Political Calculations
Unexpectedly Intriguing!
September 2, 2014

Coming over a century after many of the original events, we thought it was about time we got around to revisiting the history of the S&P 500, or rather, its predecessor indices and components, during the era of the First World War.

Our table below presents an overview of the market from January 1912 through March 1925, showing how the market's price per share, trailing year earnings per share and trailing year dividends per share evolved throughout what might be described as a series of very disruptive events:

S&P 500 Predecessor Components Price per Share, Trailing Year Dividends per Share and Earnings per Share, January 1912 - March 1925

The table below indicate the key milestones of the period:

Timeline of Major Events for the U.S. Stock Market, January 1912 through March 1925
Event Date(s) Description
January 1912 End of January 1910 - January 1912 Recession
A 5 November 1912 Woodrow Wilson elected as U.S. President.
B January 1913 through January 1915 U.S. enters into economic recession.
C 3 February 1913 Delaware becomes 36th state to ratify 16th amendment to U.S. Constitution, permitting a national income tax. Although the Revenue Act of 1913 implementing the U.S. income tax would not become law until 3 October 1913, it was understood that all income earned in 1913 would be subject to the new tax, which would come due on 15 March 1914. The combination of the imposition of the new income tax and how it was implemented is the proximate cause of the 1913-1914 recession.
D 23 December 1913 President Wilson signs the Federal Reserve Act into law. Sidenote: U.S. exports in 1913 total approximately $2.495 billion. Average export surplus (value of exports above imports) during previous 10 years ranges between $400 to $500 billion per year.
E 28 July 1914 Following the assassination of Archduke Franz Ferdinand one month earlier, Austria-Hungary declares war on Serbia, marking the official start of the First World War (a.k.a. "The Great War" or "World War I"). In response, the U.S. suspended all trading on the New York Stock Exchange for four months beginning on 31 July 1914 (until 28 November 1914) and declared its neutrality in the war on 1 August 1914.
F 16 November 1914 The 12 regional banks established by the Federal Reserve Act start operating. Side note: demand for food and materials from Europe began to increase significantly during these first months of World War I.
G 7 May 1915 A German U-boat torpedoed the S.S. Lusitania, killing 1,198 people, including 124 U.S. citizens.
H September 1915 A year after World War 1 began, inflation begins to surge in the U.S. economy as U.S. banks begin to monetize the large quantities of gold that European nations were moving into U.S. banks to both protect them from the conflict and to pay for U.S. exports, since the U.S. was operating under a gold standard. The recently established Federal Reserve lacked the means to offset the inflationary impact, with the resulting effect being that inflation spiked upward from nearly 0% at this time to reach a level over 20% by mid-1917. Inflation would continue at or near that elevated level through mid-1920.
I 24 March 1916 The S.S. Sussex was torpedoed without warning by a German U-boat, initiating a threat by President Wilson to break off diplomatic relations with Germany.
J May 1916 Fearing the U.S. would enter into the European conflict on the side of the Allies (Great Britain, France, Italy, Russia), Germany suspends its unrestricted U-boat campaign.
K 8 September 1916 All U.S. income tax rates are doubled with the top rate set to be 15% for income over $2 million on 8 September 1916 as the U.S. begins gearing up to enter into World War I by passing the Emergency Revenue Act. Side notes: Observe that stock market earnings begin falling sharply in January 1917, while the market's more insulated dividends would begin to fall a year later. Neither will begin to recover until December 1921.
L 31 January 1917 Growing desperate for victory, and fearing that the U.S. is preparing to enter the war on the side of the Allies following President Wilson's re-election in November 1917, Germany resumes its unrestricted U-boat campaign on commercial shipping in the Atlantic Ocean.
M 3 February 1917 The U.S. severs diplomatic relations with Germany as the U.S.S. Housatonic is sunk by a German U-boat. A month afterward, the U.S. learns of the "Zimmerman Telegram", which promises Mexico the return of territory it ceded in the Mexican-American War if it joins with Germany.
N 6 April 1917 Following the sinking of the S.S. Aztec on 1 April 1917, President Wilson delivers a war message to Congress on 2 April 1917, which declares war against Germany.
O 3 October 1917 The U.S. sharply hikes income taxes to support its war efforts. The top income tax rate is set at 77% for income over $1 million and expands to include 56 brackets for all income earned in 1917. Side note: Through the end of 1917, the U.S. export surplus reaches $3.5 billion - approximately 7-9 times its pre-war level.
P August 1918 through March 1919 The U.S. officially enters into recession, as its exports to warring nations in Europe are no longer able to offset its tax-hike driven economic deterioration.
Q November 1918 Germany's Kaiser Wilhelm II abdicates on 9 November 1918 and a Germany signs an armistice to end fighting on 18 November 1918. The war officially ends when the Treaty of Versailles is signed on 28 June 1919.
R January 1920 through July 1921 The U.S. enters into a deep recession as the Federal Reserve acts to bring the high rate of inflation in the U.S. economy under control by sharply reducing the U.S. money supply.
S 23 November 1921 The U.S. reduces income tax rates significantly with the passage of the Revenue Act of 1921, with the top rate reduced to 58%. Stock prices begin to rise in anticipation of the tax rate reductions in August 1921, with stock market earnings and dividends following suit in January 1922.
T May 1923 to July 1924 The U.S. economy enters into a mild recession.
U 2 June 1924 The Revenue Act of 1924 once again reduces U.S. income tax rates, this time setting the top income tax rate to 46%.

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August 29, 2014

What if you could hack your brain to boost your IQ? Would you do it? How can you do it?

Garth Sundem, author of Geek Logik, one of our all time favorites, is back in print with Beyond IQ, which taps the expertise of today's top researchers in psychology for how to expand your mental abilities.

And all you need to get started is this book, a 9-volt battery, a couple of wires, a 2 milli-Amp resistor and two moist sponges to attach to your head and your left arm....

Seriously! At least if you're as serious as the U.S. Defense Advanced Research Projects Agency (DARPA), which has used a device that's just a little more sophisticated than the one you could make yourself using the parts we listed above, which just happens to have the capability of doubling the speed at which military recruits learn to recognize and neutralize threats in DARPA's combat simulations.

More seriously, you have to jump ahead to Chapter 6 to get to the part of the book that describes how and why you might want to try that sort of thing out, but that brings us to something else that we've learned in reading Garth's books. You don't have to read them from front to back - in fact, they're often better if you skip from one chapter to another in no particular order, since they often stand on their own.

That reading approach really works well with Beyond IQ because Garth often presents brain-stretching exercises after a short discussion of the main concept in each chapter, where we suggest skipping over the exercises to read the snippets of insights presented at the end of each chapter, then coming back to the exercises when you really want to take a deep dive into a particular concept.

In putting the book together, Garth interviewed over 35 scientists doing real world research into the potential for getting more and better performance out of the human brain and the book also works well as a general introduction into the current state of the art in intelligence research. And in fact, a number of the exercises presented in the book are taken directly from their professional journal papers.

Highly recommended. You'll get smarter if you read it!

Previously on Political Calculations

Tools and posts inspired by Garth Sundem's Geek Logik:

Our Reviews of Other Books by Garth Sundem

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August 28, 2014
Source: http://www.missourieconomy.org/indicators/cost_of_living/index.stm

Now that we've established what the relative purchasing power of a dollar is in each of the United States, we're going to apply that information today to solve one of the great problems of our time: how to set the minimum wage in each state in order to achieve purchasing power equality.

After all, it goes against the ultimate liberal ideals of fairness and equality of outcomes if, thanks to nothing other than the relative cost of living in each state, that a minimum wage earner in Mississippi is able to buy more things with their earnings than can a person earning the identical wage in a high cost of living state like New York.

Clearly, in the interest of fairness and of achieving purchasing power equality, the minimum wage in each state needs to be adjusted in such a way that a person who earns the minimum wage in each state can buy no more and no less than the same amount of real goods and services. That's the great problem for society that we'll be solving today.

Let's start by examining the applicable minimum wage that applies to each state in 2012, the year for which we have the relative purchasing power data, which is the greater of either the state's own minimum wage or the federal minimum wage of $7.25 per hour. That data is directly encoded in the interactive map below:

Next, let's calculate what each state's minimum wage would have to be so that the individual's who earn it will have an equal amount of purchasing power, regardless of the state in which they might live. Here, we've used the federal minimum wage of $7.25 per hour as the benchmark for calculating the minimum wage levels in each state that would achieve purchasing power equality across the entire nation.

Finally, we calculated how much each state would need to adjust their minimum wage levels in order to realize the very achievable dream of purchasing power equality for minimum wage earners throughout the United States.

What this exercise demonstrates is that if one really cares about achieving equality, it makes absolutely no sense to impose a national minimum wage, which we observe produces the situation where the minimum wage earners in some states are considerably worse off than individuals earning the same wage in lower cost of living states - the very essence of income inequality and unfairness.

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August 27, 2014

It's a mistake to treat housing prices as if they're a function of time. They're not. But we're going to treat them that way today to illustrate how differently the trend in median new home sale prices has behaved since institutional investors dialed down their year-long buying frenzy after July 2013. The chart below reveals what we find:

Trend in Trailing Twelve Month Average of Median U.S. New Home Sale Prices, July 2012 through July 2014

The initial inflation phase of the second U.S. housing bubble ran from July 2012 through July 2013. During that time, the trailing twelve month average of the median sale price of new homes sold in the United States increased at an average rate of approximately $2,476.50 per month.

From July 2013 through July 2014, the trailing twelve month average of the median sale price of new homes sold in the U.S. has increased at an average rate of $1,300.84 per month, just under 53% of the average rate recorded during the preceding 12 months.

Here's the big picture for the trends in the trailing year average of median new home sale prices since January 1963, which is as far back as the U.S. Census Bureau provides the data:

Trailing Twelve Month Average of Median U.S. New Home Sale Prices, January 1963 through July 2014

The current temporal trend growth rate of $1,300.84 per month for median U.S. new home sale prices is still well elevated over the the typical linear growth rate of housing prices observed outside of economic bubbles in the U.S. housing market of roughly $397 per month.

Data Source

U.S. Census Bureau. Median and Average Sales Prices of New Homes Sold in the United States. [Excel Spreadsheet]. Accessed 25 August 2014.


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August 26, 2014

The Tax Foundation has provided a wonderful illustration of the relative cost of living in each of the United States:

Tax Foundation: Relative Value of $100

In the map, the Tax Foundation has adjusted the value of $100 according to its spending power in each state, or rather, for each state's relative purchasing power parity, and in doing so, has shown that 100 U.S. dollars is not worth the same in each state in terms of how much of a defined basket of goods and services that it can buy.

It occurs to us that there's another way can illustrate the data, which might provide the basis for some other interesting analysis. So, to that end, we generated the following interactive map to visualize each state's relative affordability as a percentage of the national average:

We find that Illinois comes closest to the national average, with Mississippi being where money goes the farthest and Washington D.C. as the place where money doesn't go far enough.

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