Wednesday, June 06, 2012

Stocks Predict Presidential Elections @ 88%

The chart above displays the S&P 500 Index and Intrade odds for Obama to be re-elected, on a daily basis back to December 2010. The two series have moved pretty closely together over the last 18 months, with a correlation coefficient of 0.78.

Business Insider featured a similar graph as its Chart of the Day on Monday (ht/Craig Newmark), and also linked to this article about the relationship between the stock market and presidential elections, featuring Sam Stovall, chief investment strategist for Standard & Poor's Equity Research Services, who wrote this in a recent S&P newsletter:

"The S&P 500's price performance during the three calendar months leading up to the presidential election has been a good predictor of whether the president or his party would be re-elected or replaced. An S&P 500 price rise from July 31 through October 31 traditionally has predicted the reelection of the incumbent person or party, while a price decline during this period has pointed to a replacement. Since 1948, this election-prognostication technique did an excellent job, in our view, recording an 88% accuracy rate in predicting the re-election of the party in power (it failed in 1968). 

What's more, it recorded an 86% accuracy rate of identifying when the party in power would be replaced (it failed in 1956). Therefore, pay attention to the market's performance in the three months leading up to the presidential election, as it will probably do a better job than the plethora of political pundits prognosticating on the presidency."


85 Comments:

At 6/06/2012 1:07 PM, Blogger morganovich said...

if one is seeking a reason why it is so tempting to politicize the fed (the tape is up today on comments about the fed printing more money, qe3 etc) one need look no further than this correlation.

the fed cannot fix the economy by printing money, but it can sure flood the stock market with liquidity, especially with bond yields where they are.

 
At 6/06/2012 1:31 PM, Blogger Methinks said...

The market is up. A lot (although, it's selling off a bit as I write this) for the second day. But, volume is very light for both days. A shudder from Europe will send it down again - and the Greek election is the weekend after this one.

As we get closer to the end of the year, the market will have to price in the massive tax increases from the expiration of the Bush-era tax cuts and the new Medicaid tax Obama imposed in his health care law.

My bet is that the higher the probability Obama wins, the higher the probability of tax hikes and the lower the market will have to go to increase yields. And so, if these correlations are meaningful, Obama's own tax increases will work against him in the next election.

Well, at least something good will come of out of Obamacare.

 
At 6/06/2012 1:40 PM, Blogger PeakTrader said...

Morganovich, Scott Grannis said a couple of days ago:

"How has the Fed become less easy if they haven't announced such a change in policy? That's easy: the Fed has become less easy inadvertently, because they have not responded to an increase in dollar demand from global investors.

10-yr Treasury yields have plunged to an all-time low of 1.5%, but 10-yr TIPS break-even rates show no sign of unusually low inflation expectations, and 5-yr forward inflation expectations derived from TIPS and Treasuries have actually been rising for the past 9 months and currently stand at 2.6%. This suggests that the decline in nominal yields is being driven not by declining inflation expectations—which in turn would be what we might expect if there were a need for the Fed to ease—but by sharply declining expectations for real growth."

 
At 6/06/2012 1:47 PM, Blogger PeakTrader said...

Methinks, the 2012 election is shaping up to be a repeat of the 2010 election, which isn't good news for Obama to win reelection.

 
At 6/06/2012 2:19 PM, Blogger morganovich said...

peak-

scott has totally missed the boat there. in a normal market, the relationships he posits might be true (assuming one believes that cpi and inflation are synonymous), but in this market, the facts are different because the bond market is being so heavily manipulated by the fed, but foreign CB's trying to manage exchange rates, and by the massive purchase of mortgages by freddy and fannie pushing back heaps of money to the banks that they then need to put into federal debt (at increasing leverage i might add).

to attempt to draw normal conclusions from the most manipulated bond market in american history is going to lead to bad conclusions.

 
At 6/06/2012 2:23 PM, Blogger Moe said...

The stock market experiences long-term cycles that are largely beyond political influence. Is it the stock market or where we are in the business cycle that really matters?

 
At 6/06/2012 2:26 PM, Blogger Methinks said...

Matters to whom, Moe? The voters don't give two craps about your long-term cycles. All they know is their 401-K is suffering.

 
At 6/06/2012 2:29 PM, Blogger Moe said...

really matters as a predictor of elections...

 
At 6/06/2012 2:41 PM, Blogger morganovich said...

moe-

this market is being driven far less by business cycle and far more by huge flows of liquidity from the fed than any in us history.

a hideously activist fed with loose money has caused bubble after bubble since the late 90's.

this has essentially wrecked the stock market.

reported us gdp in constant dollars is 225 above 200 levels.

the S+P is 15% below its NOMINAL level in 2000 and down over 40% in constant dollars.

that's a pretty dramatic uncoupling from the purported business cycle.

 
At 6/06/2012 2:42 PM, Blogger morganovich said...

sorry, that should read 22%. missed the shift key.

 
At 6/06/2012 2:45 PM, Blogger PeakTrader said...

Morganovich, there were no significant changes in U.S. policy to cause the huge flight into U.S. Treasury bonds recently.

Investors are abandoning Europe, and other countries, for the U.S..

 
At 6/06/2012 2:46 PM, Blogger Moe said...

I hear you - very little is "normal" these days - business cycles included.

 
At 6/06/2012 3:12 PM, Blogger PeakTrader said...

Morganovich says: "a hideously activist fed with loose money has caused bubble after bubble since the late 90's...this has essentially wrecked the stock market."

Obviously, you don't understand what causes "bubbles."

The Fed is not in the business of creating asset bubbles. It smooths-out business cycles, including long-wave business cycles, to optimize growth.

The last two major asset bubbles, from 1995-00 and 2002-07, created enormous real wealth in the U.S. economy (I've shown the data to you more than once before, and you obviously dismissed it, since it contradicts your ridiculous statements).

Those bubbles were only residuals of appropriate monetary policy to maintain sustainable growth. There are other factors beyond the Fed's control why the country is in depression. You should be praising rather than blaming the Fed.

 
At 6/06/2012 3:30 PM, Blogger Moe said...

Mr. Greenspan’s encouraged the bubble in housing prices by keeping interest rates too low for too long and he failed to rein in the explosive growth of risky and often fraudulent mortgage lending.

He freely admitted back in '08 he whiffed that one.

 
At 6/06/2012 3:59 PM, Blogger Jet Beagle said...

When the economy is growing:

- corporate profits are generally rising and stock prices go up;

- workers are more secure in their jobs and more likely to favor the incumbent.

As I see it, stock prices are not the cause for incumbent re-election. But they are a proxy for the true cause, the growing economy.

As methinks points out, workers today also care about the value of 401Ks. So stock prices today may directly influence an incumbents re-election chances. But I don't think 401Ks would have been a factor prior to the mid-1980s.

 
At 6/06/2012 4:00 PM, Blogger Tom said...

Abolish the Fed.

 
At 6/06/2012 4:15 PM, Blogger Methinks said...

Investors are abandoning Europe, and other countries, for the U.S.

Well, today they decided that Europe is all fixed and they were dumping Treasurys in favour of Eurodebt and high risk assets because QE is in t


The Fed is not in the business of creating asset bubbles. It smooths-out business cycles, including long-wave business cycles, to optimize growth.he air again.

The Fed is not supposed to be in the business of creating asset bubbles, but it is. Once the Fed cranks up the printing press to smooth out those business cycles, it can't control where the money actually flows.

The last two major asset bubbles, from 1995-00 and 2002-07, created enormous real wealth in the U.S. economy

You don't seem to understand what a bubble is.

Real wealth was created in those time periods, but not because of the overvaluations necessary to create a bubble. There really was a killer app in the 1990's. That doesn't mean there wasn't also lots of misallocation. Real wealth was also created in the last decade, that didn't mean that there wasn't a misallocation of resources. And those misallocations were likely much larger because the Fed was dropping money from helicopters.

There are other factors beyond the Fed's control why the country is in depression. You should be praising rather than blaming the Fed.

In fact, everything the Fed is expected to control is beyond its control. The Fed can and has created a lot of harm.

 
At 6/06/2012 4:16 PM, Blogger Methinks said...

Mr. Greenspan’s encouraged the bubble in housing prices by keeping interest rates too low for too long and he failed to rein in the explosive growth of risky and often fraudulent mortgage lending.

Yep. And Bernanke thinks the outcome was so great that he's decided to continue that policy.

BTW, I think Greenspan has dementia. The guy has been spouting nonesense nonstop since 2008.

 
At 6/06/2012 4:23 PM, Blogger Jet Beagle said...

methinks: "Once the Fed cranks up the printing press to smooth out those business cycles, it can't control where the money actually flows. ...

... In fact, everything the Fed is expected to control is beyond its control. The Fed can and has created a lot of harm."


I completely agree.

 
At 6/06/2012 4:24 PM, Blogger Moe said...

but...but...but.. He's the Maestro!

 
At 6/06/2012 4:36 PM, Blogger Methinks said...

This comment has been removed by the author.

 
At 6/06/2012 4:37 PM, Blogger Methinks said...

Moe,

That's what people say about someone when they can't understand the ten dollar words he uses.

And when things are going well or poorly, obviously, this is attributed to whatever activity is going on simultaneously. That's how Greenspan became a genius and "austerity" is causing Europe's woes. Of course, it must be the mere babbling about austerity that's inflicting the damage in Euroland because there's no actual austerity going on.

 
At 6/06/2012 4:39 PM, Blogger Moe said...

This headline just popped up on from WSJ:
Fed Considers More Action Amid New Recovery Doubts

I'd delve into it, but gave up my WSJ subscription 2 years ago as it is not what it used to be.

 
At 6/06/2012 5:10 PM, Blogger PeakTrader said...

Greenspan didn't have the authority to slow the housing boom.

In hindsight, since the Fed works in the future economy, because of lags in the adjustment process, disobeying the dual mandate may have been better than the bursting of the housing bubble.

However, the housing bubble was created by Congress, along with the dual mandate.

 
At 6/06/2012 5:13 PM, Blogger morganovich said...

"Morganovich, there were no significant changes in U.S. policy to cause the huge flight into U.S. Treasury bonds recently."

perhaps you missed the recent events in europe that have been driving a massive flight out of the euro and risk assets in general?

well, the bond market didn't.

and why not buy them like crazy? the fed has told you stright out through twist and zirp that it will not let bond prices fall.

 
At 6/06/2012 5:17 PM, Blogger PeakTrader said...

Morganovich says: "perhaps you missed the recent events in europe that have been driving a massive flight out of the euro and risk assets in general?"

Perhaps, you can explain what change in U.S. policy caused that?

 
At 6/06/2012 5:18 PM, Blogger PeakTrader said...

Anyway, if you can understand what Greenspan says, you weren't listening :)

 
At 6/06/2012 5:26 PM, Blogger Methinks said...

Oh clearly, Peak, all the blame for any bubble cannot be laid solely at the feet of the Fed. And the remainder is not always the doing of congress.

Economists who study bubbles have all mentioned several factors the increase the probability of bubbles. Among them are illiquidity, heightened uncertainty and restrictions on shorting (which can come in the form of too much risk, expense or outright inability). The stock market is plagued with short restrictions that create upward bias - until we run out of bids and prices crash to earth. There is no practical way to short houses and it is a very illiquid market.

But the Fed can certainly create plenty of distortions. The Fed's current artificially low rate means that the rate of return for a given level of risk is lower than it naturally would be. This forces people further out on the curve in search of higher returns. We are all forced by the Fed's actions to take more risk and work longer. And now Obama wants to tax away half of that meager return.

 
At 6/06/2012 5:29 PM, Blogger morganovich said...

peak-

the fed may not be in the business of creating asset bubbles, but that is sure what it has done.

since greenspan and his acolyte helicopter ben took over, we have had nothing but bubbles.

and if their job is to smooth the business cycle, they have been doing a horrendous job.

rather than let the bubble of 2000 resolve itself, they went crazy printing money in an attempt to reflate it thereby demolishing the business cycle. they prevented the correction needed and pushed all those imbalances forward and created a far bigger crash.

they bear a great deal of the blame for this mess.

the fed CANNOT control the business cycle. a read of their minutes and predictions of a "soft landing for housing" shows that they do not even understand it.

what the fed SHOULD do is target price stability and act as a lender of last resort.

this is what the volcker fed did to such stupendous results. so did the bundesmank.

as soon as you add "control the business cycle" to their mandate, you get this sort of disaster. it simply cannot be done in practice and arguably not even in theory.

i have studies bubbles for 2 decades. it's you who has no idea what they are or what causes them.

can you seriously think it is a coincidence that the longest series of linked bubbles in all of financial history has occurred during the greenspan and bernanke fed presidencies?

i suggest you pick up chancellors excellent book "devil take the hindmost" on the topic.

and no, they did not create massive real wealth. that's utter nonsense and your claims to have shown it are as false now as they were the first time. as i recall, what you showed was that you were unable to parse basic statistics.

the stock market has lost 40% of it's real value since 2000.

the housing market has collapsed leaving 10's of millions underwater.

that has done vast damage.

per capita income in real dollars is still below 2000 levels and drooped 2% in q1. (and that's using cpi)

you are just flat out making stuff up.

you have never provided a shred of evidence that the last 12 years have not been a period of decline in real income and wealth.

incomes are down, stocks are down, housing is down, debt is way up.

so tell me, where is all this wealth you claim appeared?

 
At 6/06/2012 5:34 PM, Blogger Methinks said...

and why not buy them like crazy? the fed has told you stright out through twist and zirp that it will not let bond prices fall.

Sorry, Morganovich, I can't agree. The Treasury market is the largest and most liquid debt market in the world. That alone makes Treasurys relatively less risky. The further out on the curve, the less control the Fed has. Those rates are set by the market and these days, there's little for the Fed to do even if it can do anything anyway. As the world panics, it buys Treasurys.

Although, today it's all good again. Risk on.

 
At 6/06/2012 5:35 PM, Blogger PeakTrader said...

There are lots of people who've been fooled into believing it's the Fed's fault, like it's Bush's fault.

I guess, if you repeat a lie often enough, and long enough, some people will believe anything.

Of course, Congress can constantly shift blame and there's not much the Fed can do about it.

 
At 6/06/2012 5:35 PM, Blogger morganovich said...

to add to methinks point:

the greenspan put which began around 1996 and was really highlighted during the Russian debt crisis in 1997 was a MAJOR factor.

he made it clear that he would bail speculators out with interest rate policies.

this created epic moral hazard that we still see today.

the bernanke put is an order of magnitude more extreme.

the news today was terrible, but helicopter ben hinted at more liquidity injections so, jump back in speculators! never mind the collapsing economy! buy!

only a madman would think this is a good idea.

did you ever read that jelly donut piece?

this fed policy is holding the economy back, not making it better.

the low rates are killing those in or near retirement and are, at this point, unable to drive any real activity.

you are mistaking the brake for the gas and moral hazard for a real market.

 
At 6/06/2012 5:38 PM, Blogger Methinks said...

so tell me, where is all this wealth you claim appeared?

Oh, Morganovich, you have some of it. I created lots over that time period. Actual, real wealth. My friends who invested in real estate (particularly at the height) are fighting like hell not to go under.

 
At 6/06/2012 5:41 PM, Blogger morganovich said...

methinks-

are you seriously claiming that buying trillion in bonds is not having an effect?

do you seriously believe that absent that we would be at levels anywhere near these?

sure, we can get a pop from risk off, the fed is not the ONLY factor, but they are what got us here and they are anchoring the short end (and the long through twist)

the gse's play a major role too by buying up 90% of mortgage origination flooding capital back to the banks who then buy levered bonds which is a horrifically circular flow. but mortgage, give money to bank, bank buys treasuries at 10:1 gearing, buy 10 mortgages with the proceeds.

i am not saying it's all the feds fault, but they sure as hell are not helping.

 
At 6/06/2012 5:45 PM, Blogger PeakTrader said...

Methinks, both asset bubbles, in 1995-00 and 2002-07, left U.S. households wealthier even at the post-bubble lows than before the bubbles began:

US household net wealth rises
But remains below the record level set in Q3 2007.
15 June 2010

At the end of Q1 2010, the value of US household assets amounted to $68.53 trillion.

At the end of Q1 2010, the level of US total household debt was $13.97 trillion.

US net wealth now represents a very respectable 491% of household disposable income. The current ratio is actually exactly in-line with the long-term ratio, which dates back to 1952, although there have been times when the ratio has risen over 600%.

Overall the US consumer remains extremely wealthy by historical and international standards; despite the high level of debt.

 
At 6/06/2012 5:45 PM, Blogger morganovich said...

methinks-

sure, i created plenty too, but we are the exception.

incomes are down.

equity portfolios are down 40% in real terms since 2000.

home equity equivalent to 38% of the value of all mortgage homes was destroyed.

savings are down, debt has tripled.

where in that do you see wealth creation?

there are always exceptions, but based on the aggregates, there has been very little created on net since 2000. sure, there's lots of new stuff, but for every amazon there is a borders and a Barnes and noble.

this has been the worst 12 years for the us economy since the 30's.

 
At 6/06/2012 5:54 PM, Blogger PeakTrader said...

Dr Perry's chart of U.S. household net wealth:

http://1.bp.blogspot.com/-rRdw6IWFYW0/TfEWS6fbefI/AAAAAAAAPYU/Czc9UrnmHu4/s1600/nw.jpg

 
At 6/06/2012 5:57 PM, Blogger morganovich said...

peak-

that is not real wealth, it's nominal wealth.

use a 3.5% annual deflator, and you will rapidly see that it is still shrinking now and is below 2000 levels by a great deal.

CPI is up 36% since 2000.

54.88tn x .64 = 35tn, about the same number as in 1997.

there has been no significant REAL gain, just inflation for 15 years.

sorry peak, but the numbers don't lie.

 
At 6/06/2012 5:59 PM, Blogger morganovich said...

btw, that cpi number comes straight from the BLS.

it is not the 3.5% number, but the actual change in the index over the period.

 
At 6/06/2012 6:00 PM, Blogger Jet Beagle said...

morganovich: "equity portfolios are down 40% in real terms since 2000."

How do you get that?

 
At 6/06/2012 6:01 PM, Blogger PeakTrader said...

Real wealth also increased, like nominal assets and nominal liabilities increased.

 
At 6/06/2012 6:16 PM, Blogger morganovich said...

jet-

in 2000 the S+P peaked at 1553. it is 1315 today.

that's a 15% drop.

during that period, the CPI index increased 36%.

thus, 1315 today is really 1315 x .64 = 841 in 2000 dollars.

1553-841 = 712.

712/1553 = 46% decline in real value.

 
At 6/06/2012 6:18 PM, Blogger Jet Beagle said...

morganovich,

Isn't it a bit of cherry picking to use th3e 12 year period 2012 to 2000 and say this has been the worst decade since the 1930s?

One could pick the years 1970 to 1982 and find an inflation-adjusted performance for equities which was worse.

Or pick the years 1965 to 1977 and find a stock market performance which was probably about the same as 2000 to 2012.

 
At 6/06/2012 6:19 PM, Blogger morganovich said...

peak-

"Real wealth also increased, like nominal assets and nominal liabilities increased."

no, it did not.

i just demonstrated that to you.

nominal gains deflated at cpi show no real growth for over 15 years. (my earlier estimate was a bit generous as i only used inflation from 2000. take it back to 1995 and that's about where you hit break-even. thus, there has been no gain in real wealth from about 5 years after greenspan took office to now.

 
At 6/06/2012 6:28 PM, Blogger Jet Beagle said...

morganovich,

I don't think those figures include returns from dividends. S&P 500 dividend yield has been running about 2% since 2000.

Also, investors have continued investing in S&P 500 stocks. Comparing the index value in 2000 with the value in 2012 doesn't account for all the dollars invested in S&P 500 stocks since then. Much of the investment made between 2001 and 2012 did not decline 40% in real dollars.

Comparing the all time peak value of the S&P index with the value at another period does not indicate how much was gained or lost by investors.

 
At 6/06/2012 6:28 PM, Blogger morganovich said...

jet-

i do not think that is true.

the s+p started 1970 at 84 and ended 1982 at 141.

that's a 68% gain.

inflation took that down into the -30's, but it was not as bad as this one.

i'm not trying to cherry pick, just trying to start from where we are.

if i were cherrypicking, i'd take the number from 3/2009, down almost 50% from here.

if you can find a worse period in real terms, i'd be happy to look at it and to change my statement, but i am not aware of one.

there has never been a period of real decline in us equities like 3/2000-3/2009. of that i am sure. the only reason the 12 year even looks close is the 47% gain since 3/2009.

 
At 6/06/2012 6:29 PM, Blogger Methinks said...

Morganovich,

Yes, I'm kind of saying that the Fed's trillion dollars of purchases spread out over months doesn't have that much of an effect on a very liquid $15 trillion Treasury market. The main reason the Fed engages in these theatrics is to engage in the type of theatrics that get everyone screaming back into risky assets.

In a market that large, the Fed is a mere participant. I grant you, it's a large participant, but the market is much larger still.

The Fed certainly can't "anchor" the long end. A study I read a while ago estimated at most the effect is 15 bps. I can't remember if that's only when the Fed is actually actively buying or if that's the residual effect.

Anyway, you're right that there's plenty to complain about. The system is entirely screwed up and even the Fed's attempt to manipulate markets is repulsive.

 
At 6/06/2012 6:32 PM, Blogger morganovich said...

jet-

i was not talking about the aggregate return on portfolios, just to a set basket of equity.

sure, add more money and you can gain, but if you take a look at the net household worth figures i deflated for peak, you can see that that has not been enough to offset losses and spending etc.

real household net worth is about where it was in 1995.

that said, add in yields, and the 70's were MUCH better than now. yields then were 5-6%.

 
At 6/06/2012 6:33 PM, Blogger PeakTrader said...

This comment has been removed by the author.

 
At 6/06/2012 6:35 PM, Blogger morganovich said...

methinks-

being a double digit buyer is not generally a "mere participant".

if the treasury were a stock, the fed would have to file a 13g.

also, low rates in the US require foreign CB's to buy bonds to keep their currencies in step.

i'm not disagreeing that the drop in the last week was somehting of a flight to safety, but it was also speculation about qe3.

 
At 6/06/2012 6:38 PM, Blogger morganovich said...

also: the fed anchoring the short end moves other market participants out longer in search of yield and tends to drive gearing up as you need to own the 5 year at what, 5:1 right now just to break even on inflation (assuming you believe cpi).

that has a pretty significant effect as well.

this whole thing is a mess.

bernanke should be tarred and feathered.

 
At 6/06/2012 6:38 PM, Blogger morganovich said...

jet-

sorry, that should read aggregate value not return.

 
At 6/06/2012 6:46 PM, Blogger PeakTrader said...

Morganovich, if average nominal income doubles from $50,000 to $100,000 and average net wealth increases from $300,000 to $600,000 (or about 500% of income, which is the long-term trend it has maintained), there's an increase in net wealth, unless nominal income growth has been equal to or less than inflation.

If there's real income growth, there's real increases in net wealth.

 
At 6/06/2012 6:47 PM, Blogger morganovich said...

also note:

these are NOT per household numbers, but aggregate ones.

this number has to climb just to keep per capita flat.

us population is up 17% since 1995.

this makes the per-capita numbers look even more dire.

it's pretty difficult to paint the last 15 years as anything other than dire for US household net real wealth.

 
At 6/06/2012 6:51 PM, Blogger Methinks said...

Morganovich,

being a double digit buyer is not generally a "mere participant".

if the treasury were a stock, the fed would have to file a 13g.


Oh, come on! The SEC forces people to file all kinds of useless crap. That means nothing. Anyway, the weak reasons for 13g filings don't apply to the treasury market. A Sovereign debt market is not a public company.

Every participant has some impact because that participant competes with other participants to transact. Certainly, the Fed is a large participant, but its activity is not as impactful at the long end as you're making it out to be.

Part of the reaction to hints about QE3 is not about the direct impact on the long bond but a response to the obvious willingness of government to screw with markets and manipulate asset prices. Or try to. Part of it is a short squeeze as well. Last week, it was definitely in large portion a flight to safety.

 
At 6/06/2012 6:56 PM, Blogger morganovich said...

peak-

"Morganovich, if average nominal income doubles from $50,000 to $100,000 and average net wealth increases from $300,000 to $600,000 (or about 500% of income, which is the long-term trend it has maintained), there's an increase in net wealth, unless nominal income growth has been equal to or less than inflation.

If there's real income growth, there's real increases in net wealth."

no. that has zero to do reality.

1. real income is at around 1997 levels today. check the census chained dollar per capita income figures. it is declining even now. q1 had a 2% annualized drop in real income.

2. you already have the numbers. you cited them yourself. why make up numbers that do not exist?

the reason the ratio is the same is that incomes have not gone up.

here's a historical chart.

your own data puts net household wealth in the us at 54.88tn.

that's 26.34 tn in 1995 dollar (deflated at cpi which went from 150.5 to 229.2 during that period (51% inflation)

so again, the numbers you yourself cited tell a very clear story. real aggregate us household wealth is slightly lower than in 1995.

as we have had 17% population growth in that period, the per capita numbers look much worse.

you are using an assumption about income that is not true, and as a result your conclusion is wrong.

parsing this data is VERY easy.

you take nominal now, deflate it at cpi, and see what has happened. why try to make up something complex and back into it when we have real data to look at?

 
At 6/06/2012 7:01 PM, Blogger morganovich said...

methinks-

the very best market manipulation is the one you just threaten to get results.

you cannot possibly believe that rates would not be percentage points higher if the fed had never undertaken QE and zirp with a multi year promise not to tighten.

sure, last week was a flight to safety, but it barely even registered on the short end where such flights have historically occurred.

it was forced to the long end by the fed.

 
At 6/06/2012 7:07 PM, Blogger morganovich said...

peak-

oops. here's the chart:

http://en.wikipedia.org/wiki/File:Graphic.png

here's the census data:

http://www.census.gov/hhes/www/income/data/historical/people/

download the all races xls.

look at the 2010 dollar column.

this number will be down again in 2011 and is down 2012 ytd.

(note, the bea data diverges because gdp-d has been so far under cpi in recent q's)

 
At 6/06/2012 7:13 PM, Blogger PeakTrader said...

Morganovich, of course, that's how it has to work. Instead of 3% real growth per year, there's been zero real growth since 1997.

 
At 6/06/2012 7:14 PM, Blogger PeakTrader said...

That way you can also avoid the compounding of the 3% per year real growth.

 
At 6/06/2012 7:20 PM, Blogger Methinks said...

Morganovich-

you cannot possibly believe that rates would not be percentage points higher if the fed had never undertaken QE and zirp with a multi year promise not to tighten.

No no! There's some confusion here. I'm not saying that. I'm saying that the Fed is very effective at the short end of the curve and not very effective at all at the long end of the curve.

 
At 6/06/2012 7:21 PM, Blogger morganovich said...

peak-

there has been no growth in net real us household wealth since 1995.

if you believe the numbers you cited and believe cpi, there is no other possible conclusion from the data.

work it through yourself.

funny how you seem to wish to disavow the very data you used now that you see it fails to support your position.

i also note you have no actual data to counter it.

look, we all make bad claims sometimes. just fess up and move on. you have checkmated yourself here.

 
At 6/06/2012 7:24 PM, Blogger morganovich said...

methinks-

i agree that the fed is less effective as you move out the curve, but the very fact that it has pinned the short end in such deeply negative real rate territory does drive everyone else out the curve.

who in their right mind would be sitting in t-bills (or even the 2 year) right now?

 
At 6/06/2012 7:26 PM, Blogger PeakTrader said...

Morganovich says: "Real income is at around 1997 levels today...there has been no growth in net real us household wealth since 1995."

It just about fits now, doesn't it.

 
At 6/06/2012 7:30 PM, Blogger morganovich said...

peak-

are you trying to be snarky or are you admitting i am correct?

it's not clear from your comment.

hey, if you disagree, trot out some numbers that dispute what i am saying, but so far, all the data you have given me supports my claims not yours.

i have given you my sources and shown you my math.

if you disagree, then do the same.

if you cannot, then bow out gracefully.

 
At 6/06/2012 7:32 PM, Blogger morganovich said...

"It just about fits now, doesn't it."

yes, it does.

download the census xls.

per capita income in 2010 dollars was 26.487. that number was 26,887 in 1998.

2011 was lower than 2010 and we are down 2% ytd.

so what other conclusion can one draw?

 
At 6/06/2012 7:34 PM, Blogger morganovich said...

This comment has been removed by the author.

 
At 6/06/2012 7:40 PM, Blogger PeakTrader said...

According to this calculator, real GDP per capita growth averaged 1.43% per year from 1995-2010, and averaged 1.90% per year from 1946-2010:

http://www.measuringworth.com/growth/

 
At 6/06/2012 7:45 PM, Blogger morganovich said...

so?

that proves nothing about personal income.

we have those figures from the census.

why try to use a poor proxy when we already have the figures?

there are lots of ways gdp can grow without personal income going up.

c can grow more than income (and therefore run up debt causing personal net wealth to decline)

i can grow.

g can grow.

that figure is totally irrelevant.

you are now trying to move the goalposts and use bad proxy data because the better data does not support your conclusion.

 
At 6/06/2012 7:46 PM, Blogger PeakTrader said...

Output = GDP = Income

 
At 6/06/2012 7:51 PM, Blogger Methinks said...

Oh, yes, Morganovich. The Fed is driving everyone into riskier assets.

I was referring to the Fed's direct activities in longer dated bonds.

 
At 6/06/2012 7:55 PM, Blogger morganovich said...

peak-

" Output = GDP = Income"

um, no.

if you believe that, then it's easy to see why you do not understand this.

GDP is driven by consumption, investment, and government spending + trade balance.

if c goes up because consumers run up debt, then gdp goes up, but net wealth goes down.

gdp also says nothing about asset wealth. the equity in homes and value of savings portfolios is not included in that number.

this is really, really simple.

we have net wealth figures.

we have cpi.

deflate net wealth with cpi and you get a clear number.

you are just trying to muddy this because you have realized that you are wrong.

 
At 6/06/2012 7:56 PM, Blogger morganovich said...

peak-

" Output = GDP = Income"

um, no.

if you believe that, then it's easy to see why you do not understand this.

GDP is driven by consumption, investment, and government spending + trade balance.

if c goes up because consumers run up debt, then gdp goes up, but net wealth goes down.

gdp also says nothing about asset wealth. the equity in homes and value of savings portfolios is not included in that number.

this is really, really simple.

we have net wealth figures.

we have cpi.

deflate net wealth with cpi and you get a clear number.

you are just trying to muddy this because you have realized that you are wrong.

 
At 6/07/2012 1:31 AM, Blogger Jet Beagle said...

morganovich,

I am not disputing your claims about household net worth since the year 2000. I am disputing your implication that equity investors sufferred the worst decade since the 1930s.

If all equity investors had invested all their funds in an S&P500 fund at exactly the 2000 peak - and made no additional investments since then - the past 12 years would have been poor. But who invested that way? Who invested all their funds at exactly the peak of 2000?

What most investors in this nation do is invest a constant percent of their income every pay period. That constant amount buys more shares of stock when the market is low and fewer when it is high. That's dollar cost averaging. Americans who invested that way did increase their equity wealth significantly over the past 12 years.

The past decade - 2002 to 2012 - has been very good for equity investors. The past 12 years? not as good. But certainly not at all the reason household wealth has not risen since 2000 - if in fact that household wealth has not increased.

 
At 6/07/2012 2:10 AM, Blogger Jet Beagle said...

morganovich,

If we used the cherry-picked dates - comparing the 2000 highs with the 2010 lows - there is still not evidence that financial assets of U.S. Households declined in the first 10 years of the 21st century.

From the 2012 U.S. Statistical Abstract:

Financial assets of households and non-profit organizations

2000 ....... $33.28 trillion
2010 ....... $47.64 trillion
% change ... 43.1%

From the Bureau of Labor Statistics

CPI - all urban consumers

2000 ....... 172.2
2010 ....... 218.0
% change ... 26.6%

Financial assets of households definitely increased in real dollars from 2000 to 2010. Those assets have certainly increased even more since 2010.

The stagnation in real household net worth was caused by a significant drop in net real estate assets. The increase in comsumer debt was also a contributing factor. But not equity investments.

 
At 6/07/2012 3:21 AM, Blogger PeakTrader said...

Jet Beagle, even if the real estate portion of household net wealth was stagnant, there was a huge amount of real growth in an extended building boom, e.g. housing tracts, shopping malls, tech buildings, etc.

 
At 6/07/2012 8:32 AM, Blogger Jet Beagle said...

PeakTrader: "there was a huge amount of real growth in an extended building boom, e.g. housing tracts, shopping malls, tech buildings, etc."

Yes, you're correct. I was only focusing on household wealth because that's what morganovich used to assert that the last decade was so awful.

As I've pointed out before, the U.S. economy reached all time highs in 2004, then again in 2005, in 2006, and in 2007. 2008 was not too shabby a year either, just a hair below 2007 in real GDP.

 
At 6/07/2012 8:36 AM, Blogger Jet Beagle said...

morganovich: "GDP is driven by consumption, investment, and government spending + trade balance."

That's really not correct. We measure GDP by totalling consumption, investment, and government spending + trade balance. But that's not at all what drives GDP.

 
At 6/07/2012 8:40 AM, Blogger Jet Beagle said...

morganovich: "we have net wealth figures.

we have cpi.

deflate net wealth with cpi and you get a clear number."


That's true, but net wealth is not at all the measure of the economy. You asserted that:

"this has been the worst 12 years for the us economy since the 30's."

and then tried to use household wealth as the measure of the U.S. economy. You are incorrect. GDP is the measure of the U.S. economy.

 
At 6/07/2012 10:42 AM, Blogger morganovich said...

jet-

i believe that both are true.

peak is wrong in his assertions about net wealth. i think we have shown that.

this has also been the slowest growth of any similar period since the 30's.

both are true.

i think this is getting a bit tangled as peak is trying to use gdp as a proxy for income and thereby household net wealth, which is not a valid method.

also:

it was peak that suggested household wealth as a metric not me.

also:

i'm not sure your numbers are correct.

cpi was 220.4 at the end of 2010 and 169.3 in 2000. (FRED CPIAUCSL series).

that's 30.2% inflation (i think i may have over-counted before by comparing 2010 wealth to 2012 cpi)

thus, if we take the 56.8 tn figure and multiply by .698 to get 1999 dollars, we get 40.7632.

that number IS lower than the 1999 number from that series.

i think you may have done the math incorrectly here and i think you are using the wrong wealth numbers.

your numbers do not look like the sheet to which you linked.

i used 722 - Household and Nonprofit Organization Sector Balance Sheet line 46 net worth.

i cannot figure out where your numbers came from. they do not correspond to anything i can see.

note that this figure gets a great deal worse if you look at it per capita. population went up 17% while overall net assets declined.

saying "well stuff got built" is not really valid either. how it was built matters.

if you borrow $1 million and use to build a house worth $1 million, no net wealth was created.

if that house goes underwater, net wealth is destroyed.

regardless, it is possible that real wealth was created, but if it was, it did not accrue to households. it would have to be somewhere else.

i'm open to ideas as to where and how to measure it, but the evidence that americans as a whole lost net wealth since the late 90's looks pretty cut and dry to me and the evidence that they lost money per capita is a slam dunk.

the evidence that this last decade was the worst growth since ww2 is also quite clear. i had this discussion with peak previously.

yo also have to be careful with the comparison, as pre and post boskin are not apples to apples.

whatever one believes about the correct rate of cpi, it is unarguable that post boskin cpi reads several points lower than pre and that the bea moved in synch with it.

ceteris paribus, lower cpi readings from the same data lead to higher reported real gdp.

the series are not normalized across boskin and thus cannot really be compared. you either need to lower recent growth or increase past growth to make them comparable.

even with this tailwind, recent years are still the worst growth.

decadal gdp growth was"

2000-10: 17.2%
90's: 42.1%
80's: 32.4% (note this is not apples to apples with the first 2 and needs to be higher to noramilze)
70's: 37.3%
60's: 55.1%
50's: 33.5%
(source FRED GDPC96 series in chained 2005 dollars)

so, even with the statistical tailwind, the 2000-10 decade was weaker by around 50% than the next weakest post ww2 decade.

i don't really have the wherewithal to seek the worst to years without using demarcations, but given how badly the last one diverges, it seems likely to be recent.

the evidence that the economy has been way below past trends since 2000 is pretty definitive.

 
At 6/07/2012 10:46 AM, Blogger morganovich said...

jet-

also, i agree that gdp is not the only measure of the economy. it's just the most commonly used.

that said, if gdp has been way below trend and us households have lost real net wealth (both proven in my last comment) then i think it's indisputable to say that this last decade was a bad one and as far as i can tell, accurate to call it the worst since ww2.

if you have some other metric of economic activity or financial wellbeing of us households you'd like to use to dispute that, i'd be interested to see what you come up with, but that data thus far seems pretty compelling to me.

 
At 6/07/2012 10:54 AM, Blogger Jet Beagle said...

morganovich,

Again, you are focusing on the high of the 2000 expansion, and the low of the recession which just ended. As I tried to point out earlier, anytime you measure peak to trough you can "prove" that any period was a wreck. That doesn't make such an analysis worth anything.

I know that the last 10 years, 2002 to 2012, were good for investors like me - despite the 2009-2010 downturn.

I also know that household wealth does not measure the economy.

 
At 6/07/2012 11:11 AM, Blogger Jet Beagle said...

morganovich,

My last comment on this subject:

If you insist on grouping economic periods by an artifical calendar decade, you are correct that the 10 years after the 2000 high point were indeed poor. But that's only because 2008-2010 were so bad. Not the entire decade - just those years.

If you instead you looked at five year periods - at every five year period after WWII - you'd see that the 5 year periods ending in 2005, 2006, and 2007 were pretty much normal for the post-WWII period.

My objection to your analysis is that you group the decent early 21st century years with the post-2007 collapse.

 
At 6/07/2012 12:12 PM, Blogger morganovich said...

jet-

it's not peak to trough, we are well off the trough.

further, i am not even starting at the peak.

i'm using 1997.

you keep calling "cherry pick" where there is none. i'm just starting at today and seeing for how long there has been no net real wealth accumulation.

if you have a period you think was worse, trot it out. but claiming there is one and providing no evidence is not convincing, especially what you call "cherry pick" for using 1995-1997, the beginning of the biggest boom in a generation as a start point.

your five year idea may or may not have merit, you'd need to show me data. i'm not going to do your work for you.

but i'd bet you the 5 years ending in 2008 or 2009 would be a trainwreck.

but 5 years is a fraught timeframe as it will be all about "was there a recession in it" and lots of periods do not have one.

however, here is what i did to check your theory and why i think i have proven you wrong and myself correct:

please try it yourself.

take the fred GDPC96 series.

set up an equation to take (gdp-gdp 10 years ago/gdp 10 years ago) and get % change for the trailing 10 years.

copy it into every cell beside the data. this will give you trailing 10 year growth for every quarter since ww2.

the average value is in the high 30's.

the lowest ever value pre 2000 was 21.9% in 1/1/83 (volcker recession)

there were 8 q's of below 30% in 82-3. that is the only period of below 30%

in the last 13 q's we have never exceeded 20% and we have not exceeded 30% for 15q's (nearly 4 years). this is utterly unpreceedented in the us since such records were kept.

2007 was a below average year as well.

the last 5 years have been the worst run of 5 since ww2.

run this series and it will be very clear.

i suppose one could argue that 2001-6 looked more average than dire, but i think that misses the point. they looked that way because the fed tried to head off a burst bubble and inflated a new one. the price we paid for that was this massive doubled up recession.

that was how peak and i got going on this was discussing the fed controlling the business cycle.

the reason we are in such a mess now was the fed kicking the can down the road last recession.

i do not think you can try and look at this one and the last one a separate issues. this one is a direct result of what the fed did last time.

 
At 6/07/2012 12:22 PM, Blogger morganovich said...

"I know that the last 10 years, 2002 to 2012, were good for investors like me - despite the 2009-2010 downturn."

they have been fantastic to me and if they have been good to you, that's great. but they have been good to me because we have outperformed the indexes and lost no money in 2008.

but they have not been good to the average investor who tends to get a rate of return slightly below the indexes.

take the S+P.

it began 2002 at 1148. it is now 1322.

that's a 15% gain. (divs excluded)

cpi began 2002 at 174.6 and is now 229.2 a 31% gain.

1.15 X .69 = a 21% loss in real terms.

that's 1.9% per year, which pretty much offsets dividend income.

thus, real returns over that period are about zero for the indexes.

pay any taxes at all, and you lost in real terms.

this would seem to imply that the average investor has not been as fortunate as we have.

 

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