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Spencer England

Spencer England



Articles by Spencer England

Chairman Paul Volcker Died at age 92

7 days ago

I first met Volcker when I was a junior international economist in Washington in the late 1960s. He was the Treasury Under Secretary for International Economics. I was going to a luncheon at the National Press Club for the Indian Finance Minister.  As I got on the elevator, Paul Volcker and John Kenneth Galbraith — among other things he was the US Ambassador to India under Kennedy –followed me on.   I am 6’2″ — or at least I was back then — but they were both well over 6’6″.  I honestly believe that was the only time in my life that I was the shortest economist in the room.
This was back when they had the annual International Monetary Fund( IMF) meeting in Nairobi, Kenya.  The standing joke was that they had the meeting in Nairobi so everyone could compare

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S&P 500 BY PRESIDENTIAL TERMS

November 8, 2019

With the presidential election still a year away, Wall Street is starting its normal analysis that if a democrat is elected it will cause a devastating stock market crash.  One would think that after all these years of such claims being proven dead wrong that the street would finally give up on it. In the post WWII era from Truman to Obama it is 70 years and each party has had bad candidates in office for half that time.  Truman was only President for seven years and five months so the Democrats only had 35.4 years in office while the Republicans had 36 years in office.  Over these years the average annual S&P 500 gains was 15.9% for Democrats and 6.6% for Republicans. If you look at the actual returns, you would think if anything; Wall Street analyst

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STOCK MARKET DOWNSIDE RISK VS. UPSIDE POTENTIAL

October 3, 2019

Despite all the recent stock market volatility the actual S&P 500 PE on trailing operating earnings is almost exactly where my model says it should be.
The biggest problem is that the market PE  is about 19 and bond yields are under 2%.  The quick and dirty rule of thumb is that a 100 basis point change in yields should generate a 100 basis point change in the S&P 500 PE.    With bond yields already under 2% the upside potential for the market PE is under 200 basis points — driving the PE to the upper limit of the fair value band.
Consequently, further market increases are almost completely dependent on earnings growth. But currently, unit labor cost are rising faster than prices as measured by the non-farm business deflator and world economic growth

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Economic and Market Risk

September 16, 2019

The use of drones against Saudi Arabian oil facilities changes the economic-market risk significantly.
Until now the oil producers have done an excellent job of preventing terrorist attacks from disrupting oil supplies. But the use of drones significantly changes the risk of future oil disruptions.   How do we prevent future drone attacks on the choke points in the oil supply line?
I, for one, am surprised that the stock market reaction has been so muted.
Am I wrong in believing that the game has changed?

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Tariffs and Price Changes

September 11, 2019

I have been looking at the data recently to find economic series that would quickly reflect the impact of rising tariffs on the consumer.
One is Retail Sales: GAFO.  Think of it as department store type merchandise  — goods excluding autos, food and energy. It is reported every month in both the Census retail sales press release and in the BEA measures of retail sales they compile in putting together personal spending and GDP.  I have long preferred the BEA data because it provides very detailed measures of retail sales and real growth. Moreover, the practice of some to deflate the Census retail sales data with the CPI overstates retail price increases and under states real sales growth.As the chart shows price changes in GAFO sales moves very closely with

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Decennial Census Temp & Intermittent Employment

September 9, 2019

There seems to be some confusion about the impact of Census employment of temporary and intermittent employment for the 2020 Census.
The U.S. Bureau of Labor Statistics has a table showing the monthly  employment for Special Census workers. You can find it at: BLS – Special Census Workers
The table also has the data from the 1990 and 2000 Census so you can compare what happened in those Censuses to what to expect over the next year. I took the data from Table 1 of total nonfarm employment and subtract the Census employment to create  a new series,  Total NonFarm Employment excluding Census Temp & Intermittent Employment.  The chart shows the last some 20 years of  special Census employment.  As you can see, this months 27,000 increase hardly shows in the

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IS TREND PAYROLL EMPLOYMENT REALLY WEAK?

September 7, 2019

For seven years from 2012 to 2018 the monthly payroll employment showed a solid trend of around 200,000 gains each and every month.  If it was much above or below this trend, analysts found some excuse to explain the difference and expected the off-trend observation to be quickly reversed.  So far this year most analysts continued to act as if this pattern was being repeated.
However, in August the Bureau of labor Statistics (BLS) rebenchmarked the data to more recent Census data. They announced that it would lower reported employment growth but they did not release the revised data until the August employment report last Friday.  The new data shows that 2019 payroll employment was significantly weaker than originally reported. The January monthly increase

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Why is current economic growth called strong?

September 3, 2019

As of the second quarter the year over year percent change in real GDP is 2.3%.  Virtually everyone refers to this as strong. Why?  By historic standards 2.3% real GDP growth is subpar. It is below the long term growth rate of the economy using virtually any widely accepted estimate of trend or potential growth. Many republicans actually claim that the potential growth rate is now 4%. If so, it would only make Trump’s 2%-3% growth look worse.
In 1967, real GDP growth was 2.7%, significantly stronger than the current rate.  Yet, that was labeled as  a GROWTH RECESSION.  In Obama’s second term, after the recession and economic recovery, his economic expansion averaged 2.4% growth, or essentially the same growth Trump has experienced during what is actually

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Importance of Imports

August 21, 2019

It is standard analysis to see real and nominal imports as a share of GDP quoted to estimate the importance of imports in the economy. Currently that shows nominal imports are about  15% of GDP and real imports are some 18% of real GDP.
But I suspect that this comparison understates the role of imports in the economy because services are some 45% of GDP but only about 16% of imports.  As my high school algebra teacher was fond of saying, you are adding crabs and apples. Rather, you should compare real goods imports to real goods GDP. On this basis imports are some 46% of GDP, a much larger share than standard analysis shows.  (second chart fixed….Dan)

This impacts the economy through two routes.  One, import prices are frequently the marginal price that

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Quality Spreads

August 15, 2019

While the yield curve turning negative is getting a lot of attention and seems to be the main excuse for yesterdays stock market drop, there are other financial indicators that are also signaling weaker economic growth ahead.
The primary one is quality spreads as the yield on corporate bonds are rising relative to treasuries.  This is driven by investors fear that in a weak economy, recession environment the risk of corporate defaults rises and bond buyers demand a larger premium to take that larger risk.It is easy to see that quality spreads are driven largely by economic weakness by comparing them to capacity utilization.

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Long Treasuries vs The Long Wave

August 8, 2019

Since the early 1990s, I published this chart every month on the back cover of my publication until I retired a couple of years ago.  I thought it was a great piece of marketing to remind readers that I was a long run bull on interest rates.
Readers might not pay much attention or remember claims that I was bullish, but they would pay attention to and remember this.  I even had bond managers walk out over this chart in the middle of my presentation.
Now just felt like a good time to publish it again.

Click on image to enlarge it for better viewing.

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Trump vs China

August 7, 2019

Trump should not forget that the Chinese leadership does not have to hold an election in 2020.
I wonder who this gives an advantage in the trade war.

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Economy may be weaker than generally recognized

August 6, 2019

Note how the survey data is weakening more than the payroll data
The survey data tends to lead the payroll:

In 2019 payroll employment —  what Wall Street pays attention to –is the weakest since 2012.

Moreover, hours worked has flattened out:

Finally, average hourly wage growth is also weak.

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The Federal Deficit by Presidential Terms

July 27, 2019

Under Trump the federal deficit has rebounded to some 4.4 % of GDP  — it is the same whether you look at it quarterly or monthly data as this chart does.  The monthly estimate is calculated by Haver Analytics. So much for the tax cut paying for itself.

The shaded areas are by Presidential term, not of recessions as is usually the case.  Typically, Republicans leave office with a larger deficit than they inherited while Democrats leave with a smaller one, or a surplus. Of course, this is exactly what “starve the beast” calls for.

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THE EPIC JOURNEY OF APOLLO ELEVEN

July 19, 2019

This is my oldest son the weekend of the Apollo moon landing.
The whole country was glued to their TVs that week.
Figure 1
The TV was about the state of the art 50 years ago and my brother, the photo journalist, took the photo.  In  the pre-digital era he mostly worked in black and white.

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Trump and the News Media

July 17, 2019

Well by attacking the group Trump got the press to completely forget about the refugees on the southern border.
You would think that after all this time the media would learn to deal with his misdirection.

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S&P 500 P/E

July 14, 2019

Friday evening the S&P 500 closed at 3013.77, up 20.2 % year to date. But much of that gain is just recovering from the drop in late 2019, as  it is only up some 3.4% from September, 2019.
This is the first time the S&P closed above 3000 and people are wondering if the market is overvalued. The S&P 500 PE is now at 19.6, almost exactly where my model implies it should be.  As the chart shows it is right in the middle of my estimated fair value band just as it was when Trump was elected.  But the PE was 21.3 in November, 2017 as compared to 19.6 now. Both the actual PE and the fair value band declined through 2017  and 2018 and the fair value band has stabilized so far this year.  Interestingly, this means that S&P EPS has been rising faster than the market

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LONG BOND YIELDS

July 9, 2019

Everybody and their brother has an opinion about the direction of long bond yields so  it should be OK for me to stick my two cents worth in.
This chart of the composite of all long bond yields versus the long wave is one I published every month on the back cover of my monthly publication for over 20 years before I retired a couple of years ago.  Basically, I thought of it as a good way  to show that I was a long term bull on interest rates in a way that money managers would remember. But it did get their attention. The basic message was that on the up-sweep of the long wave, bear market were long and deep while on the down-sweep, bear markets were short and shallow while  bull markets were long and deep.
Figure one
Of course it is always nice to have some

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Real Per Capita Income by State ( 2012 $ )

July 3, 2019

You can not use inflation data like the CPI to compare living cost is one location to another.  So the BEA has constructed a database  of Regional Price Parities  ( RPP) that allow you do do that for all states and the some 383 Standard Metropolitan Areas in the USA. .  I was preparing to show them when BEA published the 2018 data.  But that data willnot be released until next year so I’m going ahead and showing the 2008 to 2017 data. Note, that in the tables for real per capita personal income by state for 2012 and 2017,  I have converted the data in 2012 $ to an index of personal income as a percent of the national average to facilitate comparisons.
Figure one
The first thing I noticed in the data is Connecticut and Massachusetts  at the top of the

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WHAT IS HAPPENING TO COAL PRODUCTION ?

May 31, 2019

Does anyone know why coal production is falling out of bed?  It is down some 40% from its August level.

But coal employment is still near its’ recent peak, which implies that productivity is horrible.
I suspect the problem is exports to China.
Maybe someone needs to ask Trump about this.

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REAL TRADE BALANCE

May 10, 2019

The real trade deficit ( million 2012 $) increased from $81,558 in February to $ 82,054 in March.  The March observation was between the January and February data points so it was not large enough to generate a significant change in imports  0.58 percentage point contribution to first quarter real GDP growth.   In the first quarter real GDP report the significant contribution of foreign trade to real GDP growth has been interpreted by the administration as a sign of success with its trade policies.  But the underlying real import and export data suggest that it is premature to call  it a trend change.
Figure 1
In evaluating the trade balance it is important to remember that it is the difference between two very large numbers so that a small change in

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S&P 500 PE

May 8, 2019

Based on the 5 May 2019 close the S&P 500 PE on trailing operating earnings is 18.25.  That places it at the bottom of my fair value band that is based largely on  long term treasury bond yields.  We can each have out own theories, but it appears to be that the market is correcting on fears of what Trump’s trade war will have on earnings growth.
Figure one

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Energy’s Share of Consumer Spending

May 5, 2019

One important factor to keep in mind when thinking about the economy is that energy’s share of personal consumption expenditure is now 4%, or about half of what it was in the late 1970s-early 1980s.

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Expect a core CPI of 2% this year.

May 1, 2019

My discovery that half the annual increase in the not seasonally adjusted core CPI occcurs in the first quarter and that simply doubling the first quarter increase gives you an amazingly accurate estimate of the December to December reading work again in 2018.
In 2019 it is saying the annual increase in the core CPI will be about 2% — the same as the widely accepted consensus.
Figure 1

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2019 Core CPI

April 11, 2019

In a low inflation world firms tend to raise prices once a year, typically in the first quarter of the calendar year or their fiscal year.   Because of this very strong seasonal pattern, on a not seasonally adjusted  around 50% of the annual increase in the core CPI —  excluding food and energy — occurs in the first quarter

This very strong pattern gives great insight in to the annual inflation rate. One, is if this year’s first quarter is greater than or less that the prior year’s first quarter, this year’s annual increase will be greater of less than the prior year’s annual increase. This has worked every since year since 1990. Second, just doubling the NSA first quarter rate gives you an amazingly accurate estimate of the annual increase in  the core

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Wage Growth

April 8, 2019

Based on my wage equation, last January I warned to expect a sharp acceleration in wage growth in 2018.  Now that wage growth has risen       from 2.4% in 2017 to 3.4% in 2018, the same economic variables imply that wage growth may be flattening out.  If wage growth remains near    current levels it will be one less factor pressurizing the Fed to tighten.

One of the key variables driving wages higher a year ago was inflation expectations.  Because there  are no good long run measures of inflation expectations  I use the three year trailing growth in the CPI as a proxy for  inflation expectations.  A year ago that measure was starting to     accelerate, but now it appears to be flattening out and should be an   important  factor limiting wage gains.

The

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Effective Tax Rates

April 1, 2019

Along with fourth quarter  GDP, corporate profits for the the fourth quarter was also reported.  Profits growth was either quite strong or very weak depending on how you looked at them.  On a year over year basis, after tax profits growth was 11% and appeared to be accelerating. However, on a quarter to quarter basis after tax profits actually fell -6.73% (SAAR) in the fourth quarter  and that is after a third quarter annual growth rate of only  3.7%(SAAR).  By comparison after tax profits growth surged 38.4 % (SAAR) and 14.0 % (SAAR) in the first and second quarters, respectively.  Much of this early 2018 growth was due to the tax cut.  But now that the tax cut is behind us, it looks like the Administrations promised strong growth remains just that, a

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Trump’s Emergency and the Wall

February 15, 2019

I presume that Trumps Emergency is strictly political theater as it will be tied up in the courts for the next couple of years.
Trump has no problem with this as he can tell his base that it is working and they will accept his story.
Now I’lljust wait and see the response to this idea.

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Stock Market Valuation

December 19, 2018

Trump is blaming the Fed for the recent poor stock market performance. For once, he may be right.
The recent market plunge took the stock market PE from the top of my fair value band through the bottom. The last observation is the 14 December close. The fitted PE has is a function of both short and long term yields.  This approach implies that the market is now cheap, but that does not necessarily mean that it is a buy.
Figure 1

Maybe you would prefer a leading indicator approach. In this case real MZM growth ( zero maturity money= M1 +money market accounts). It is obvious that MZM growth is still weakening and signalling that the market PE should contito fall. It is just the simple theory that stock market liquidity and movement are driven largely by

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