Political Calculations
Unexpectedly Intriguing!
June 30, 2015

Reuters has sounded some dire news:

Wall St. tumbles as investors flee equities on Greek debt crisis

U.S. stocks fell sharply in heavy trading on Monday and the S&P 500 and the Dow had their worst day since October after a collapse in Greek bailout talks intensified fears that the country could be the first to exit the euro zone.

The European Central Bank froze funding to Greek banks, forcing Athens to shut banks for a week to keep them from collapsing.

And Greece appeared to confirm it was heading for a default after a government official said the country would not pay a 1.6 billon euro loan installment due to the International Monetary Fund on Tuesday.

U.S. investors also worried about Puerto Rico's debt problems and a bear market in China the day before quarter-end and ahead of Thursday's U.S. jobs report and the long weekend for U.S. Independence Day.

So are U.S. investors really "fleeing" the U.S. stock market based on the situation in Greece, Puerto Rico and China?

Well, if we look at what our standard model of how stock prices behave, we find that the level of stock prices is within the range of values we would reasonably expect them, whether U.S. investors were focused on either the third quarter of 2015, the fourth quarter of 2015 or the second quarter of 2016!

S&P 500 - Alternative Futures - 2015-Q2 - Standard Model - Snapshot 2015-06-29

That's really a consequence of how tightly compressed the expectations for the change in the year-over-year growth of dividends per share in each of these future quarters is at this time - there's really not that much difference between them at this point (although watch out below if investors suddenly focus on 2016-Q1!).

But more practically, if we had to pick one future quarter where the expectations associated with are currently driving the trajectory of the S&P 500, we'd go with 2015-Q3, for reasons not having anything to do with Greece, Puerto Rico or China, so the answer to that first question is... not so much.

Which will be nice while and as long as that lasts, but perhaps a better and more relevant question to ask at this point is how close is order to breaking down in the U.S. stock market?

Keeping in mind that the answer is presently rising at a rate of just under 1 point per trading day, the answer that applies the S&P 500's closing value of 2067.54 on 29 June 2015 is about 1.3%, or 27.4 points away from the key statistics-based threshold.

S&P 500 Daily Closing Value vs Trailing Year Dividends per Share, 30 June 2011 through 29 June 2015

More interesting is that its happening at nearly the four year anniversary of the last time order broke down in the U.S. stock market, after 30 June 2011, when the Federal Reserve's QE 2.0 bubble suddenly deflated.

S&P 500 Daily Closing Value vs Trailing Year Dividends per Share, December 1991 through June 2015

So will the period of order that began on 4 August 2011 finally break down after holding for four years? Well, if we consider each of the alternative trajectories for which we have sufficient data to project into the future using our standard forecasting model is any indication, the answer is... almost certainly yes.

S&P 500 - Alternative Futures - 2015 - Standard Model - Snapshot 2015-06-29

We've got about a month where we can continue to use our standard forecasting model for the S&P 500 in 2015, before we'll need to switch to our rebaselined model to work around the effects of the echoes resulting from last year's stock price volatility upon our standard model.

But this will likely be the last time we share what the alternative futures for the S&P 500 look like this year, as we'll have other things going on that will demand our attention.

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June 29, 2015
Ruins of Theater at Delphi and Remains of Temple of Apollo - if you don't know why this image is relevant to our forecast of the future for Greece's economy, you should brush up on your ancient history!  Source: https://www.cia.gov/library/publications/the-world-factbook/photo_gallery/gr/photo_gallery_B1_gr_44.html

We have been following the negotiations between Greece's new government leaders and the nation's European creditors with some interest as the nation would seem to be diving headlong into defaulting on its debt interest payments at the end of June 2015. Last week, we finally got the details for how each of these parties propose to both cut the Greek government's spending and by how much they would hike Greece's taxes through 2016.

As best as we can tell, Greece's economy is about to be struck with another body blow regardless of which bailout proposal might go forward as the stage is set for tragedy, no matter what.

But you don't have to take our word for it. Since we're the ones who built the tool that calculated, with uncanny mathematical precision, how the tax hikes and spending cuts approved by previous Greek government leaders and the nation's major creditors wrecked the Greek economy by ensuring that the nation would fall into deep depression, we're going to do that same math all over again.

The first set of numbers we'll be using in this exercise represent the tax and spending changes that Greek Prime Minister Alexis Tsipras' government has proposed to accept as a condition for receiving a new bailout, which were reported in The Guardian, and which Grumpy Economist John Cochrane featured on his blog. Totaling the detailed expected tax collections and spending cuts by year presented in the table above, we obtained the following hard numbers proposed for each in both 2015 and 2016:

23 June 2015 Greek Government Proposal for Tax Hikes and Spending Cuts
Tax Collections [millions of Euros] 2015 2016
Value Added Tax Hikes 680 1,360
Corporate Tax Hikes 945 815
Retirement and Pension "Social Contribution" Hikes 350 800
Other Tax Hikes 320 397
Total Proposed Tax Hikes 2,295 3,372
Spending Cuts [millions of Euros] 2015 2016
Retirement and Pension Cuts 60 300
Defense Cuts 0 200
Total Proposed Spending Cuts 60 500

We'll also use the OECD's 2014 estimate of Greece's GDP of 179,080.6 million Euros as the baseline reference from which we'll forecast how Greece's GDP will change as a result of the Greek government's tax and spending proposals and we'll set the amount of quantitative easing that the European Central Bank might adopt at 0, which will give us an idea of the total amount of fiscal drag that the current Greek government would appear to be ready to impose on the Greece's economy.

The default data in our tool below is set up with the data for 2015, where we'll use the results for that year to repeat the calculations as they would apply for the proposed tax hikes and spending cuts in 2016. If you're reading this article on a site that republishes our RSS news feed, click here to access a working version of our tool!

GDP and "Input Shocks"
Input Data Values
Nominal GDP for the Previous Period [millions]
Change in Expected National Government Tax Collections [millions]
Change in National Government Spending [millions]
European Central Bank Net Quantitative Easing [millions]
Fiscal Policy Multipliers (Estimated Range)
Government Spending (0.6-0.7)*
Government Taxes (-3.0)
Quantitative Easing (0.8-1.0)
* If unemployment rate ≥ 7.5%. Multiplier is 0.5 if unemployment rate < 7.5%.

Individual Effects of Fiscal and Monetary Policies Upon GDP
Calculated Results Values
Effect of Change in Government Spending on GDP [millions]
Effect of Change in Government Taxes on GDP [millions]
Effect of Change in Monetary Policy on GDP [millions]
Combined Effects of Fiscal and Monetary Policies Upon GDP
Combined Effects on GDP [millions]
Estimated GDP for Next Period [millions]

Without any quantitative easing specifically targeting the Greek economy on the part of the European Central Bank to offset the negative consequences of the Greek government's proposed tax hikes and spending cuts for 2015, we can reasonably expect Greece's economy to contract by about 3.9% in 2015, with its GDP falling to 172,159.6 million Euros. Using that GDP number and substituting the Greek government's proposed 2016 tax hikes and spending cuts, we can reasonably expect that Greece's economy will further contract by an additional 6.0% from that lower level to 161,743.6 million Euros in 2016. Altogether, the Greek economy would be 10% smaller in 2016 than it was in 2014.

And that would be the consequences to Greece's economy that Greece's own government has proposed to accept as a condition for continuing to be allowed to borrow money from its international creditors. The situation for Greece's economy would be even worse under the counterproposal offered by those parties, who would have Greece increase its Value Added Tax collections by up to 1,789 million Euros in 2015 and up to 1,838 million Euros in 2016 (1% of the GDP they project for Greece in those years), while also boosting the amount of Greek defense cuts to 400 million Euros in 2016.

Adjusting the numbers in our tool above to reflect 3,404 million Euros worth of tax hikes in 2015 (still coupled with 60 million Euros of spending cuts) would have Greece's GDP in 2015 fall to 168,832.6 million Euros. In 2016, with an additional 3,850 million Euros of tax hikes paired with 700 million Euros of spending cuts, Greece's GDP would fall to 156,862.6 million Euros - a 12.4% reduction from 2014's GDP figure.

Crowds gather as hundreds of thousands of dollars in “Scrip Money” are burned. The notes were issued after the bank had closed. April, 1933. Local Identifier: 306-NT-177.567C Source: http://unwritten-record.blogs.archives.gov/2014/10/29/black-tuesday-85-years-gone-by/

The reason why the negative impact on Greece's GDP is set to be so large is because the proposed conditions for receiving a new bailout to avoid a Greek default on its debt are so heavily weighted toward tax hikes over spending cuts, where tax hikes outweigh spending cuts by roughly a 10-to-1 ratio. The negative impact to the nation's GDP would be considerably less if the ratio were reversed - as it stands, they might as well burn the bailout money they receive as part of the deal being negotiated because they won't get any benefit from it.

The wild card in our analysis is the Quantitative Easing (QE) program that the European Central Bank might adopt to offset these negative impacts within Greece. The question is whether they are capable of working QE within just Greece itself to specifically offset the negative impacts that would be caused by their tax-dominant austerity plan within that nation. If not, the ECB would have to apply their QE programs across Europe as a whole where their efforts would have to be much, much, much bigger to be able to reach enough into Greece to avoid it falling even deeper into economic depression.

Neither option seems likely at present. Especially since the international creditors, made up of the European Central Bank (ECB), the International Monetary Fund (IMF) and the European Union (EU), actually seem to be intent on breaking both Greece's economy and the democratically-elected Greek government. And even more especially after the Greek government called to put the creditors' bailout measure up for a public referendum on Sunday, 5 July 2015, prompting the creditors this past weekend to cut off Greece's available lines of credit and thereby guaranteeing its default on 30 June 2015.

The international creditors' strategy at this point would not appear to have anything to do with genuinely resolving Greece's debt and economic problems, which they have been party to creating. They're trying to send a message to others in Europe who might threaten their supremacy by challenging them, where it seems that Greece is to be the example of what they mean will happen whenever they say "or else".

Why else would they reject Greece's proposal, in which the Greeks offered to slit their own economic throats and slash their own GDP by 10%, to instead demand that the Greeks slit their own throats even deeper and slash their GDP by 12.4% as a condition of keeping their IV drip of credit hooked up?

We can only conclude that things other than common economic sense are motivating the parties in this deal.

How Greece Got Here, or Rather, Previously on Political Calculations

We've been periodically monitoring Greece's deteriorating fiscal situation for a number of years. Here's our previous analysis, presented in chronological order.

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June 26, 2015

There are two ways to watch the following performance of Emimem's Lose Yourself: first with the sound on, and then with the sound off. Both are awesome!

HT: Kottke.

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June 25, 2015
Walking Running Gals - Source: National Institute of Health - http://www.niddk.nih.gov/health-information/health-topics/Diabetes/physical-activity-diabetes/Pages/physical-activity-diabetes.aspx

After having worked out how many calories you're really eating, we thought we'd next turn our attention next to working out how many calories you're really burning when you engage in the two most common forms of physical activity: running and walking.

With these activities, there's an old rule of thumb that says it's the distance that matters most in determining how many calories you burn, where whether you run or walk, the amount of calories you burn will be the same if the distance you cover is the same.

That rule of thumb is something you'll often see if you monitor your estimated calories burned on a modern treadmill, which for every mile you walk or run on it, will often indicate that you've burned about 100 calories.

It turns out though that the amount of calories burned by running or walking over a given distance are different, as Amby Burfoot of Runner's World explains after investigating a contrary claim by David Swain, an exercise physiologist at Old Dominiion University:

In "Energy Expenditure of Walking and Running," published last December in Medicine & Science in Sports & Exercise, a group of Syracuse University researchers measured the actual calorie burn of 12 men and 12 women while running and walking 1,600 meters (roughly a mile) on a treadmill. Result: The men burned an average of 124 calories while running, and just 88 while walking; the women burned 105 and 74. (The men burned more than the women because they weighed more.)

Swain was right! The investigators at Syracuse didn't explain why their results differed from a simplistic interpretation of Newton's Laws of Motion, but I figured it out with help from Swain and Ray Moss, Ph.D., of Furman University. Running and walking aren't as comparable as I had imagined. When you walk, you keep your legs mostly straight, and your center of gravity rides along fairly smoothly on top of your legs. In running, we actually jump from one foot to the other. Each jump raises our center of gravity when we take off, and lowers it when we land, since we bend the knee to absorb the shock. This continual rise and fall of our weight requires a tremendous amount of Newtonian force (fighting gravity) on both takeoff and landing.

Burfoot went on to provide the math formulas that would provide a better estimate of actual calories burned per mile by either running or walking, which we've adapted into the following tool. All you need to do is to enter your weight, whether you're running or walking and also the distance you're covering, and we'll do the rest!

Your Weight
Input Data Values
Your Weight [lbs]
Select Whether Running or Walking
Distance [miles]

Estimated Calories Burned per Mile
Calculated Results Values
Total Calories Burned per Mile
Net Calories Burned per Mile
Estimated Calories Burned for Entered Distance
Total Calories Burned Over Distance Traveled
Net Calories Burned Over Distance Traveled

In the tool above, the results for walking apply for walking speeds between 3 and 4 miles per hour. However, Burfoot reports that walking at speeds of 5 miles per hour or faster will actually burn more calories than running, since walking is more energy-intensive than running is at those speeds.

In terms of calories burned, the net calories burned figures are the important results in the tool, since those results account for your basal metabolism, or rather, how many calories you would have burned anyway over the elapsed time of the activity if you hadn't been either running or walking.

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June 24, 2015

We now have a handle on what the expected future for the S&P 500's dividends per share is through 2016-Q2. Our first chart shows the recent past history of how Standard and Poor has recorded each quarters dividends from 2013-Q1 through 2015-Q1, with the expected future dividends as recorded by the CBOE's dividend futures contracts as of 19 June 2015, the expiration date for the 2015-Q2 dividend futures contract:

Past and Expected Future Dividends per Share for the S&P 500, 2013-Q1 through 2016-Q2

Standard and Poor will report its dividends per share figure for 2015-Q2 after the end of the month.

The most important thing to take away from the dividend futures data presented in the chart above is that the rate at which dividends are expected to increase is decelerating. Which is the biggest factor behind why stock prices have mainly moved sideways to slightly higher in 2015 to date.

More interesting though is how quickly investors have shifted their forward looking focus since last week, when they were tightly focused on 2015-Q3 as they went about setting stock prices. In the last two days, they've moved their focus in stages to the more distant futures of 2015-Q4 and then 2016-Q2.

Alternative Futures for the S&P 500 - 2015Q2 - Standard Model - Snapshot 2015-06-19

And in making that last move, they've pretty much found the fundamental ceiling for the S&P 500, as the potential for continued upward movement through the end of June 2015 is limited to what we consider to be our typical margin of error.

That's not to say that stock prices couldn't move higher, but that would be consistent with what we would describe as a noise event, which would likely not be sustained in the absence of a significant improvement in the expectations for future dividends.

All noise events end. It's only ever a question of when.

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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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