Political Calculations
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March 22, 2018

In California, the rising number of homeless people are not who you may think they are. The Los Angeles Times editorial board recently drove home that point by personalizing what it means to be homeless in the United States' second-most populous city in 2018.

Many people think of homelessness as a problem of substance abusers and mentally ill people, of chronic skid row street-dwellers pushing shopping carts. But increasingly, the crisis in Los Angeles today is about a less visible (but more numerous) group of “economically homeless” people. These are people who have been driven onto the streets or into shelters by hard times, bad luck and California’s irresponsible failure to address its own housing needs.

Consider Nadia, whose story has become typical. When she decided she had to end her abusive marriage, she knew it would be hard to find an affordable place to live with her three young children. With her husband, she had paid $2,000 a month for a three-bedroom condo in the San Fernando Valley, but prices were rising rapidly, and now two-bedroom apartments in the area were going for $2,400 — an impossible rent for a single parent who worked part time at Magic Mountain.

Nadia and her children are among the economically homeless — men, women and, often enough, families, who find themselves without a place to live because of some kind of setback or immediate crisis: a divorce, a short-term illness, a loss of a job, an eviction. In many cities across the nation, these are not necessarily problems that would plunge a person into homelessness. But here they can. Why? Because of the shockingly high cost of housing in Los Angeles.

Perhaps the most important thing that anyone should take away from Times' editors' take on Nadia's situation is that she is functional adult who is more than capable of improving her lot. Later in the editorial, the LA Times' editors disclose that she was able to get her family into a homeless shelter and that she has been able to secure a full time job doing data entry at an insurance company, where only a few of her co-workers know of her homeless status.

Nadia is far from alone in Los Angeles.

Estimates of People Experiencing Homelessness in Los Angeles City and County, 2012-2017

Meanwhile, north of Los Angeles, Santa Barbara is one of the wealthiest cities in California. There, the New Beginnings counseling center has made arrangements to allow up to 150 Californians who are either living in their cars or in recreational vehicles to be able to park them overnight in the otherwise empty parking lots of local churches and government offices.

The clients can park after 7 p.m., but have to clear out as early as 6 a.m. The benefit is that the vehicles are no longer parked on city streets, which riles some residents and merchants. And because the lots are monitored by New Beginnings, the clients, who all go through a screening process, can at least feel safe while they sleep.

Santiago Geronimo works in the kitchen of a high-end Santa Barbara restaurant and until recently, he, his girlfriend and her son Luis lived in a two-bedroom apartment shared by four adults and three kids. But the girlfriend, Luisa Ramirez, lost her retail clerk job because of a back injury, and they've lived in a Ford Explorer since September. Their new home is a church parking lot on the Goleta border.

There is a common element among many of California's employed homeless, in that many were living in apartments or houses until one of their household's members experienced a job loss. Beyond that, many were employed with relatively good incomes until they lost their jobs, where they soon found that their available employment options were limited to low-paying jobs that weren't enough to pay their rents or mortgages.

Then the evictions came, and they became homeless. All across the state.

Estimates of People Experiencing Homelessness in California, 2012-2017

Steve Lopez, a LA Times columnist, asked a good question about why California's working population doesn't move to where housing is cheaper:

You might ask why people of lesser means don't head to less expensive areas than Santa Barbara — it's a fair question, and I've written about people who eventually did make such a move. In Santa Barbara, the answers I got were the same ones I've heard elsewhere in coastal California. People hold open the option of leaving, but many are connected to specific places by history, family and employment connections, and they're not quite ready to give up on a turnaround, move to a place they don't know, and start over from scratch.

Besides that, local economies rely on those of lesser means, so where are they supposed to live?

"You know," said Phil, "there's a huge Hispanic population that does all the damn work around here. Every restaurant you go into, you can watch them slaving away. And they're taking care of people's gardens and everything else, and they wind up with eight or 10 people living in a one-bedroom place."

Until that doesn't work, as Santiago Geronimo found out.

The truth is that many Californians have tried to move to greener pastures, as many have from California's economically-distressed Central Valley, where that region's oil industry has yet to recover from the decline of oil prices from July 2014 through February 2016. According to Moody's, for every job lost in the oil and gas industry, an additional 3.43 jobs may be lost in other sectors, creating a negative deficit that other, more strongly growing sectors of the economy must be in overdrive to overcome, just to get to the point where any positive economic growth may be recorded. California's Central Valley lost thousands of oil and gas industry jobs during the downturn, where some of the impact of those losses are also being felt in other communities throughout the state's interior.

In Bakersfield, in Kern County, where many of the state's oil and gas industry jobs are centered, the city's homeless shelters were forced to turn away Californians seeking shelter earlier this year because they ran out of space to accommodate them during a short cold snap, when having to sleep outdoors became too intolerable.

Some of the economically displaced from California's Central Valley have migrated to where jobs are available in the state's thriving metropolises, such as San Francisco and Los Angeles, where they've run into the same situation of excessively high rents. Consequently, they've joined the ranks of the employed homeless.

Others are fleeing the state altogether, paradoxically seeking to escape the "prosperity" of the state's coastal cities, with the housing shortage-driven soaring rents and declining quality of life in those cities becoming a primary motivation for their flight.

All these things together would appear to have set California on a very different course than the rest of the United States. At the very least, where the trends for homelessness are concerned.

Estimates of People Experiencing Homelessness in the United States, 2012-2017

For his part, the state's governor, Jerry Brown, refused to declare the state's homelessness crisis to be an emergency in 2016, which denied the state's counties and cities any additional resources to combat homelessness. The state's data for homeless in 2017 shows the results of that decision, where at the national level, if not for California, the trend for homelessness in the U.S. would have improved.


U.S. Department of Housing and Urban Development. Annual Homeless Assessment Report (AHAR) to Congress. [PDF Documents: November 2012, November 2013, October 2014, November 2015, November 2016, and December 2017].


In 2014, the Point-In-Time (PIT) estimates from 2007–2013 were revised to be lower than the figures originally reported in previous AHARs, where the reduction reflects an adjustment to the estimates of unsheltered homeless people submitted by the Los Angeles City and County Continuum of Care during these years. The adjustment removed: 20,746 people from 2007 and 2008, 9,451 people in 2009 and 2010; 10,800 people in 2011 and 2012; and 18,274 people from 2013. A similar, but smaller downward adjustment was made to the estimates from 2007-2014 in 2015, reflecting an adjustment to previous estimates of unsheltered homeless people submitted by the Los Angeles City and County Continuum of Care and Las Vegas Continuum of Care. The figures we've presented incorporate these adjustments.

Meanwhile, in Modesto, the city's police took action to ensure that city's homeless population count for 2018 would come in lower than it did in 2017....


March 21, 2018

Last week, the stock prices of one particular class of companies crashed after regulators at the U.S. Federal Energy Regulatory Commission acted to terminate a tax benefit that it had previously allowed.

Here's an excerpt from the FERC's official 15 March 2018 press release:

FERC Revises Polices, Will Disallow Income Tax Allowance Cost Recovery in MLP Pipeline Rates

The Federal Energy Regulatory Commission (FERC) today responded to a federal court remand by stating it no longer will allow master limited partnership (MLP) interstate natural gas and oil pipelines to recover an income tax allowance in cost of service rates.

The U.S. Court of Appeals for the District of Columbia Circuit in United Airlines, Inc. v. FERC, (827 F.3d 122 (D.C. Cir. 2016) held that FERC failed to demonstrate there was no double recovery of income tax costs when permitting SFPP, L.P., an MLP, to recover both an income tax allowance and a return on equity determined by the discounted cash flow methodology.

The Commission today acted in response both to the court remand and comments filed in response to an inquiry issued after the court ruling. FERC will now revise its 2005 Policy Statement for Recovery of Income Tax Costs so that it no longer will allow MLPs to recover an income tax allowance in the cost of service.

Normally, the intersection of federal tax laws, regulations and accounting procedures would make most investors' eyes glaze over with extreme boredom, but the market's response to the FERC's announced change was both swift and dramatic.

Shares of U.S. energy master limited partnerships (MLPs) plunged on Thursday, after regulators said they will no longer allow certain tax benefits for interstate oil and gas pipeline operators structured as MLPs.

MLPs are tax-exempt corporate structures that pay out profit to investors in dividend-style distributions. In 2016, a U.S. Appeals Court ruled that energy regulators were allowing these companies to benefit from a “double recovery” of taxes.

On Thursday, the U.S. Federal Energy Regulatory Commission (FERC) said the companies, largely oil and natural gas pipeline firms, will no longer be allowed to recover an income tax allowance as part of the fees they charge to shippers under a “cost of service” rate structure.

This could affect MLP earnings, and as a result shares stumbled. The Alerian MLP index, which tracks a number of pipeline firms, fell as much as 9.4 percent on Thursday to its lowest since February 2016.

The stock market tape for the Alerian MLP index (NYSE: AMLP) reveals the carnage for the nation's Master Limited Partnerships (MLP), many of which were specifically set up under that legal structure to support the distribution of natural gas and oil within the U.S.:

Google Finance: AMLP, 14 March 2018 through 20 March 2018

You can see almost the exact moment in time when the FERC made its announcement of its new policy on 15 March 2018, which looks like came out somewhere between 11:06 AM and 11:10 AM Eastern time.

For investors, the change in tax allowances means that companies structured as MLPs will have reduced revenues, which in turn, will reduce the amount of money available to pay what had been high-yielding dividends to their shareholders.

And though these companies have yet to announce changes in their dividend policies, their stock prices swiftly declined in anticipation of that outcome. One MLP, Williams Companies (NYSE: WMB) saw its share price drop by nearly 11% on 15 March 2018, which proved to be the biggest loss of any component company of the S&P 500 that day.

One question going forward is how many of these firms will seek to restructure themselves or that might seek to consolidate in light of the FERC's new tax allowance policy. What might at first seem like an arcane tax regulation change will likely have a significant impact on what the future will look like for the U.S. natural gas and oil pipeline industries.

And if changes in a corporate income tax allowance that affects a small number of companies can do that to their stock prices, imagine what new tax on total revenue like the EU's proposed 3% tax on the gross digital revenues of tech companies in the European Union like Amazon (NASDAQ: AMZN), Apple (NASDAQ: AAPL), Alphabet (NYSE: GOOGL), and Facebook (NYSE: FB) might do to their stock prices. And to the S&P 500, since these firms account for nearly 10% of the entire market cap of the stock market index.

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March 20, 2018

The risk of a national recession beginning in the United States anytime in the next year, or specifically between 16 March 2018 and 16 March 2019, is slightly over 0.5%. If that sounds very familiar, that is because we wrote an almost identical lead sentence nearly six weeks ago!

Then, as now, the occasion for our using that introductory sentence once again is the eve of a two-day meeting for the Federal Reserve's Open Market Committee (FOMC), which is expected to announce that it will boost its target range for short term interest rates in the U.S. by a quarter percent, increasing to be between 1.50% and 1.75%.

But it hasn't yet, so the probability of a national recession starting sometime in the next 12 months has remained about the same, as confirmed by the latest update to our recession probability track.

U.S. Recession Probability Track Starting 2 January 2014, Ending 16 March 2018

This update confirms a prediction that we made six weeks ago, where we made the following observation after finding something worth noting about the direction of U.S. Treasury yields:

The interesting thing about what's happening in the bond market is that long-term yields are increasing faster than short term yields, where the spread between the 10-Year and 3-Month constant maturity Treasury yields bottomed at 0.98% on 27 December 2017. Since then, the spread between the two Treasuries has opened up to 1.29%.

For our recession probability track, that means momentum has been building for a potential reversal in the downward component of its trajectory toward increased odds of recession.

Sure enough, that's exactly what happened over the last six weeks! Unfortunately, we do not expect that positive trend to continue.

Going into the FOMC's March 2018 meeting, we find that the trend for the 3-Month Constant Maturity U.S. Treasury since January 2018 is slowly rising yields. Meanwhile, the trend in the yield for the 10-Month Constant Maturity U.S. Treasury has reversed from growing to falling in recent weeks. The two trends together mean that the spread in the U.S. Treasury yield curve, the difference between the 10-Year and 3-Month Treasuries, has begun to shrink once more.

Since that is happening at the same time that the Fed is set to hike its Federal Funds Rate, the combination of all these things means that the risk of future recession starting in the U.S. economy will rise, primarily as a consequence of the Fed's action.

Our analysis above is based on Jonathan Wright's 2006 paper describing a recession forecasting method using the level of the effective Federal Funds Rate and the spread between the yields of the 10-Year and 3-Month Constant Maturity U.S. Treasuries. If you would like to play the recession forecasting game at home, or just want to run the latest numbers yourself without having to wait another six weeks for us to get around to it when the Fed is getting set to meet again, our tool for Reckoning the Odds of Recession is available to satisfy your recession forecasting needs.

If you use the latest data for the treasury yields and the Federal Funds Rate in our tool, you'll find that your results will differ from the data we've presented in the chart above. That is because the chart follows Wright's methodology in using the one-quarter average for the yields and rates data used in its calculations, where the tool's results based on the most recently available data can be taken as an indication of the direction that the recession probability track is heading when compared with the information provided by our recession probability track chart.

Give it a shot - there's no legitimate reason why economists should have all the recession forecasting fun!

Update: Lance Roberts offers some valuable insights into the difficulties of recession forecasting and considers a variety of other indicators.

Previously on Political Calculations


March 19, 2018

It has been a long week and a half since we closed out our month-long red zone forecast for the S&P 500. Since then, investors appear to have briefly flirted with focusing their forward-looking attention on 2018-Q2 in setting stock prices, but that didn't last very long, where in the second full week of March 2018, they would appear to be splitting their attention between 2018-Q2 and the much more distant future quarter of 2019-Q1.

Alternative Futures - S&P 500 - 2018Q1 - Standard Model - Snapshot on 16 March 2018

It has been pretty quiet week on the FedWatch front during all that time, which is attributable to Federal Reserve officials going into a news blackout period ahead of the Federal Open Market Committee's two-day meeting in this upcoming week, which will conclude on Wednesday, 21 March 2018. At this point, investor expectations of a quarter point rate hike being announced this week are all but locked in, where investors are anticipating at least two more quarter point rate hikes to be announced in the next six months, before the end of each of the next two quarters.

Probabilities for Target Federal Funds Rate at Selected Upcoming Fed Meeting Dates (CME FedWatch on 16 March 2018)
FOMC Meeting Date Current
125-150 bps 150-175 bps 175-200 bps 200-225 bps 225-250 bps 250-275 bps 275-300 bps
12-Mar-2018 (2018-Q1) 5.6% 94.4% 0.0% 0.0% 0.0% 0.0% 0.0%
13-Jun-2018 (2018-Q2) 1.0% 22.0% 72.3% 4.7% 0.0% 0.0% 0.0%
26-Sep-2018 (2018-Q3) 0.3% 7.9% 37.1% 46.2% 8.2% 0.4% 0.0%
19-Dec-2018 (2018-Q4) 0.2% 4.1% 21.8% 39.7% 26.8% 6.8% 0.7%

That marks a change in expectations, where previously, investors had expected three rate hikes in 2018, but in the first, second and fourth quarters, as opposed to occurring in the first, second and third quarters as they are now anticipating. At the same time, expectations of an additional quarter point hike in the fourth quarter are building, but as yet, have not reached the level where investors are giving at least a 50% chance of that happening.

With Fed officials clammed up during the past 10 days, investors had little more than news headlines to catch their attention. Here are the potentially market-moving news items that caught ours....

Wednesday, 7 March 2018
Thursday, 8 March 2018
Friday, 9 March 2018
Monday, 12 March 2018
Tuesday, 13 March 2018
Wednesday, 14 March 2018
Thursday, 15 March 2018
Friday, 16 March 2018

For those keeping track, Barry Ritholtz found that the positives outweighed the negatives for the U.S. economy and markets in the first full week of March 2018, and that the they balanced each other during Week 2 of March 2018.

We're making a point of noting the major international trade-related headlines, where U.S. President Trump's planned tariffs are certainly getting lots of attention, but through the first half of March 2018, we'll agree with Goldman Sachs' assessment that stock prices really aren't reflecting much of a concern over the probability of a broad trade war. Despite what the headlines are indicating, what we are seeing so far is mostly consistent with the typical levels of noise that have historically characterized the day-to-day volatility of stock prices. We'll continue paying attention to both trade headlines and stock prices to see if that apparent investor response continues.

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March 16, 2018

Every now and again, we're amazed by the potential utility of the inventions that we come across.

Today is no different, where we have two inventions coming together that we learned about from Core77:

Remember Stuart Semple? He's the British artist who started making and selling that ultra-black paint after artist Anish Kapoor tried to have it all to himself. Now Semple has created that paint's opposite: LIT, which is made out of "the most powerful light emitting pigment on the planet."

This stuff is absolutely amazing. You can shine a light source on it, turn light source off, and the paint continues to give off light for up to 12 hours. It can also turn heat into light. And unlike regular glow-in-the-dark paint, it can be "recharged" indefinitely.

To test this stuff out, science channel The Action Lab shone the world's brightest flashlight--a 32,000-lumen model made by Imalent--onto the paint to see how it responds. If you are too impatient to listen to the scientific explanation for what's happening here, skip ahead in the video to about 3:26.

That's the kind of introduction the Inventions In Everything team lives for! Here's the video:

Now for the cool part. You can actually own both of these things today! Amazon has the Imalent DX80 "The End of Darkness" 32,000 Lumen LED Rechargeable Flashlight available for $379.95 at this writing, while Stuart Semple is selling the LIT paint pigment powder from his UK-based website for £9.99 (or $13.80 U.S. dollars at this writing, not including shipping, but click here for the latest currency conversion rates).

What would you do with these two things is something that you would have to work out for yourself, but we'd be interested in seeing the applications that people come up with!

Other Stuff We Can't Believe Really Exists


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Welcome to the blogosphere's toolchest! Here, unlike other blogs dedicated to analyzing current events, we create easy-to-use, simple tools to do the math related to them so you can get in on the action too! If you would like to learn more about these tools, or if you would like to contribute ideas to develop for this blog, please e-mail us at:

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