Political Calculations
Unexpectedly Intriguing!
June 24, 2016

Most people don't realize this, but the entire science of economics is really about cows.

Really! Just consider the following list of economic systems that have been proposed, which we've grafted together from a several different sources, and which nearly all begin with a single scenario, where you have two cows....


  • You have two cows.
  • Either you sell the milk at a fair price or your neighbors try to take the cows and kill you.


  • You have two cows.
  • Under the new farm program the government pays you to shoot one, milk the other, and then pours the milk down the drain.


  • You have two cows.
  • You sell one and buy a bull.
  • Your herd multiplies, and the economy grows.
  • You sell them and retire on the income.


  • You have two cows.
  • The government seizes both and provides you with milk.
  • You wait in line for hours to get it.
  • It is expensive and sour.


  • You have two cows.
  • The government takes both of them and hires you to take care of them, and sells you the milk.


  • You have two cows.
  • The government takes one and gives it to your neighbor.
  • You form a cooperative to tell him how to manage his cow.


  • You have two cows.
  • The government takes them and denies they ever existed.
  • Milk is banned.

So what is it about cows that make them so useful for demonstrating different concepts like these different systems of allocating resources in economics?

The short answer is once you've grasped the concept of having two cows, you suddenly have a stake in understanding the concepts of supply and demand that drive real world events wherever resources are scarce and must be allocated by some means, and ideally, the most effective means that make the most people happy.

And as you're about to see, that can be a real challenge. Just consider the following news story from July 2012, where the effect of an especially severe period of drought in U.S. farm states created similarly severe shortages of feed grains for the nation's beef cattle, which created a very painful situation in those states where cattle ranching represents a big part of their agricultural economy.

But the impact of the drought that forced farmers to either sell off more of their cattle herds for slaughter than they really wanted to or else go bankrupt didn't end when the rains returned.

And in fact, the negative impact has endured for years. The accelerated slaughter of beef cattle in 2012 and 2013 caused the supply of cows to fall to reach a 63-year low in 2014, which in turn, caused their price to increase because the demand for beef did not fall enough with respect to the available supply to keep from rising. This is the reason why Americans have seen such high prices for beef in the supermarket during the last few years.

So when the rains returned, easing the shortage of feed grain and thereby allowing cattle farmers to regrow their herds, some people with highly deficient thinking might think that situation would be almost immediately remedied. Such people would be wrong, as other facts of nature would ensure a prolonged depression in beef production, which would begin with an even greater negative impact in the near term, as income would be deferred today as the price of investment for being able to realize more income through greater growth in the future.

The number of young, female cattle held back for breeding probably rose 3.1 percent to 5.53 million head, according to the Bloomberg survey. Beef supplies will keep falling because those heifers aren’t going to the feedlot, said John Nalivka, president of Sterling Marketing Inc., an agricultural economic research and advisory company in Vale, Oregon.

“It’s a real ironic situation that most people wouldn’t think about,” Nalivka said. “At the initiation of herd expansion, you actually reduce your production. That means we’re going to have tight beef supplies for the next two to three years.”

Expanding the U.S. herd is a slow process. Calves have nine-month gestation periods and take 20 months to 22 months to reach slaughter weight, according to Ron Plain of the University of Missouri in Columbia. Animals typically are fattened on corn until they weigh about 1,200 pounds (544 kilograms), when they are sold to meatpackers. The calf crop probably declined to 33.57 million head, down 2.1 percent from a year earlier, the Bloomberg survey showed.

As a result of those considerations, at a minimum, the shortage of beef cattle that was caused by a shortage of feed grain that itself was caused by an especially severe multi-year drought would not begin to recover for a nearly three year long period of time.

Coincidentally, that is exactly what we see now beginning to happen in the USDA's data for U.S. beef production. The following chart spans a little over 10 years of time, from January 2005 through April 2016, which allows us to consider the impact of a couple of major shocks to the economy.

U.S. Beef Production, January 2005 - April 2016

Amazingly, where U.S. beef production is concerned, the negative impact of the most severe period of drought from 2011 through mid-2014 was nearly three times greater than the negative impact of the so-called Great Recession from January 2008 through June 2009 upon the nation's cattle farms.

It has already lasted much longer. For now, it appears to have reached the point where it has started to turn the corner and begin growing again. It will however still be several years before a full recovery can be said to have achieved. Assuming no new climate change shocks or national recessions whack the market environment for cows again in the meantime.

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June 23, 2016
Market Chaos! Run!

If we go by media reports, there is a very fine line between ho-hum and major fear in the U.S. stock market as it considers the potential outcome of the United Kingdom's popular referendum today on "Brexit", in which the British people will state their preference to either remain part of the European Union or will declare that they no longer wish to remain part of Europe's dominant economic and monetary union.

Here is a case in point from yesterday's headlines, courtesy of Reuters:

Wall Street flat, all eyes on Brexit vote

From that headline, you would expect that Wall Street isn't very emotional at all on the topic of Brexit. If you looked at how U.S. stock prices traded on that day, you would find that they fell by 3.45 points, or 0.165%, on the day before the U.K.'s historic vote.

If you want to use an adjective to describe that level of change from the previous day's close in the market, flat is a pretty good one to choose.

Now, compare that headline with the following one that Reuters produced just over a week ago:

Wall Street falls as Brexit vote becomes major fear

From that headline, you would reasonably expect there to have been major market carnage on Wall Street that day, wouldn't you?

There certainly was, if your threshold for major market carnage in the U.S. stock market involves the S&P 500 plunging downward by 3.74 points, or by 0.180%, from its previous day's closing value.

Clearly, where the the most mainstream of media is concerned, there is a very fine line between ho-hum flatness and outright fear in the markets. It just happens to fall somewhere within the 0.29 point gap between a market index that falls by 0.165% on a day defined by what might be described as mildly watchful apprehension and one that falls by 0.180% from the previous day on a day filled with "major fear"!

Update 24 June 2016, 9:24 AM EDT:

Are you ready for blood running in the streets panic - at least, if we go by Reuters' measure of fear? Via Barry Ritholtz, here are the pre-market futures following the actual Brexit vote:

Pre-24 June 2016 Market Futures, via Barry Ritholtz - Source: http://ritholtz.com/2016/06/brexit-meltdown/

Barry writes:

We haven’t seen numbers like this since the financial crisis — although to be fair, these numbers bring us in the USA back to where we were on Monday, prior to the rally this past week; Europe seems to be getting punished to a much greater degree.

As a heads up for what's going to happen in today's stock market action, we're about to get a case study on what happens to U.S. stock prices when investors suddenly shift their forward looking focus from one point of time in the future to another. In this case, from the distant future to the much nearer term. This will be evident today as a direct result of the Brexit vote outcome.

Where the U.S. stock market is concerned, nothing has changed with respect to the expectations for the amount of dividends that will be paid out in the future - at least, as yet, and thus, nothing has changed with respect to the alternative trajectories that U.S. stock prices might take, except just how far forward into the futures are looking. If you want to know where stock prices are going to go, figure out how far into the future investors are looking (use the following chart as your guide, in which we've sketched in how the stock price futures for the S&P 500 stand before the market opens.)

Alternative Futures - S&P 500 - 2016Q2 - Standard Model - Snapshot 24 June 2016, pre-open

We've been through this kind of rodeo with our model's performance before, back when China had its meltdown in August 2015. There will also be a wild card speculative element (noise) in today's trading, but the main shift in the trajectory of stock prices should become pretty apparent over the next several trading days, if not sooner.

As for what to expect, assuming no new unexpected events impact the market, should investors remain focused on either the near term future defined by 2016-Q3 or 2016-Q4, the S&P 500 is likely within 1-2% of where it will end the day. It is certainly possible that an outburst of speculative noise might erupt in the market, which could take it down by an additional 4% from where it looks set to open, but the immediate impact of the Brexit event itself will likely fade during the day, leading stock prices to stabilize.

It is also possible that the world's central banks will take an action that will succeed in refocusing the attention of investors on the more distant future, which would be accompanied by a significant rally.

We'll have fun watching how it all plays out!

Update 24 June 2016, 9:38 AM EDT:

Via Eddy Elfenbein's Twitter feed:


June 22, 2016

How much will U.S. GDP most likely be revised when the U.S. Bureau of Economic Analysis publishes its annual revision to the nation's real GDP on 29 July 2016?

We started working on that question last Thursday, the day after the BEA released its revision of GDP data for the individual 50 states and the District of Columbia, when we identified the "maximum potential" size of the revision to be a -2.0% decline from its value that was recorded at the end of 2015.

We updated that post two days later to take into account the contribution to national GDP from the U.S. government's overseas military and civilian activities, which add to the GDP contributed by the 50 states and the nation's capital to be equal to what the BEA should report for the nation's entire GDP. (Although we did that work last Friday, we only just featured that contribution to national GDP in the period from 2005-Q1 through 2015-Q3 yesterday.)

We then used that information along with the BEA's just-revised data for the individual 50 states plus DC to determine the "maximum likely" size of the upcoming revision to the nation's real GDP. The chart below reveals what we found.

Previously Reported and Revised Real GDP, 2005-Q1 Through 2015-Q4, per BEA Regional Data released on 2016-06-14, Revised to Account for 'Overseas' GDP, with Date Correction - was 14 June 2015, now corrected to 14 June 2016 - previous chart here: https://2.bp.blogspot.com/-EzKqOVcLGC4/V2XJce71MhI/AAAAAAAANkk/uxCWYmwSK98c6baRUFRi1-NmNArdwz1qgCLcB/s1600/Political-Calculations-2016-GDP-Revision-Projection-spanning-2005Q1-to-2015Q4.png

But the "maximum likely" revision of -1.4% of previously reported GDP through 2015-Q4 is not the "most likely" size of the upcoming revision to the nation's GDP will be, because the BEA's plans for the revision of the national level GDP data will only cover the period from 2013-Q1 through 2016-Q1.

That means that it will miss the discrepancy that opens up in 2012-Q3 and 2012-Q4 between the just-revised state level GDP and previously indicated overseas federal GDP and its previously recorded national level GDP. That discrepancy is just over $55.1 billion in terms of constant 2009 U.S. dollars in 2012-Q4, which itself is over 24% of the full $225.7 billion discrepancy that our previous calculations indicates between the pre-revised national level real GDP and the post-revised state level GDP data through 2015-Q3.

Because the BEA won't be including that $55.1 billion portion of the discrepancy from 2012, the "most likely" size of the revision that it will report at the end of July 2016 is therefore -1.1%, which is 24% less than the "maximum likely" revision of -1.4% we previously calculated.

Our "most likely" estimate assumes however that the BEA's estimates of the contribution to national GDP from the U.S. government's overseas military and civilian activities will not greatly change from what it has previously indicated. Should the BEA revise its estimates of this component of nation real GDP, the actual size of the BEA's upcoming revision to the national GDP will entirely depend upon how that single factor might change.

In the case that it turns out that more GDP than previously indicated was generated through supporting the U.S. government's various overseas activities, the actual magnitude of the revision will be smaller than what we've now indicated the "most likely" size of the revision to be, and vice versa for the opposite scenario.

So if you want to place your bets on the over or under, all you need to do is to take your best guess as to just how much more or less of the nation's real GDP has been generated through supporting the U.S. government's activities overseas than what the BEA has previously indicated. To make it interesting, we've set up an online survey where you can put in your two cents and also find out what the consensus is for all those who have answered that single question!

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June 21, 2016

Since January 2007, the GDP of the United States has been boosted by an unusual source: the wars it is fighting abroad.

We can see that from our pioneering analysis of the upcoming July 2016 revision of national GDP, which becomes clear when we pair that data with the national roll up of GDP data for the individual 50 states and the District of Columbia.

The difference between the two data series is entirely made up of the contribution to the nation's GDP from federal military and civilian activity located overseas, which because it falls outside of the territory covered by the U.S. Bureau of Economic Analysis' Gross Domestic Product measurements, cannot be attributed to a particular state.

And because it primarily represents the work of contractors to support the U.S. government's various military and foreign policy endeavors overseas, primarily in Iraq and Afghanistan, it represents the hidden contribution to the national Gross Domestic Product of the United States from its foreign wars.

We calculated the difference between the national level data and the aggregate data for the 50 states plus the District of Columbia in the period from the first quarter of 2005 through the third quarter of 2015 (using pre-14 June 2016 revision data for the aggregate data, which only extended through 2015-Q3). Our results are visualized in the following chart:

The GDP of War: Contribution to U.S. GDP by Contractors Supporting Overseas Federal Military and Civilian Activity, 2005-Q1 to 2015-Q3

What this chart reveals is just how much the unknown soldiers of Afghanistan and Iraq contributed to the economy of the United States, which may very well be the only quantifiable recognition they will get.

President Barack Obama, speaking at Arlington National Cemetery, used standard language of reflection declaring, “We honor the sacrifice of the thousands of American servicemembers — men and women — who gave their lives since 9/11, including more than 2,200 American patriots who made the ultimate sacrifice in Afghanistan.” This is factually accurate.

However, it overlooks the important sacrifices made by non-service members on behalf of military missions. Since 9/11, a total of 1,592 private contractors (approximately 32 percent of whom were Americans) working on Department of Defense contracts were also killed in Afghanistan. Last year, private contractors accounted for 64 percent of all U.S. deaths in Afghanistan (56 service members and 101 contractors died). But we cannot know exactly where last year’s deceased are from, because shockingly the U.S. Department of Labor “does not routinely track the nationality of workers injured or killed under any of the laws administered by the program.”

This common practice of omitting the contractors’ role in U.S. military operations is troubling for several reasons. It overlooks their service and sacrifice, it disperses the burden of war onto poorly paid or protected locals or third-country nationals, and it gives a false impression of a much smaller U.S. military footprint and national commitment. Whenever the White House and Pentagon announce how many troops will be deployed to Iraq or Afghanistan, they never mention how many contractors will be deployed alongside them. When journalists and analysts request information, officials and spokespersons seem to never have it on hand, and it’s difficult to later obtain accurate or updated estimates....

This relative disregard for contractors is especially puzzling given that their support for recent military missions spans almost all phases of operations: shaping the environment, deterrence, support to stabilization operations, and civil governance. Their tasks include training, intelligence, transportation, translation, and force protection. But “contractors” is a dirty word in some military and policy circles, one that many Americans may conflate with the notorious firm formerly known as Blackwater, which was responsible for the massacre of 17 Iraqis in September 2007. However, even at the height of the surge, Blackwater employees comprised only 1 or 2 percent of all contractors in Iraq.

At its peak in the first quarter of 2012, the contribution of U.S. contractors working to support Overseas Federal Military and Civilian Activities was $241.4 billion, which is about 1.5-1.6% of the entire GDP of the U.S. that was recorded for that quarter.

It likewise represents the billions of dollars that were wasted through what can only be considered to be the military and foreign policy failures of the Obama administration in both Iraq and Afghanistan.

Data Sources

U.S. Bureau of Economic Analysis. Table 1.1.6. Real Gross Domestic Product, Chained Dollars, billions of chained (2009) dollars, seasonally adjusted at annual rates. [National Income and Product Accounts (NIPA) Online Database]. Accessed 14 June 2016. [Note: Pre-29 July 2016 revision data.]

U.S. Bureau of Economic Analysis. Quarterly Real Gross Domestic Product by State, 2005-2014 (Prototype Statistics). [Excel Spreadsheet]. 2 September 2015. Accessed 19 November 2015. [Note: Pre-14 June 2016 revision data.]

U.S. Bureau of Economic Analysis. Current-Dollar Gross Domestic Product (GDP) by State, 2014:III-2015:III. [Excel Spreadsheet]. 2 March 2016. Accessed 2 March 2016. [Note: Pre-14 June 2016 revision data. Nominal data was converted to be in terms of chained 2009 U.S. dollars.]


Reuters. Timeline: Invasion, surge, withdrawal; U.S. forces in Iraq. [Online Article]. 18 December 2011. Accessed 20 June 2016.

Stanton, Zack. Summer 2014: Interactive Timeline: War in Afghanistan. Wilson Quarterly. [Online Application]. Accessed 20 June 2016.

Glenn, Cameron. Timeline: Rise and Spread of the Islamic State. Wilson Quarterly. [Online Article]. Accessed 20 June 2016.

Micallef, Joseph V. A Legacy of Failure: Obama's Mideast Foreign Policy. Huffington Post. [Online Article]. 18 October 2015. Accessed 20 June 2016.

Zenko, Micah. The New Unknown Soldiers of Afghanistan and Iraq. Foreign Policy. [Online Article]. 29 May 2015. Accessed 20 June 2016.

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June 20, 2016

How is the pace of dividend cuts in the U.S. stock market during 2016-Q2 coming along compared to the previous quarter? And how does that compare to the pace of dividend cuts that was recorded in the year ago quarter of 2015-Q2?

The last time we answered these questions was six weeks ago, so now that we're in the home stretch for 2016-Q2, let's find out how the pace of dividend cuts announced in the quarter has progressed. Our first chart below updates our chart comparing the pace of dividend cuts between 2016-Q1 and the current quarter of 2016-Q2.

Cumulative Announced Dividend Cuts in U.S. by Day of Quarter in 2016, 2016-Q1 vs 2016-Q2, Snapshot on 2016-06-17

We find that the number of dividend cuts announced in 2016-Q2 through Friday, 17 June 2016 puts it in the borderline range that falls between recessionary conditions being present in the economy and outright contraction occurring within the economy. This marks an improvement over the past six weeks that suggests that the U.S. economy is relatively healthier now than it was just weeks ago.

But how does that compare to the year ago period? Our second chart reveals the differences between the current quarter of 2016-Q2 and the year ago quarter of 2015-Q2.

Cumulative Announced Dividend Cuts in U.S. by Day of Quarter, 2015-Q2 vs 2016-Q2, Snapshot on 2016-06-17

Going by the measure of the number of announced dividend cuts that we've been able to track through our two main sources, the U.S. economy in 2016-Q2 is unequivocally slightly worse than it was in 2015-Q2. We can confirm this in that the total number of dividend cuts with nearly two weeks remaining in the second quarter of 2016 is already higher that the level that our two sources recorded in the same quarter a year earlier.

At the same time, although they have generally followed a similar trajectory through this point in time, dividend cuts in 2016-Q2 have typically been announced sooner than they were in the year ago quarter of 2015-Q2.

Consequently, we would describe the economic trajectory of 2016-Q2 as very similar to 2015-Q2, although having come out of a worse first quarter of the year.

We don't anticipate many additional dividend cuts to be announced through the remainder of June 2016, so unless that significantly changes, we won't visit these charts again until after the end of the calendar quarter.

Next, let's update our chart showing the trajectory of the S&P 500 with respect to the alternate trajectories that our futures-based model of how stock prices work would project.

Alternative Futures - S&P 500 - 2016Q2 - Standard Model - Snapshot 2016-06-17

In Week 3 of June 2016, the S&P behaved largely as our model would predict if investors are focused on the distant future quarter of 2017-Q1 in setting today's stock prices.

As for why that might be, let's review the headlines we considered to be significant in explaining the behavior of stock prices in the trading week ending on Friday, 17 June 2016.

Monday, 13 June 2016:
Tuesday, 14 June 2016:
Wednesday, 15 June 2016:
Thursday, 16 June 2016:
Friday, 17 June 2016:

Data Source

Seeking Alpha Market Currents Dividend News. [Online Database]. Accessed 17 June 2016.

Wall Street Journal. Dividend Declarations. [Online Database]. Accessed 17 June 2016.

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