Paying Companies in the S&P 500

While recessions tend to temporarily lower the number of companies paying dividends, which we would expect since some of the 500 companies that make up the S&P 500 would lack the earnings needed to pay dividends during these periods of contraction in the U.S. economy, we find that the biggest driver of what affects the number of companies paying dividends to individual shareholders, pension and retirement plans, et cetera is the relative tax rates of dividends and capital gains with respect to each other.

For example, in 1978, before we have data showing the percentage of S&P 500 dividend payers, the capital gains tax rate was reduced from a maximum tax rate of 39.9% (that's on paper - the real maximum capital gains tax rate was 49.9% as a result of an interaction with the maximum regular income tax rate) to 28%, which was then lowered to 20% in 1981.

By contrast, the tax rate for dividends was the same as for personal income taxes, with a maximum tax rate of 50% beginning in 1982. Prior to 1982, the maximum personal income tax rate was 70%.

That changed with the U.S. Tax Reform Act of 1986, which equalized the maximum tax rates for both dividends and capital gains at 28%.

In the period before 1986, the number of S&P 500 companies that paid dividends to their shareholders declined from 469 in 1980 (or 93.8% of all companies making up the index) to 426 companies in 1986 (or 85.2%). After 1986, the number of dividend paying companies in the S&P 500 was largely stable, ranging between 426 and 438 for the next decade.

That stability ended with the Taxpayer Relief Act of 1997. Here, the capital gains tax rate was reduced from 28% to 20%, while the tax rate of dividends was held at the 28% level. As we can see in the chart above, this change in tax law coincided with a dramatic drop in the number of companies within the S&P 500 that paid dividends, which plummeted from 427 in 1997 to 351 in both 2001 and 2002.

The Taxpayer Relief Act of 1997, by the way, caused the Dot-Com Bubble to form the U.S. stock market.

That decline in the number of S&P 500 companies paying dividends wasn't reversed until 2003, with the passage of the Jobs and Growth Tax Relief Reconciliation Act, which once again equalized the tax rates of both capital gains and dividends, but this time at 15%.

Since then, the number of dividend paying companies in the S&P 500 has rising from 351 in 2002 to 425 at this point in 2014, despite a recession-driven dip to 363 companies in 2009, and also the increase in the maximum tax rates for dividends and capital gains to 23.8% as part of the Fiscal Cliff tax deal in January 2013.

Data Source

Standard & Poor. S&P 500 Issue Indicated Dividend Rate Change. [Excel Spreadsheet]. Accessed 9 July 2014.

Previously on Political Calculations

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