Category: Chart of the Week

Still the American Dream?

This week’s chart chronicles the trends of home ownership and prices since the turn of the century. The financial crisis of 2008 coupled with a surge of foreclosures and high unemployment rates have contributed to a decade low home ownership rate of 66 percent.

This week’s chart chronicles the trends of home ownership and prices since the turn of the century. During the robust residential real estate market of the mid-2000’s, home ownership rates peaked at 69.2 percent with the home price index exceeding $200,000. However, the financial crisis of 2008 coupled with a surge of foreclosures and high unemployment rates have contributed to a decade low home ownership rate of 66 percent. Not surprisingly, the home price index has cratered as ownership has declined.

A recovery for home ownership and prices faces several headwinds. To begin with, plunging home prices, a shaky job market, and frail economy have many first time home buyers resistant to committing to a purchase, in spite of the attractive price opportunities. For purchasers looking to take advantage of low interest rates, other hurdles remain, chief among them stricter underwriting standards for mortgages and higher required down payments.

Collectively, these trends help explain the booming rental market of today, as seen from the perspectives of demand, supply, and investment. Perhaps more importantly, does this mean that the American dream of owning a home is quickly becoming a thing of the past?

U.S. Income Inequality

Income inequality in the United States has emerged as a popular topic in the media as well as the upcoming presidential election. The upcoming presidential debates are certain to feature a fair amount of political rhetoric in an attempt to address the issue of income inequality.

Income inequality in the United States has emerged as a popular topic in the media as well as the upcoming presidential election. The Occupy Movement has garnered a great deal of media attention in the past six months, with its premise of protesting economic and social inequality. The upcoming presidential debates are certain to feature a fair amount of political rhetoric in an attempt to address the issue of income inequality.

The chart above depicts the percentage of total income1 that the top 10% of earners (in 2010, families with a market income above $108k) are responsible for. As seen in the chart, the line forms a “U” shape where the top 10% accounted for approximately 45% of total income prior to WWII, declined to the low/mid 30’s until the late 1970’s and has risen to approximately 45% today.

In addition, we can use the GINI ratio (index of income concentration) to further scrutinize income disparity. The GINI ratio is a statistical measure of income equality ranging from 0-1. A measure of 1 indicates perfect inequality; i.e. one person has all the income and the rest have none. A measure of 0 indicates perfect equality; i.e. all people have equal shares of income. As also seen in the chart, the GINI ratio has also risen precipitously since its inception in 1967. Currently the GINI index stands at 0.47, which stands out as one of the highest when compared to other developed economies:

 

Germany 0.27
France 0.32
Italy 0.32
Canada 0.32
Japan 0.38
Uruguay 0.45
Russia 0.42
Singapore 0.47

There are many theories as to why we have seen such growth in income inequality since the late 1970’s. Potential explanations include:

  • Immigration of unskilled workers has put downward wage pressure on native born workers.
  • Advances in computers and automation may have replaced moderate to low skilled workers, thereby decreasing demand for these types of employees.
  • Decline of private sector labor unions and their ability to maximize incomes of their members.
  • Tax policy – corporate and individuals.
  • Relatively small increases in the minimum wage.
  • Corporate deregulation (in particular financials – 10% of corporate profits in 1970’s, 40% today – increase in executive compensation, prevalence of lobbyists).
  • Education gap between rich and poor has grown substantially. Cost of tuition is prohibitive for low income families. This has led to a shortage of highly skilled workers; therefore, demand (compensation) goes up for these types of workers.

The upcoming presidential debates will surely contain a healthy dose of discussion regarding income inequality, with a bulk focusing on tax policy and education reform. It will be interesting to see how each candidate plans to address these issues and the effect these policies will have on the financial markets. Is income inequality a detriment to the greater economy, or an essential part of capitalism?

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1 Income is defined as the sum of all income components reported on tax returns (wages and salaries, pensions received, profits from businesses, capital income such as dividends, interest, or rents, and realized capital gains) before individual income taxes. Government transfers such as Social Security retirement benefits or unemployment compensation benefits are excluded from the income definition. Non-taxable fringe benefits such as employer provided health insurance is also excluded from the income definition. Therefore, the income measure is defined as cash market income before individual income taxes.

Trends in Personal Savings Rates

This week’s chart shows the personal savings rate from January 1959 to February 2012. The average for that time period is represented, along with averages over the last 30, 20, and 10 years.

This week’s chart shows the personal savings rate from January 1959 to February 2012. The average for that time period is represented, along with averages over the last 30, 20, and 10 years. Averages are plotted according to their respective time periods.

The chart shows a noticeable decline in the personal savings rate over the 53 year period. The 53 year average is 7% compared to a 30 year average of 5.2%, a 20 yr average of 4.1%, and a 10 year average of 3.8%. Since consumers are saving less, they are spending more. This phenomenon has driven growth in consumer expenditures which in turn has contributed to growth in GDP. In the mid 1960s, consumer expenditures accounted for 61% of nominal GDP. By the early 80s it increased to 65.7% and in 2008 to 70.5%. The health of the economy has become more dependent on consumer spending.

During recessions the personal savings rate tends to spike up as consumers become more conservative. We saw this occur in the most recent recession with the savings rate climbing as high as 8.3%. As the economy has rebounded fear has subsided and consumers are spending more. In addition, with interest rates so low, consumers have less incentive to save. This has led to a personal savings rate of 3.7% in February 2012, which is below the 10 year average.

Trends in Tax Revenues

This week’s chart shows trends in tax revenues, indexed to 2007, for a group of ten selected countries (based on rolling twelve month averages for each). Taxes are the main source of government revenues and a crucial factor for the fiscal stability and economic growth of countries.

This week’s chart shows trends in tax revenues, indexed to 2007, for a group of ten selected countries (based on rolling twelve month averages for each). Taxes are the main source of government revenues and a crucial factor for the fiscal stability and economic growth of countries. Tax revenues are appropriated for public works, interest payments, financial assistance, education, infrastructure, growth incentives, and counter cyclical measures.

As the chart illustrates, there has been a divergence of tax revenues between developed and emerging market countries. Since 2007, most emerging market governments’ tax revenues have increased while the majority of developed countries’ tax revenues have either decreased or slightly increased.1 Many developed countries across the world continue to face revenue headwinds as they de-lever and recover from the 2008 financial crisis and subsequent economic slow-down, all of which have lowered tax revenues.

Going forward, this chart suggests a much more favorable backdrop for emerging market countries compared to developed countries. An increasing trend in tax revenues should allow emerging market countries to allocate money to public services as well as investment in infrastructure, education, research and development, and other important factors that contribute to countries’ long-term success and prosperity. Developed countries are struggling to maintain public services and programs with limited revenues and are being forced to borrow money; the U.S. has over $15 trillion in debt outstanding and is projected to run a deficit of approximately $1.2 trillion in 2012.2 As this occurs, investment in infrastructure, education, and other important growth platforms is placed on hold as more money is allocated towards debt and interest payments.

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1 Bank of Korea, Bank of Italy, Federal Reserve, Bank of Thailand, UK Office for National Statistics, Bank of Greece, National Bank of Poland, Bank of Japan, Bank of Spain, Bank of the Republic of Columbia

2 Congressional Budget Office as of 03/31/2012

Stock up on Soybeans in 2012

This past Friday, March 30th, the United States Department of Agriculture (USDA) released the 2012 Prospective Plantings report, which included various estimates. According to the report, “Soybean growers intend to plant an estimated 73.9 million acres in 2012, down 1 percent from last year and down 5 percent from 2010.

This past Friday, March 30th, the United States Department of Agriculture (USDA) released the 2012 Prospective Plantings report, which included various estimates. Amongst the estimated data, the Prospective Planting report included a lower than anticipated soybean forecast. According to the report, “Soybean growers intend to plant an estimated 73.9 million acres in 2012, down 1 percent from last year and down 5 percent from 2010. Compared with last year, planted acreage intentions are down in many areas as some acreage is expected to shift to corn” (USDA).

The projections on soybeans from the USDA indicate that soybean ending stock is expected to reach dangerously low levels. After the release of the USDA prospective planting report, soybean future prices quickly skyrocketed as anticipated rationing of soybean stock will most likely result throughout the year. The price of soybeans ended up over 3% from the previous day’s close indicated from the chart above. Although it may be too late for U.S. farmers to switch acres to soybeans this season due to the fieldwork they have already completed, the higher prices have the potential to entice South American farmers to switch during their next planting season. This additional soybean production will be necessary to fulfill Chinese demand as they continue to be a dominant player in the agricultural market.

Sources:

  • USDA Prospective Plantings report
  • Farm Press Article: by Dr. Scott Irwin, Dept. of Agriculture and Consumer Economics, University of Illinois
  • Bloomberg article – China reference

Where’s the Yield?

Driven by the stock market’s upward trajectory during the past six months, the yields of various asset classes illustrate a return to riskier asset classes and a change in the landscape for income-driven investors. Our Chart of the Week shows the disparity between this week’s yields and those of roughly six months ago, when we last examined this topic.

Driven by the stock market’s upward trajectory during the past six months, the yields of various asset classes illustrate a return to riskier asset classes and a change in the landscape for income-driven investors. Our Chart of the Week shows the disparity between this week’s yields and those of roughly six months ago, when we last examined this topic.

Investors’ return to riskier asset classes has caused an increase in Treasury yields and a decrease in the yields of more volatile bonds and equities. Since September 26, 2011, when we last produced a chart of the week on this topic, the S&P 500 Index has increased by 21.5%, from 1,162.95 to 1,412.52 as of March 27, 2012. European debt woes that threatened the global economy throughout the 3rd and 4th quarters of last year have subsided and yields have diminished as investors add risk back to their portfolios. The 10-Year Treasury’s yield has increased by 22 basis points over the past six months and is now greater than that of the S&P 500, which declined by 24 basis points. For the week of March 12, 2012, global bond funds enjoyed their 11th straight week of inflows and emerging market bond funds had their 2nd best week of the trailing year, manifested by the 1.18% drop in the yield of the BarCap Emerging Market Bond Index over the past six months. High yield bond funds have also seen noteworthy inflows over the past six months, which has driven yields down 1.94%. U.S. Treasuries are again becoming more attractive for the income-driven investor as the yields of more volatile asset classes have decreased, and the income-focused portfolio will likely return to a more traditional structure as the yields of various markets move closer to historic averages.

An Apple a Day…

On March 19th, Apple made news once again by declaring the payout of a dividend for the first time since December 1995 and buy-back program of company stock. Apple announced a $2.65 per share dividend that will begin in July 2012. This represents a 0.45% quarterly yield and a 1.81% annual yield (dividend / share price).

One cannot walk down the street, shop at a mall, or sit next to someone on an airplane without those ubiquitous white ear buds visibly present. With the introduction of Apple’s iPod on October 23, 2001, and the subsequent releases of the iPhone (June 2007) and the iPad (January 2010), Apple’s technologies have been accepted as the premiere gadgets to own. This success has catapulted Apple to be one of the best performing companies in the United States and the world.

On March 19th, Apple made news once again by declaring the payout of a dividend, the first time since December 1995, and a buy-back program of company stock. Apple currently has $100 billion of cash on its balance sheet. Investors and pundits alike have wondered, what will Apple do with all that cash? Keep investing in the business? Increase the retail presence? Buy a strategic partner? Buy a competitor? Buy back stock? Those questions have been put to rest, at least for now.

Apple announced a $2.65 per share dividend that will begin in July 2012. This represents a 0.45% quarterly yield and a 1.81% annual yield (dividend / share price). The $10 billion released for the stock buy-back program will begin in the fourth quarter of 2012. All in, this plan will cost the company approximately $40 billion over the next three years ($29.7 billion for the dividends and $10 billion for the buy back).

The price of Apple stock has steadily increased over time (as depicted in the chart above), resulting in an increased market capitalization of the company. With approximately 932.4 million shares outstanding, the company has a market capitalization value of over $560.5 billion. Apple is easily the largest constituent in the S&P 500. Exxon Mobil is the next closest company at $408.6 billion.

The Improving Outlook for Construction Jobs

This week’s chart shows the month over month change in construction jobs and the month over month change in annualized housing starts in the U.S. (based on rolling six month averages for each). As the chart illustrates, the steep drop off in housing starts that began in late 2006 resulted in significant job losses in the construction sector starting in mid-2007. However, over the past several months, a positive trend has started to emerge in new housing starts.

This week’s chart shows the month over month change in construction jobs and the month over month change in annualized housing starts in the U.S. (based on rolling six month averages for each). As the chart illustrates, the steep drop off in housing starts that began in late 2006 resulted in significant job losses in the construction sector starting in mid-2007. The construction sector, which added approximately 1.1 million jobs from January 2003 to December 2006 (an average of about 24,000 jobs a month), lost approximately 2.1 million jobs from January 2007 to December 2010 (an average of about 44,000 jobs per month) according to ADP payroll data. However, over the past several months, a positive trend has started to emerge in new housing starts. This positive trend in housing starts has largely been driven by an increase in construction of multifamily housing units (i.e. apartment buildings) due to the increased demand for apartments (as a result of many households transitioning from homeowners to renters).

While this improvement is a welcome development in the housing market and construction sector, the recent increase in construction jobs is nowhere close to the kind of growth required to make up for the lost construction jobs during the recession and its aftermath. We have had an increase in construction jobs for five consecutive months with approximately 56,000 construction jobs added in the U.S. At this pace, it would take over 15 years to recover all the construction jobs that were lost from January 2007 to December 2010.

Beware of Changing Correlations!

This week’s chart shows the dynamic nature of correlations between asset classes by comparing correlations amongst traditional asset classes over 20-year and 5-year historical periods. The chart above shows how much these correlations have all increased when comparing the 5-year figures to the longer dated 20-year period.

This week’s chart shows the dynamic nature of correlations between asset classes by comparing correlations amongst traditional asset classes over 20-year1 and 5-year2 historical periods.3 The chart above shows how much these correlations have all increased when comparing the 5-year figures to the longer dated 20-year period. What does this mean for investors? We see two main takeaways:

  1. For those that rely on mean-variance optimization programs for determining their asset allocation, it is imperative to understand the exact timeframe reflected in the correlations used as inputs, as different time periods will yield not only different correlations but critically, different portfolio structures.
  2. The correlation amongst traditional asset classes has increased in the last five years, thus it is more difficult to truly create a “diversified” portfolio that offers protection from large draw downs in the equity markets. This was never more apparent than during the financial crisis of 2008-2009.

As now outlined in both this chart and “Correlation Doesn’t Tell the Whole Story”, correlations can be helpful in conducting asset allocation studies, but they also feature some notable shortcomings that should be well understood by those who rely on them for portfolio decisions.

1 March 1992 – February 2012
2 March 2007 – February 2012
3 Indices used for analysis were Russell 1000, Russell 2000, MSCI EAFE, MSCI Emerging Markets, and BarCap Aggregate

Velocity of Money

This week’s chart shows the change in the velocity of the money from 1959 through 2011 along with the growth in the monetary base. Velocity measures the frequency with which a unit of money changes hands in an economy over a given period of time. This figure can be viewed as a general gauge of activity taking place within an economy.

This week’s chart shows the change in the velocity of the money from 1959 through 2011 along with the growth in the monetary base. Velocity measures the frequency with which a unit of money changes hands in an economy over a given period of time. This figure can be viewed as a general gauge of activity taking place within an economy. The monetary base represents liquid currency as well as close substitutes for money including currency in circulation, bank vaults, and bank reserves. In monetary economics, the quantity theory of money states that money supply multiplied by velocity equals real GDP times the price level.

Money Supply * Velocity = Real GDP * Price Level

This implies that the price level has a direct relationship with the supply of money in an economy. As the chart shows, the monetary base is at the highest level on record, which would normally lead to an increase in the price level (inflation). However, velocity is at the lowest level since record keeping began in 1959 and is the primary reason inflation remains subdued, despite the large increase in the money supply.

The Federal Reserve has more than doubled the monetary base since December 2007 through quantitative easing in hopes of stimulating borrowing and spending. However, increases in the monetary base have largely sat idle in bank reserves as banks increased their capital ratios, tightened lending standards, and overall loan demand levels decreased, causing the velocity of money to fall. Given the current economic slack in the U.S., it is unlikely that the Federal Reserve’s monetary policies will cause inflationary issues in the near term as long as velocity remains low. However, once economic activity begins to pick up, policy tightening will be essential to reduce potential inflation pressures.