Thursday, September 29, 2016

Global activity reviving

From the "where there's smoke there's likely fire" department: Non-energy commodity prices are up 30% year to date, Caterpillar stock is up over 50% from its January lows, and global equity prices—as well as the S&P 500—are up almost 20% from their February lows. Something's happening out there, and it looks promising. Most likely, global economic activity is picking up, and cheaper (and more stable recently) oil prices could be the reason. 


The chart above compares the CRB Metals index (copper scrap, lead scrap, steel scrap, zinc and tin) to the price of Caterpillar stock. Both have traditionally moved together, and the past year or so is no exception. Global mining activity looks to be picking up, and so it's a good bet that global activity in general is on the mend. This supports my forecast over the past six months that we are likely to see some stronger GDP numbers for the second half of this year. It's nothing to write home about yet, but any improvement from the 1.1% annualized growth rate of the first half (which includes today's modest upward revision to second quarter growth) is certainly welcome.

The chart above shows a longer-term view of metals prices. They do tend to soften during periods of economic weakness, and they do tend to rebound as activity recovers.


The chart above compares the level of US stock prices to the ratio of the 10-yr Treasury yield to the Vix index (which ends up being a proxy for the market's nervousness and confidence in the outlook for growth—a higher number reflecting more nerves and less confidence, and a lower number reflecting less nerves and more confidence). In the past year the market has overcome fears related to collapsing oil prices and the British decision to exit the European Union. It now feels like we're in a holding period, in which activity has recovered somewhat from a fear-induced slump, but nothing is going gangbusters yet. 

If there is to be any meaningful surge in activity on the horizon, it will likely require a satisfying and confidence-building resolution to the US elections which are coming up in just over 5 weeks. I think that, in turn, would require a Trump victory, since he would almost certainly work with Congress to reduce tax and regulatory burdens. If nothing else, a significant reduction in the corporate income tax rate could unleash a tidal wave of profits repatriation and a subsequent surge in corporate investment.

At the very least, there is reason to remain optimistic.

Tuesday, September 27, 2016

Chemical activity still increasing

A quick update: Last month I had a post titled "Chemical activity continues to increase" that was well-received since it is not commonly followed. The latest data, released today, continue to show improvement and the observations I made last month still hold. Here are some updated charts:


The CAB index is up 4.1% in the past year, for the best showing in the past two years. This suggests that the oil production slump is washing out of the data, and cheaper oil prices are resulting in stronger production of related chemicals.


The year over year change of the 3-month moving average of the index is now up to 3.7%, and a similar measure of industrial production is showing an uptick as well, and that is in line with historical experience—with chemical activity tending to lead industrial production.

I'm not convinced any of this points to a significant acceleration of economic growth. But it does argue convincingly that the economy is not turning down or slumping. Most likely, it just means that the economy is still growing slowly but on the margin it is doing slightly better.

For more detailed information, see Calculated Risk.


Sunday, September 25, 2016

Kill the estate tax

Caroline Freund writes at PIIE that the estate tax is a key tool for fighting US inequality. I strongly disagree. It's easy to rebut her main points, since they defy logic and are based on faulty statistics. What follows are some quotes from the article and my rebuttals:

This year marks the 100th anniversary of the US estate tax, which affects only the ultra-wealthy.
–Not true. Narrowly defined, the US estate tax affects only people whose estate currently exceeds $5.45 million, or couples whose estate exceeds $10.9 million. However, that is hardly a reasonable definition of "ultra-wealthy" in a era when it takes a net worth of at least $1.7 billion to make the Forbes 400 list. More broadly, the estate tax affects anyone who is wealthy or hopes to one day become wealthy—and those are the people who are most likely among the most productive members of society. The estate tax is effectively a punishment on success, since it amounts to the legalized theft by the state of money people have worked hard to accumulate, and upon which they have already paid tax at least twice (once when they paid income tax on their earnings, and a second time when the equity investments they made with their after-tax earnings had their profits taxed). Punishing success is like cutting off your nose to spite your face.

There is no productive activity in inheriting a large sum of money, so it does little to distort the economy.
-On the contrary, the estate tax creates huge distortions in the economy. How else to explain the virtual army of accountants and lawyers who toil to reduce the estate tax liabilities of their clients? How else to explain why the insurance industry—which sells a legal run-around to the estate tax in the form of life insurance policies—fights so hard to keep the estate tax in place? How else to explain why today's mega-billionaires (e.g., Bill Gates and Warren Buffett) are directing that their estates be donated to charitable foundations? I don't know anyone who wants to give almost half of the wealth they have accumulated after a lifetime of work to the government.

Historically such taxes have worked well in the United States, raising revenue and redistributing wealth.
-No, the estate tax has hardly worked at all. In the most recent 12 months, the federal estate tax generated revenues of only $21.4 billion, a paltry 0.6% of total federal revenue. How does redistributing $21 billion qualify as income redistribution, when personal income is currently running at a $16 trillion annual rate? How can anyone justify having a behavior- and economy-distorting tax that redistributes only 0.13% of total income? How well will the mega-billion Gates Foundation fight inequality, when it is extremely likely that it will spend only 5% per year of its endowment on charitable activities (the legal minimum required of any charitable organization)? No one really knows, but that doesn't seem to worry the people who defend the estate tax.

The author laments the fact that the estate tax has been reduced in recent decades, erroneously claiming that the estate tax generated $216 billion in 2001, when in fact it generated only $28.2 billion at a time when personal income was $9 trillion (0.3%). In the past 35 years, the estate tax has never generated more than 0.35% of total personal income in any one year.

The author further erroneously claims that the estate taxes collected in 2001 could cover the cost of food stamps "14 times over." That is wildly off the mark, since the total cost of food stamps in 2001 was $18 billion, whereas estate tax revenues were $28.2 billion.

If we eliminated the estate tax in its entirety, the economy would most likely strengthen, living standards would rise, and the impact on the federal deficit would be nil. Eliminating the estate tax would increase people's incentives to invest and accumulate wealth—wealth which is enjoyed by everyone, just as we all benefit from the fruits of successful companies. And with increased wealth and incomes, federal revenues would increase. By making this assertion, I rely on nothing more than my strongly-held belief that people are able to invest their own money much more efficiently and productively than government bureaucrats and politicians can.

UPDATE: Scott Adams (Dilbert) recently posted a quick-and-dirty takedown of the estate tax and Clinton's proposal to raise it (in the same post he also explains why he is now endorsing Trump):

Clinton proposed raising estate taxes. I understand that issue and I view it as robbery by government.  
 ... under Clinton’s plan, estate taxes would be higher for anyone with estates over $5 million(ish). I call this a confiscation tax because income taxes have already been paid on this money. In my case, a dollar I earn today will be taxed at about 50% by various government entities, collectively. With Clinton’s plan, my remaining 50 cents will be taxed again at 50% when I die. So the government would take 75% of my earnings from now on. 
Yes, I can do clever things with trusts to avoid estate taxes. But that is just welfare for lawyers. If the impact of the estate tax is nothing but higher fees for my attorney, and hassle for me, that isn’t good news either. 
You can argue whether an estate tax is fair or unfair, but fairness is an argument for idiots and children. Fairness isn’t an objective quality of the universe. I oppose the estate tax because I was born to modest means and worked 7-days a week for most of my life to be in my current position.