The Economic Report – Week of Monday, June 21, 2021

FRIDAY, JUNE 25, 2021

BLOGS/OP-EDS

New Personal Income data is out! (Jason Furman via Twitter @jasonfurman)
Jason Furman on the new personal income data, “New Personal Income data is out! Real disposable personal income was 4% above its pre-pandemic trend. In a normal world that would be huge–but it is less huge than recent months boosted by checks. A with lots of charts! Overall consumption remained 1% below it’s pre-pandmic trend, the same shortfall it had in April. This was because spending was revised up for March and April but down for May. Also these data are adjusted for inflation and that was up a lot in recent months. The composition of consumption was creeping towards normalization as spending on goods fell sharply but still 10% above trend and services spending spending crept up but still 6% below trend. You see that in particular goods and services as well: –Motor vehicles and parts are 25% above trend (down a lot from April) –Restaurant meals are almost back, just 1% below pre-COVID –Movies still way down (shifting from positive to normative: you should see Cruella) The release also includes the personal consumption expenditures price index. It is usually ~0.2pp below the CPI as it was this month. The core PCE (not the official Fed target but what they mostly look at) is now well above a 2% growth rate from the pre-pandemic period. So far this year core PCE prices have risen at a 4.8 percent annual rate. To hit the Fed’s median expectation of 3.0% for Q4/Q4 prices will need to slow to a 1.7% annual rate for the remainder of the year. That’s possible (some prices will fall, like autos) but not what I expect. Finally, a glimpse into the future. Excess saving continues to grow and is now $2.2 trillion. This could support substantially higher consumption but no one knows whether or not it will. Note the monthly consumption gap is ~$10b so don’t need much spendout to be well above it.”

Liquidity trap for me but not for thee? (Tyler Cowen, Marginal Revolutions)
Tyler Cowen argues the Fed is a rate maker, not taker, “…no one is doubting that the Fed is in charge of forthcoming rates of inflation. (And if the T-Bill rate is ever so slightly above zero, rather than at or below zero, that too seems to stem from higher expected rates of price inflation in the first place.) I agree with those individuals who suggest that the currently higher rates of price inflation will not be with us 4-5 years from now, and that is because the Fed does not want that to happen…”

Ten Things We Now Know About the White Working Class Vote in 2020 (Ruy Teixeira, The Liberal Patriot)
Ruy Teixeira highlights an interesting factoid about the 2020 electorate, the shift against Trump in the non-college white vote was driven by men, “…Even with their declining population share and Trump’s dominance of their group, white noncollege voters still made up a larger share of Biden’s coalition (32 percent) than white college voters (29 percent), according to Catalist….The shift against Trump among white noncollege voters was almost entirely driven by men. They shifted 7 points against him, while women in this group barely moved at all (.2 points). This is a not a widely-appreciated fact, to say the least….”

Where Did the Coronavirus Come From? What We Already Know Is Troubling. (Zeynep Tufekci, New York Times)
Zeynep Tufekci on the “lab leak” hypothesis, “…Since most pandemics have been due to zoonotic events, emerging from animals, is there reason to doubt lab involvement? Maybe if you look at all of human history. A better period of comparison is the time since the advent of molecular biology, when it became more likely for scientists to cause outbreaks. The 1977 pandemic was tied to research activities, while the other two pandemics that have occurred since then, AIDS and the H1N1 swine flu of 2009, were not…even if we are denied answers, we can still learn lessons. Perhaps the biggest one is that we were due for a bat coronavirus outbreak, one way or another, and the research showing bat coronaviruses’ ability to jump to humans was a warning not heeded…”

Who are the better forecasters of inflation, bond traders or economists? (Joseph Gagnon + Madi Sarsenbayev, Peterson Institute For International Economics)
Joseph Gagnon and Madi Sarsenbayev point out that post 2000 the accuracy of economists’ inflationary forecasts has declined “…The graph is split into two panels to magnify changes in the data after 2000, when inflation and inflation forecasts were relatively stable over time. Bond yields, inflation compensation, and economists’ forecasts all miss most of the fluctuations in future long-term inflation….The apparently strong predictive power of economists’ forecasts in table 2 is mainly derived from the years before 2000, when both inflation and forecasts of inflation were trending downward. As shown in table 1, which focuses on the years since 1999, predictive power of economists’ forecasts is at best moderate and limited to longer horizons…”

Preferred Shares (Tim Barker, Phenomenal World)
Tim Barker argues that labor’s stronger position will likely lead to a rebound in labor share, and inflation with a good Larry Lindsey quote, “…redistribution is difficult because someone always loses. Even in a virtuous circle of demand-led growth, social conflict is never far away….But the experience reminds us that economic expansions can generate self-undermining social conflicts. On these matters, FOMC transcripts contain moments of remarkable lucidity. In 1995, Lawrence Lindsey told his colleagues: “It is not hard to understand how we can get both lack of inflation and an improvement in the unemployment rate when in fact wages are being suppressed. The problem is that we cannot have wages that continue to be depressed and have a 3 percent expansion of the real private economy; it just does not add up. One of two things can happen: In one, workers get restless, wages go up, the profit share falls, and there is upward pressure on inflation. That is scenario “one” … Or we get scenario “two,” where the demand is not there, we do not in fact have 3 percent expansion ex-government in the economy, and we get slower growth than the Greenbook is forecasting. My own bet is that the second result is more likely than the first.” In plain language, Lindsey laid out a choice between stagnation and redistribution, and predicted stagnation. It was a smart wager. The subsequent decades of low growth have only now given way to a new willingness to experiment with expansion. While we await the results, we can remind ourselves that we live in an economic system defined by conflict, as well as cooperation, between groups of people with divergent interests…”

News

U.S. Personal Spending Stagnated in May as Prices Increased (Reade Pickert, Bloomberg) ($)
“…U.S. personal spending stagnated in May, reflecting a decline in outlays for merchandise, while a closely watched inflation measure continued to climb. Purchases of goods and services were unchanged following an upwardly revised 0.9% increase in April, Commerce Department figures showed Friday. The personal consumption expenditures price gauge, which the Federal Reserve officially uses for its inflation target, rose 0.4%…”

Used-Car Prices Are Poised to Peak in U.S. After Pandemic Surge (Alexandre Tanzi, Bloomberg) ($)
“…The record-breaking rise in used-car prices is probably coming to an end — and with it a key driver of the recent spike in U.S. inflation. The bellwether of the industry — the wholesale market where dealers buy and sell in bulk — has already topped out and prices of individual secondhand cars should follow in a matter of weeks, said Zo Rahim, industry analyst at Cox Automotive. Cox owns Manheim, the biggest U.S. auction house selling millions of vehicles every year…”

A new phase in the financial cycle (Staff, The Economist) ($)
“…Yet in early April the curve began to flatten. The yields on two-, three- and five-year Treasury bonds perked up as money markets began to price in the prospect that the Federal Reserve would raise interest rates in 2023. There were bigger moves at the long end of the curve. By this week the ten-year yield had fallen to 1.5%, more than 0.2 percentage points lower than at the end of March. The 30-year yield fell by even more….The bond market is hinting that the early-cycle phase in which risk assets are embraced almost without discrimination has come to a close. The peak in economic growth may have passed. Output and orders readings in the manufacturing purchasing managers’ index (pmi), a closely watched marker of activity, probably peaked in May. Other cyclical indicators have rolled over. The prospect of further fiscal stimulus is also more uncertain. America’s infrastructure bill is stuck; whatever now emerges from Congress will have a far smaller price tag than the $2trn-3trn figure widely touted just weeks ago. Markets are forward-looking. They now have less to look forward to. If peak gdp growth lies in the past, the scope for further upward revisions to forecasts for stockmarket earnings is limited. The s&p 500 index already trades at a high multiple of prospective earnings. A lot of good news is already priced into risky assets…There are echoes here of early 2004, says Andrew Sheets of Morgan Stanley…When America’s unemployment rate peaked in 2003, it was a cue for economic recovery and a strong early-cycle rally in risky assets. Stocks, commodities and corporate bonds performed very well, just as they have over the past year. As 2003 turned into 2004, the economy kept going. But markets slipped into something of a funk…”

New Econ Research

Learning from Inflation Experiences (Ulrike Malmendier + Stefan Nagel, NBER) (2013)
“How do individuals form expectations about future inflation? We propose that personal experiences play an important role. Individuals adapt their forecasts to new data but overweight inflation realized during their life-times. Young individuals update their expectations more strongly in the direction of recent surprises than older individuals since recent experiences make up a larger part of their lives so far. We find support for these predictions using 57 years of microdata on inflation expectations from the Reuters/Michigan Survey of Consumers. Differences in life-time experiences strongly predict differences in subjective inflation expectations. Learning from experience explains the substantial disagreement between young and old individuals in periods of high surprise inflation, such as the 1970s. It also explains household borrowing and lending behavior, including the choice of fixed versus variable-rate investments and mortgages. The loss of distant memory implied by learning from experience provides a natural microfoundation for models of perpetual learning, such as constant-gain learning models”

Do US firms have an incentive to comply with the FLSA and the NLRA? (Anna Stansbury, Peterson Institute For International Economics)
“….To what extent do US firms have an incentive to comply with the Fair Labor Standards Act (FLSA) and the National Labor Relations Act (NLRA)? I examine this question through a simple comparison of the expected costs of noncompliance (in terms of legal sanctions) to the profits firms can earn through noncompliance. In the case of the FLSA minimum wage and overtime provisions, typical willful violators are required to pay back wages owed and in some cases additional penalties, if detected by the Department of Labor (DOL). Based on available data on the penalties levied, a typical firm would need to expect a chance of at least 78–88 percent that its violation would be detected in order to have an incentive to comply with the FLSA. In practice, the probability of detection many firms can expect to face is likely much lower than this. In the case of the NLRA, a firm that fires a worker illegally is required to reinstate the worker with back pay if the violation is detected. Based on empirical estimates of the effect of unionization on firm profits, a typical firm may have an incentive to fire a worker illegally for union activities if this illegal firing would reduce the likelihood of unionization at the firm by as little as 0.15–2 percent. These analyses illustrate that neither the FLSA nor the NLRA penalty and enforcement regimes create sufficient incentive to comply for many firms. In this context, the substantial evidence of minimum wage and overtime violations, and of illegal employer behavior toward unions, is not surprising…”

New Numbers

Personal Income and Outlays, May 2021 (Bureau Of Economic Analysis, U.S. Department Of Commerce)
“…Personal income decreased $414.3 billion, or 2.0 percent at a monthly rate, while consumer spending increased $2.9 billion, or less than 0.1 percent, in May. The decrease in personal income reflected declines in pandemic-related assistance programs. In addition to presenting estimates for May 2021, these highlights provide comparisons to February 2020, the last month before the onset of the COVID19 pandemic in the United States…A comparison of the May 2021 current-dollar levels of consumer spending with the February 2020 pre-pandemic levels shows that spending for goods increased while spending for services decreased. Spending for goods in May 2021 was 20 percent above the February 2020 level. Categories with notable increases included motor vehicles and parts, recreational goods and vehicles (led by information processing equipment), and furnishings and durable household equipment. Spending for services in May 2021 was 1.0 percent below the February 2020 level. Categories with notable decreases included transportation services, recreation services, and food services and accommodations. During the COVID-19 pandemic, establishments in these sectors were at times closed or at limited capacity….”

New Science

Ion dynamics in battery materials imaged rapidly (Aashutosh Mistry, Nature)
“Merryweather et al. have customized an optical microscopy technique, previously used in biology9, to track the movement of lithium ions in the active materials of batteries. In this approach, a laser beam is shone at electrochemically operating battery particles as they store or release lithium ions, and the scattered light is analysed. The local concentration of electrons in these particles changes as more lithium is stored, which in turn alters the scattering pattern. Therefore, the time evolution of the scattering signals at each position on a particle correlates with the local change in lithium concentration (Fig. 1)….This method could also be used to examine solid electrolytes — battery materials that are interesting, but poorly understood. If light scattering from solid electrolytes changes with local ion concentration as it does in active materials, then the technique could be used to map how the ion distribution in such electrolytes changes when an electric current passes through them. Optical scattering might be equally useful for studying other systems that involve coupled ion and electron transport, such as catalyst layers in fuel cells and electrochemical gas sensors…Merryweather and colleagues’ research offers previously inaccessible insights into battery materials operating at far-from-equilibrium conditions. Their method for directly observing changes in active particles during operation will complement existing approaches, in which internal changes are inferred from destructive testing of batteries. It could therefore revolutionize the battery-design cycle….”

China plans crewed missions to Mars by 2033 (Christian Shepherd, Financial Times) ($)
“…Beijing wants to send astronauts to the red planet over five missions running from 2033 to 2043, Wang Xiaojun, head of China Academy of Launch Vehicle Technology, one of the country’s state-run aerospace companies, said in remarks published by Chinese state media….Wang also described an expected third phase during which trips to Mars become commonplace, including the possible use of multiple space stations to form a “sky ladder” of stops for travelers along the route…”

In Our Airpods

Multilateral tax cooperation gets one step closer (PIIE’s Trade Talks Podcast)

THURSDAY, JUNE 24, 2021

BLOGS/OP-EDS

One Chart Shows How the Entire Housing Market Got More Expensive (Joe Weisenthal, Bloomberg Odd Lots) ($)
Joe Weisenthal highlights a great chart by Ali Wof of composition of new home sales by price, “…this chart of the composition of new home sales by price shows the big upward move across all different levels. Low-end homes occupy a substantially lower share of the total number of homes sold this May (relative to last year), while higher-priced homes have grown in share….”

A Few Comments on May New Home Sales (Bill McBride, Calculated Risk)
Bill McBride on the new home sales numbers, “…And on inventory: note that completed inventory is near record lows,..but inventory under construction is closer to normal…The inventory of completed homes for sale was at 36 thousand in May, just above the record low of 33 thousand in April 2021. That is about 0.6 months of completed supply (just above the record low). The inventory of new homes under construction, and not started, is at 4.6 months – a normal level….”

Is Education No Longer the ‘Great Equalizer’? (Thomas Edsall, New York Times) ($)
Thomas Edsall on non-cognitive returns to education, “education lifts all boats, but not by equal amounts,” but advocates continued investment in non-cognitive skills to help low skilled workers add value in a service based economy, implicitly highlights the importance of supervision for lower skilled workers, “…A promising approach to the augmentation of human capital lies in the exploration of noncognitive skills — perseverance, punctuality, self-restraint, politeness, thoroughness, postponement of gratification, grit — all of which are increasingly valuable in a service-based economy. Noncognitive skills have proven to be teachable, especially among very young children….Education, training in cognitive and noncognitive skills, nutrition, health care and parenting are all among the building blocks of human capital, and evidence suggests that continuing investments that combat economic hardship among whites and minorities — and which help defuse debilitating conflicts over values, culture and race — stand the best chance of reversing the disarray and inequality that plague our political system and our social order….”

I Never Did Acid in the 70s, But I’m Experiencing Flashbacks Anyway (Craig Pirrong, Streetwise Professor)
“Who knows? Not me. We never lost control” Craig Pirrong on the “material risk” of sustained inflation, “…one would expect that this is one time, and at least partially transitory, jump in the price level rather than inflation qua inflation. That said, there are reasons for concern… availability bias is a big reason why people focus on commodity prices–they are readily observable, on a second-by-second basis, because they are actively traded on liquid markets. Other goods and services, not so much. But just because we can see them easily doesn’t mean that they are reliable beacons for the price level overall, or changes therein. This brings to mind why we should really fear a return of 70s-style inflation (or worse, heaven forfend). When sitting in (the great) Sherwin Rosen’s Econ 302 course at Chicago on a cold morning in February, 1982, I was startled when Sherwin’s normal rather droning delivery was interrupted by him shouting and pounding his right fist into his left palm: “And that’s the problem with inflation. IT FUCKS UP RELATIVE PRICES!!!!” Some prices are stickier than others, meaning that inflation pressures can impact some goods and services more and sooner than others–thereby causing changes in relative prices. This is a bad thing–and why Sherwin dropped the F-bomb about it–because relative prices guide resource allocation. If you fuck up relative prices, as inflation does, you interfere with resource allocation, leading to lower incomes and growth. Inflation has adverse real consequences. So we should definitely fear an acid flashback to 70s inflation. And although I do not believe the recent surge in prices is a harbinger thereof, I think that there is a material risk that we may all experience such a flashback…”

News

Lord of the Roths: How Tech Mogul Peter Thiel Turned a Retirement Account for the Middle Class Into a $5 Billion Tax-Free Piggy Bank (Justin Elliott et al., Pro Publica)
“…Over the last 20 years, Thiel has quietly turned his Roth IRA — a humdrum retirement vehicle intended to spur Americans to save for their golden years — into a gargantuan tax-exempt piggy bank, confidential Internal Revenue Service data shows. Using stock deals unavailable to most people, Thiel has taken a retirement account worth less than $2,000 in 1999 and spun it into a $5 billion windfall….Yet, from the start, a small number of entrepreneurs, like Thiel, made an end run around the rules: Open a Roth with $2,000 or less. Get a sweetheart deal to buy a stake in a startup that has a good chance of one day exploding in value. Pay just fractions of a penny per share, a price low enough to buy huge numbers of shares. Watch as all the gains on that stock — no matter how giant — are shielded from taxes forever, as long as the IRA remains untouched until age 59 and a half. Then use the proceeds, still inside the Roth, to make other investments…”

U.S. Initial Jobless Claims Are Higher Than Estimates at 411,000 (Olivia Rockeman, Bloomberg) ($)
“…Applications for U.S. state unemployment insurance fell slightly last week, though were higher than forecast, as the labor market meanders toward a full recovery. Initial claims in regular state programs decreased by 7,000 to 411,000 in the week ended June 19, Labor Department data showed Thursday. The median estimate in a Bloomberg survey of economists called for 380,000 new applications. The prior week’s claims were revised up to 418,000….”

How Home Builders Are Contributing to Housing Frenzy (Justin Lahart, Wall Street Journal) ($)
“…But another factor behind the low level of home sales might be that some builders are waiting until a home is further along in the construction process before they sell it, giving them further visibility into costs before locking in a price. Evercore ISI analyst Stephen Kim notes that on a recent trip to Charlotte, N.C., builders told him they were letting more time elapse between starting a project and selling, and building more homes on “spec,” or without a guaranteed buyer.The implication is that the slowdown in new-home sales might not last much longer, as homes that are under construction eventually hit the market. Builders might still not be close to slaking demand, but they will be able to profit from it even more….”

Nonbank Lenders Are Dominating the Mortgage Market (Orla McCaffrey, Wall Street Journal) ($)
“…Nonbank mortgage lenders in the U.S. issued 68.1% of all mortgages originated in 2020, up from 58.9% in 2019, according to industry research firm Inside Mortgage Finance. That is their highest market share on record and their biggest yearly gain since 2014….”

How Tiger Global is changing Silicon Valley (Staff, The Economist) ($)
“…Between January and May Tiger Global Management….ploughed money into 118 startups, ten times more than it backed in the same period in 2020….Its portfolio now counts more than 400 firm…Its new vehicle aims to raise an additional $10bn. That may be less than SoftBank’s gargantuan $100bn Vision Fund, but it is still an awful lot by VC standards—and the New Yorker may leave a more enduring mark on Silicon Valley than its deep-pocketed Japanese rival has….Tiger Global’s final impact may be the most profound. It reflects a shift in the balance of power between investors and entrepreneurs. Traditionally, investors had the upper hand. Startup founders pilgrimaged to Sand Hill Road, seeking not just money but valuable advice that the best VCs would provide. Competition from Tiger Global and other tourists has forced Californian VCs to offer more generous terms, monetary and otherwise. That in turn has made entrepreneurs themselves more confident. “It’s no fun to be an investor these days,” sums up the boss of a startup preparing to go public. The question for moneymen in Silicon Valley (which remains overwhelmingly male) is less what startup to back and more whether a startup lets you invest….”

Economics needs to evolve (Staff, The Economist) ($)
“…Evolutionary economics seeks to explain real-world phenomena as the outcome of a process of continuous change. Its concepts often have analogues in the field of biological evolution, but evolutionary economists do not attempt a rigid mapping of biological theories to economic ones. An evolutionary approach acknowledges that the past informs the present: economic choices are made within and informed by historical, cultural and institutional contexts. Fittingly, the habits of the economics profession today can be understood only by examining the field’s own history. In the 19th century the discipline that would become economics was an evolutionary science in several senses. Thinkers of diverse backgrounds vied to offer theories which best explained economic activity while, at the same time, its practitioners saw the object of their study as an extension of the biological sciences….an evolutionary approach crept back into the profession. One important contribution came in 1982, when Richard Nelson, now of Columbia University, and Sidney Winter, now of the University of Pennsylvania, published “An Evolutionary Theory of Economic Change”. Neoclassical models of economic growth failed to capture the forces—like Schumpeterian creative destruction—which played an essential role in generating technological change, they thought. Theories often supposed, for instance, that executives knew and would immediately adopt profit-maximising strategies. In reality, practices might differ widely across an industry, reflecting distinct beliefs and the persistence of firms’ unique cultures and habits. As these approaches competed, some ways of doing things became more widespread across an economy—until some other “industrial mutation” changed the competitive dynamic again….Theory built on unrealistic assumptions has proved less illuminating than economists a century ago might have hoped. Trying to understand the world as it is could yield insights and perhaps, eventually, better predictions. Economists still working with equilibrium models out of habit should consider the disruptive potential of a new, yet old, approach…”

New Econ Research

The Impact of Intangibles on Base Rates (Michael Mauboussin + Dan Callahan, Morgan Stanley)
“…suggests two hypotheses that we can test. The first is that intangible-based businesses can grow faster than what the base rate data show…the right tail of the distribution of growth rates is extending outward from the average. Amazon’s results provide anecdotal evidence for this. The second is that we should observe greater variance in the distribution of growth rates for intangible-based businesses. That means that the left tail of the distribution of growth rates is also spreading further from the average. BlackBerry’s 26.7 percent average annual revenue decline in the past decade through February 2021 is a case in point….Companies grow by generating a return on investment. The nature of investment has changed markedly in recent decades, from one dominated by tangible assets to one mostly in the form of intangible assets. Intangible assets have some characteristics that distinguish them from tangible assets, including greater potential economies of scale and higher risk of obsolescence. The good news is that intangible-intensive companies can grow faster than their tangible counterparts. The bad news is they can also become irrelevant and shrink fast. As a consequence, we should see two effects in the data: higher growth and more dispersion in the outcomes. Our analysis of the results from companies in the Russell 3000 from 1984-2020 reveals both of these. The base rate of sales growth is getting stretched from the average in both the positive and negative direction. There are two main lessons for investors. First, it is important to be mindful of the potential shift in the base rate as the result of the rise of intangibles. Second, skillful investors may be able to identify the companies that will grow faster than expected, hence providing the potential for attractive returns….”

The Global Recovery: Lessons from the Past (Dario Caldara et al., Federal Reserve)
“…In this note, we draw insights about the ongoing global recovery by looking at the evolution of several economic indicators in the aftermath of past recessions. We find that, following severe contractions, output typically remains well below its pre-recession trend in the medium term. This behavior is more marked for severe recessions that are accompanied by financial crises, while severe but short contractions result in a faster recovery. The post-COVID-19 recovery appears to be much more rapid than in standard severe recessions, putting it roughly in line with severe and short recessions of the past…. The current recovery outperforms those from typical severe recessions. Figure 1 compares the ongoing global recovery, and its projected path, with the historical evolution of GDP in the aftermath of severe contractions. Given the sharp rebound in economic activity in the second half of 2020 (solid portion of black line), the recovery from the COVID-19 shock has so far outperformed those from typical severe recessions, suggesting that this episode may look more like the “severe and short” recessions rather than the “severe and financial” ones… Furthermore, productivity is likely to be more resilient compared to past slumps, which should help to sustain the pace of the recovery in the coming years….”

New Numbers

Gross Domestic Product (Third Estimate), GDP by Industry, and Corporate Profits (Revised), 1st Quarter 2021 (Bureau Of Economic Analysis, U.S. Department Of Commerce)
“…Real gross domestic product (GDP) increased at an annual rate of 6.4 percent in the first quarter of 2021 (table 1), according to the “third” estimate released by the Bureau of Economic Analysis. In the fourth quarter, real GDP increased 4.3 percent. The “third” estimate of GDP released today is based on more complete source data than were available for the “second” estimate issued last month. In the second estimate, the increase in real GDP was also 6.4 percent. Upward revisions to nonresidential fixed investment, private inventory investment, and exports were offset by an upward revision to imports, which are a subtraction in the calculation of GDP (see “Updates to GDP”). The increase in real GDP in the first quarter reflected increases in personal consumption expenditures (PCE), nonresidential fixed investment, federal government spending, residential fixed investment, and state and local government spending that were partly offset by decreases in private inventory investment and exports…”

New Science

Same or Different? The Question Flummoxes Neural Networks (John Pavlus, Quanta Magazine)
“…One of the most powerful classes of artificial intelligence systems, known as convolutional neural networks or CNNs, can be trained to perform a range of sophisticated tasks better than humans can, from recognizing cancer in medical imagery to choosing moves in a game of Go. But recent research has shown that CNNs can tell if two simple visual patterns are identical or not only under very limited conditions. Vary those conditions even slightly, and the network’s performance plunges….Ricci thinks that getting any machine to learn same-different distinctions will require a breakthrough in the understanding of learning itself. Kids understand the rules of “One of These Things Is Not Like the Other” after a single Sesame Street episode, not extensive training. Birds, bees and people can all learn that way — not just when learning to tell “same” from “different,” but for a variety of cognitive tasks. “I think that until we figure out how you can learn from a few examples and novel objects, we’re pretty much screwed,” Ricci said….”

U.S. Confirms Removal of Wuhan Virus Sequences From Database (Rachel Chang + Robert Langreth, Bloomberg) ($)
“…Details of the genetic makeup of some of the earliest samples of coronavirus in China were removed from an American database where they were initially stored at the request of Chinese researchers, U.S. officials confirmed, adding to concerns over secrecy surrounding the outbreak and its origins. The data, first submitted to the U.S.-based Sequence Read Archive in March 2020, were “requested to be withdrawn” by the same researcher three months later in June, the U.S. National Institutes of Health said in a statement Wednesday. The genetic sequences came from the Chinese city of Wuhan where the Covid-19 outbreak was initially concentrated…he disappearance of the genetic sequences from the database raises questions about what else from the Wuhan outbreak has been shielded, said American virologist Jesse Bloom, who publicized his discovery that they were missing earlier this week. Bloom, who subsequently recovered the information, said it

Covid Delta strain risks spreading ‘like wildfire’ among unvaccinated in US (Nikou Asgari + John Burn-Murdoch, Financial Times) ($)
“….The Delta variant of coronavirus that has swept across Europe is now gaining ground in the US…Official estimates from the US Centers for Disease Control and Prevention put Delta’s prevalence at 10 per cent during the period from May 22 to June 5. The FT’s analysis applies similar methods to more up-to-date data, matching the CDC’s figure for late May but then rising rapidly to between 37 per cent and 42 per cent on June 20….”

In Our Airpods

Hyun Song Shin on CBDCs and the Future of Central Banking (Bloomberg Odd Lots) ($)

WEDNESDAY, JUNE 23, 2021

BLOGS/OP-EDS

Unicorn Market Cap, June 2021 (Almost Post-Pandemic Edition) (Elad Gil, Elad Blog)
Elad Blog take a look at the CB Insights Unicorn Data using October of last year as a baseline to measure “new” Unicorn births and finds almost 70% of the new firms are American. He notes a downtick in Chinese firm creation (though could be/is likely a data issue, see next item) “…Over 67% of the new unicorns by # are in the USA with 154 total. (out of 227 globally) There were 69 new unicorns in Silicon Valley, 30 in New York, and 8 in Los Angeles. This is increasing share for both the USA & Silicon Valley as a % of global tech unicorns, with NY and LA accelerating somewhat. New York anecdotally feels like it has transitioned into a break out cluster of its own….China has slowed on new unicorn generation. While China is 29% of all unicorn market cap, it only added 9 new unicorns (roughly 4% of global total) since October 2020. The decline in new unicorn formation in China is striking. One potential interpretation is it at least in part a data issue. For example, 20 or so Chinese unicorns from pre-2020 were just added to this data set as a historical reconciliation. Other interpretation in the last section below….”

No, the Chinese Start-Up World Is Not Collapsing (Yiqin Fu, Yiqinfu.github.io)
Yiqin Fu checks the CB Insights data against Chinese language sources and finds that while there is a slowdown in funding in China since at least 2018 (see the charts below) CB’s data missed 90% of the Chinese companies newly valued at $1B+ in that period, “…Tables and charts have been going around the Internet showing that the Chinese start-up world is no longer producing stars: The country purportedly added 14 unicorns in 2020 (cf. 73 in the U.S.) and a mere three in the first half of 2021 (cf. 126 in the U.S.).The numbers didn’t sit right with me, so I checked some Chinese-language sources for the years 2020 and 2021. It turns out that CB Insights, the U.S.-based business analytics firm that produced the list of unicorns, missed more than 90% of the Chinese companies newly valued at $1B+ in that period. (I didn’t get the chance to check its data on American or European fundraising, but I assume it’s largely accurate.)…Given the data, our narrative could either be that Europe and the U.S. are being flooded with an unprecedented amount of venture capital – Tiger Global closed a deal in three days – or that on the side of the world, China is facing new setbacks….Europe’s performance this year is almost matching China’s….”

No, the U.S. Isn’t Being Overrun by Zombie Companies (Tracy Alloweay, Bloomberg) ($)
Tracy Alloway reports on research from Goldman Sachs showing America isn’t being overrun by zombie firms, “…Rather than adding to the amount of zombies in existence, the chaotic events of 2020 have instead wiped a chunk of them out. By Goldman’s calculations, the amount of junk-rated debt issued by zombie companies has dropped to its lowest level since 2009…Zombie debt fell from $70 billion at the end of 2019 to just $30 billion at the end of 2020, Goldman says. In fact, the picture looks even better below the headline number as the vast majority of zombie debt now comes from just a handful of companies. The single-largest issuer accounted for a third of the entire zombie total at the end of 2020, according to Goldman’s estimates….Of course, you could argue that the appearance of zombies will be artificially depressed thanks to low interest rates themselves, in which case you might try to strip out interest coverage ratios altogether from your zombie criteria. On that basis, famed junk bond analyst Marty Fridson has crunched some more numbers to find just 17 zombies in the high-yield market with only $8 billion worth of debt outstanding….”

How Job Separations Differed between the Great Recession and COVID-19 Recession (Serdar Birinci, Federal Reserve Bank Of St. Louis)
Serdar Birinci from the FRBSL does a comparison of job separations during the 2007-2009 and the recession associated with COVID-19 and finds the later had a disproportionate impact on lower earning workers, “…In both recessions, job separation rates were consistently higher for lower-earnings groups—that is, workers in lower-earnings occupations tend to quit without a job in hand or to be laid off more often than those in higher-earnings occupations. Similarities between the two figures end there, however. The Great Recession’s effects on job separation rates were quite homogeneous across earnings groups. For example, from January 2007 (11 months before the recession began) to February 2009 (four months before the recession ended), rates increased by 0.5 percentage points for both the first quintile (Q1), the lowest-earnings group, and the fifth quintile (Q5), the highest-earnings group. The other quintiles faced similar increases. In contrast, the COVID-19 recession had disproportionate effects on the separation rates of earnings groups. From January to June 2020, the Q1 job separation rate increased by 9 percentage points, from 1.3% to 10.3%. Between these dates, the Q5 rate increased by only 1.7 percentage points, from 0.4% to 2.1%….”

Jobs are the wrong target for the energy transition (Eli Dourado, Center For Growth and Opportunity @ Utah State University)
Eli Dourado makes the case that energy abundance should be the goal of the energy transition that’s underway, “…we should look to other metrics of success for the energy transition. One is how much energy we consume per person. J. Storrs Hall noted in his book Where’s My Flying Car? that American energy use per capita increased about 2 percent per year from around 1800 to the late 1970s. Since then it has fallen. We will know we have turned a corner on energy abundance when we are able to consume more than ever before…Another key metric to watch is the residential electricity price. This doesn’t tell the whole story, because we can differentiate between electricity and primary energy, and because residential electricity is more expensive than industrial electricity. But it is notable that while real residential electricity prices fell precipitously in the 1960s and the 1990s, they have gone up since 2000, averaging 13.5¢/kWh last year. How low can we push this number down?…”

News

New Drug Could Cost the Government as Much as It Spends on NASA (Josh Katz, Sarah Kliff , + Margot Sanger-Katz, New York Times) ($)
“….A newly approved drug to treat Alzheimer’s disease is expected to become a multibillion-dollar expense for Medicare. By one projection, spending on the drug for Medicare’s patients could end up being higher than the budgets for the Environmental Protection Agency or NASA.There’s little evidence that the drug, Aduhelm, slows the progression of dementia, but the Food and Drug Administration approved it this month. Analysts expect that Medicare and its enrollees, who pay a share of their prescription drug costs, will spend $5.8 billion to $29 billion on the drug in a single year….The drug’s approval has aroused criticism from health policy experts and pharmaceutical researchers for its lack of proven effectiveness. Effective or not, if widely prescribed, it could have an overwhelming impact on Medicare’s budget because the public program covers the vast majority of the nearly six million Americans with an Alzheimer’s diagnosis. There is little precedent for a sudden spending jolt of this size. Even at the low end of projections, Aduhelm would become one of Medicare’s most expensive drugs….”

‘Amazon effect’ sets the tone for US workers’ remuneration (Andrew Edgecliffe-Johnson, Financial Times) ($)
“…The ecommerce leader recruited aggressively last year, hiring 500,000 people worldwide to meet the demands of homebound consumers at a time when millions of workers were losing their jobs. In the US, it paid at least $15 an hour before benefits, a rate it introduced in 2018 that is double the federal minimum wage….“There is absolutely an Amazon effect,” said Aaron Cheris, head of Bain & Company’s retail practice for the Americas. Jeff Bezos’s company should not be blamed for labour shortages, he argued, but “most of my retail clients would blame them for the rising wage expectations”…The changing expectations are now visible beyond the largest chains: $15 has become the new minimum at the Vail ski resort in Colorado, at Universal’s theme park in Orlando, and at the Tyson Foods poultry plant in Pine Bluff, Arkansas….”

Bubble Expert Jeremy Grantham Addresses ‘Epic’ Equities Euphoria (Kriti Gupta, Bloomberg) ($)
“Jeremy Grantham….The last 12 months have been a classic finale to an 11-year bull market. Peak overvaluation across each decile by price to sales, so that the most expensive 10% is worse than it was in the 2000 tech bubble and the remaining nine deciles are much more expensive. all measures of debt and margin are at peaks. Speculative measures such as call option volumes, volume of individual trading and quantities of over-the-counter or penny stocks are all at records….Checking all the necessary boxes of a speculative peak, the U.S. market was entitled historically to start unraveling any time after January this year. One odd characteristic of the three biggest bubbles in the U.S. — 1929, 1972 and 2000 — is that the very end was preceded by blue chips outperforming more aggressive, higher beta stocks. In 2000, for five months from March, tech-related stocks crashed by 50% as the S&P 500 was unchanged, and the balance of the market was up over 15%. In 1972, before the biggest bear market since the Depression, the S&P outperformed the average stock by 35%. And in 1929, the effect was even more extreme, with the racy S&P low-priced index down nearly 30% before the broad market crashed. Today, the Nasdaq and Russell 2000 are below the level of Feb. 9 four and a half months later, and many of the leading growth stocks are down. (Tesla has fallen from $900 to $625.) The SPAC ETF is down 25% since February. Meanwhile, the S&P has chugged higher by 8% since Feb. 9…...“Meme” investing — the idea that something is worth investing in, or rather gambling on, simply because it is funny — has become commonplace. It’s a totally nihilistic parody of actual investing. This is it guys, the biggest U.S. fantasy trip of all time….”

Nine Months After Lockdowns, U.S. Births Plummeted by 8% (Alexandre Tanzi, Bloomberg) ($)
“…Nine months after the declaration of a national emergency due to the emergence of the Covid-19 pandemic, U.S. births fell by 8% in a month.The December drop marked an acceleration in declines in the second part of the year. For the full year, the number of babies born in the country fell 4% to about 3.6 million, the largest decline since 1973, according to a Wednesday report from the Centers for Disease Control and Prevention…

Where the World’s Richest 1% Are Gaining Wealth the Fastest (Benjamin Stupples and Marion Halftermeyer, Bloomberg) ($)
“..The share of the wealth held by the richest 1% in nations including the U.S., China, Brazil and India jumped in the fallout from the pandemic, fueled by efforts to curb the effects of the virus, according to Credit Suisse Group AG…the world’s 500 richest people added $1.8 trillion to their combined net worth last year… Global household wealth totaled $418 trillion at the end of 2020, rising 7.4% from 12 months previously…“

Even before covid-19, the world was investing more in science (Staff, The Economist) ($)
“…new study by UNESCO…Between 2014 and 2018, a 19.2% surge in spending on research worldwide outstripped global economic growth (14.8%). That added investment meant the proportion of GDP spent on research rose from 1.73% to 1.79% on average. Much of that growth came from one country alone…In its quest to seize scientific superiority from America, China increased its expenditure from $135bn in 2008 to $439bn in 2018….Nine-tenths of research spending, output and personnel comes from G20 countries; four out of five countries worldwide spend less than 1% of their GDP on research. At 4.9% Israel invests the most in research and development as a share of GDP of any country….”

Electric Vehicles Seen Reaching Sales Supremacy by 2033, Faster Than Expected (Brett Haensel + Keith Naughton, Bloomberg) ($)
“…Global electric vehicle supremacy will arrive by 2033 — five years earlier than previously expected — as tougher regulations and rising interest drive demand for zero-emission transportation, according to a new study. Consultant Ernst & Young LLP now sees EV sales outpacing fossil fuel-burners in 12 years in Europe, China and the U.S. — the world’s largest auto markets….EY sees Europe leading the charge to electric, with zero-emission models outselling all other propulsion systems by 2028. That tipping point will arrive in China in 2033 and in the U.S. in 2036, EY predicts…. And by 2045, non-EV sales are seen plummeting to less than 1% of the global car market..”

Blackstone Bets $6 Billion on Shifting Path to Suburban Homes (Patrick Clark, Bloomberg) ($)
“..Blackstone Group Inc.’s new single-family rental strategy is a $6 billion bet that tight housing markets will lead Americans to seek new ways to get suburban housing. The private equity giant agreed to buy Home Partners of America Inc., a rental company that owns more than 17,000 houses, according to a statement on Tuesday. The company gives tenants the option of buying their rental at a predetermined price, making it unique among large single-family landlords….For Blackstone, there may also be a case of sellers regret. The company exited its stake in Invitation Homes in 2019, selling the last of its position at $30.10 per share. Blackstone made about $7 billion on its stake in Invitation, more than doubling its money, Bloomberg reported at the time. But shares in the company have increased by 25% since then….”

Warehouse Rents Surge on Bidding Wars for Scarce Space (Jennifer Smith, Wall Street Journal) ($)
“…Demand for industrial real estate is so strong that taking rents—the initial base rent agreed on by a landlord and tenant—are rising faster than asking rents, according to real-estate firm CBRE Group Inc. Industrial taking rents were up 9.7% in the first five months of 2021 compared with the same period last year, while industrial asking rents rose 7.1%, according to CBRE, which tracks 58 U.S. markets.Prices are rising at a particularly strong rate for logistics space near ports and cities, and for big-box warehouses such as those used in large online fulfillment operations. First-year base rents in Northern New Jersey jumped by a third year-over-year through May, while those in Southern California’s Inland Empire rose 24.1%, according to CBRE. Taking rents for bulk warehouse space of 500,000 or more square feet increased 13.2% from the same period in 2020….”

New Econ Research

Temptation and Incentives to Wealth Accumulation (Attanasio, Kovacs, + Moran, National Bureau Of Economic Research) ($)
“We propose a rich model of household behavior to study the effect of two important policies: mortgage interest tax deduction and mandatory mortgage amortization. These policies have attracted some controversy, first because they are conceived to increase overall saving, an objective that the literature does not agree they can achieve, and second because they incentivize illiquid savings and may thus increase the share of ‘wealthy hand-to-mouth’ households. We build a life-cycle model where housing may act as a commitment device to counteract present biases arising from temptation. We show that the model matches several empirical facts, including the large share of wealthy hand-to-mouth households. We evaluate the effect of the two policies and find that they increase wealth accumulation by 7 and 10% respectively. Our results demonstrate that these policies not only induce portfolio re-balancing, as emphasized by the previous literature, but also increase savings by making commitment more accessible.”

New Numbers

U.S. International Transactions, First Quarter 2021 and Annual Update (Bureau Of Economic Analysis, U.S. Department Of Commerce)
“…The U.S. current account deficit, which reflects the combined balances on trade in goods and services and income flows between U.S. residents and residents of other countries, widened by $20.7 billion, or 11.8 percent, to $195.7 billion in the first quarter of 2021, according to statistics from the U.S. Bureau of Economic Analysis (BEA). The revised fourth quarter deficit was $175.1 billion. The first quarter deficit was 3.6 percent of current dollar gross domestic product, up from 3.3 percent in the fourth quarter. The $20.7 billion widening of the current account deficit in the first quarter mostly reflected an increased deficit on goods and a reduced surplus on primary income…”

Global wealth report 2021 (Richard Kersley + Nannette Hechler-Fayd’herbe, Credit Suisse)
“…Gross assets in the United States rose in value by 8.4% in 2020, but household net worth increased even faster at 9.0% The difference was due to debt not keeping pace with assets – rising only 3.5% – itself a reflection of reduced consumption and higher saving. Within the subcategories of assets, corporate equity showed the biggest increase (14.9%), while the important housing component rose 7.1%. More than half the rise in assets and net worth occurred during the final quarter of 2020. The year began less well, with net worth falling 6.2% in Q1 2020, largely due to the stock market crash in February[1]March. But net worth recovered fully in the second quarter. Canada saw a similar increase in net worth (9.9%) – but the rise was linked more to real assets and less to stocks and equities. Canada and the United States show contrasting trends in wealth inequality. In Canada, the Gini coefficient and the wealth share of the top 10% have been on a gradual decline since 2000. The share of the top 1% also drifted down until 2012, after which it rose slightly. Things have been different in the United States, where all three of these measures have trended upward. The contrast is most evident in the wealth share of the top 10% of wealthholders, which has risen substantially in the United States since 2007 – from 71.6% to 75.7% – but has fallen in Canada from 57.1% to 56.5%. Since the global financial crisis, stock prices have risen more in the United States than in Canada, raising the shares of top wealth groups, while house prices have risen faster in Canada, lifting the wealth share of middle groups instead. The US stock market outperformed the Canadian stock market again in 2020, with Q4 share prices up 19.6% year[1]on-year compared to 2.8% in Canada. According to the Federal Reserve, the wealth share of the top 1% in the United States rose from 31.0% to 31.4% in 2020. It is unlikely that wealth concentration in Canada has risen to a similar degree, given the much smaller rise in Canadian stock prices….”

UNESCO Science Report (Schneegans, Lewis, + Straza, United Nations Educational, Scientific and Cultural Organization)

New Science

Gas Giants’ Energy Crisis Solved After 50 Years (Robin George Andrews, Quanta Magazine)
“…their planetary pyrexias are acute: Jupiter’s lower latitudes, for example, should be a frigid −110 degrees Celsius. Instead, the atmosphere there cooks at 325 degrees….Now two papers have conclusively revealed where all that heat is coming from: Jupiter and Saturn’s northern and southern lights — their auroras. The results come from detailed measurements of both gas giants’ upper atmospheres. Saturn’s atmospheric temperature was taken by the Cassini spacecraft during the maneuvers that ultimately plunged it into the planet; Jupiter’s was stitched together using a telescope atop a giant Hawaiian volcano. Both show that the atmospheres are hottest near the auroral zones below both magnetic poles. As you approach the equator, the temperature drops off. Clearly, the aurora is bringing the heat — and, as with a radiator, that heat decreases with distance….A solution to the energy crisis may have far-reaching ramifications. Planets — from those in our own solar system to those orbiting distant stars — don’t always keep their atmospheres. Many gassy envelopes are destroyed over time, in some cases turning giant worlds into tiny, uninhabitable husks. Researchers want to be able to distinguish these from habitable, Earth-like planets…”

In Our Airpods

Taper Timing With Fed’s Williams (Bloomberg Surveillance)

TUESDAY, JUNE 22, 2021

BLOGS/OP-EDS

‘Free’ Money Can Make Life Worse (Robert Doar, Wall Street Journal) ($)
What’s the old quip – if it’s free, you’re the product? My friend and AEI colleague Robert Doar is skeptical of the new Federal child credit payments that will start next month, “…The fundamental problem with the new program is that it will reduce the community connection of millions of families that are at heightened risk of distress. Many of these families need help that money can’t buy. The mission of welfare programs isn’t merely to raise incomes; it’s to help struggling families thrive.Sen. Daniel Patrick Moynihan didn’t like the welfare reforms of the 1990s. He worried that the system, which emphasized personal responsibility and encouraged work, would lead to “children sleeping on grates.” He was wrong. In fact, outcomes improved across nearly every measure of child well-being…..These days, you know who sleeps on grates? Adults who receive monthly checks from the federal government but don’t have to deal with caseworkers….”

Lumber Trader Stinson Dean on the Recent Plunge in Lumber Prices (Joe Weisenthal, Bloomberg Odd Lots) ($)
The cure for high prices remains high prices. Joe Weisenthal reports on the state of play of the lumber market, “…In case you’ve missed it, the price of lumber has been plunging lately. Since the frenzied peak in May, it’s now down more than 45%…. lumber trader Stinson Dean…In his view, the big story is the regaining of market power by homebuilders against the sawmills. He noted that you’re starting to see a normalization in the futures market. There’s not as much of a scramble for immediate delivery, so the premium for front-month futures is compressing relative to the second month.Although prices are still elevated compared with the beginning of the year and last year, “supply is ample” and the short-covering phase of the market is gone….”

Renters, Owners, and the New York City Left’s Mayoral Ennui (Alex Yablon, Ghost)
Election day reading for NYC, Alex Yablon makes the case that the renter/owner divide is what is driving city politics, “…What I’d like to argue here is that there is a deeper structural explanation for the New York City left’s troubles in 2021. The source of the New York City left’s strength in legislative races from 2018 to the present as well as its weakness in the current mayoral race are one and the same: Fundamentally, the contemporary left is a movement driven by people who rent their homes, a class that is swelling in number. However, people who own property still dominate our politics. The relationship to asset ownership, more than race, ethnicity, feelings toward police, union affiliation or any other social category, explains the rapid development of the New York City left and its current limitations….If in Marx’s time it was your boss who alienated the surplus value of your labor, today it is increasingly your landlord, be it a faceless LLC owned by an institutional investor or a seventy year old West Indian immigrant with a city pension. Owners have a strong incentive to increase the value of their assets while holding down costs, just like capitalists have a strong incentive to increase the productivity of labor without raising wages….Let’s turn to New York. Here’s a map of census data showing every renter and owner in the city, pulled from a website created by Ryan McCullough of Mapbox. Renters are pink and homeowners are blue….With the social and economic geography out of the way, let’s turn to politics. Here is a Gothamist map of results of the 2018 gubernatorial primary race between incumbent moderate Andrew Cuomo (purple) and progressive challenger Cynthia Nixon (orange)….Here’s a Gothamist map of New York’s voter turnout from that primary election. Darker colors indicate higher turnout….The lightest areas on this map correspond almost perfectly to the pink dots in the map of renters and owners. Ditto for dark areas and the blue dots for owners. Turnout is lower in renter neighborhoods than owner neighborhoods. Aside from Park Slope, the neighborhoods where Nixon did well saw moderate to low turnout. Low turnout in these areas was bad for Nixon — she was swamped by Cuomo’s huge pools of support throughout the city and state — but good for her allies in state legislative races, because they didn’t have to get that many votes to beat incumbents in their smaller districts….”

Interview: Marc Andreessen, VC and tech pioneer (Noah Smith, Noahpinion) ($)
Marc Andreessen on competition and talent constraints, “…As time passes, I am increasingly skeptical that most incumbents can adapt. The culture shift is just too hard. Great software people tend to not want to work at an incumbent where the culture is not optimized to them, where they are not in charge. It is proving easier in many cases to just start a new company than try to retrofit an incumbent. I used to think time would ameliorate this, as the world adapts to software, but the pattern seems to be intensifying. A good test for how seriously an incumbent is taking software is the percent of the top 100 executives and managers with computer science degrees. For a typical tech startup, the answer might be 50-70%. For a typical incumbent, the answer may be more like 5-7%. This is a huge gap in software knowledge and skill, and you see it play out every day across many industries…”

News

Wage Gains at Factories Fall Behind Growth in Fast Food (Austen Hufford and Nora Naughton, Wall Street Journal) ($)
“…For years, factory jobs paid significantly more than those in many other fields, especially for less-educated workers. That is changing, according to economists, manufacturers and federal data….Since the start of 2020, jobs in many industries including restaurants and retail have posted their highest-ever hourly wages relative to wages in manufacturing, according to an analysis of federal data by The Wall Street Journal. The $23.41 that hourly factory workers made on average in April is 27% more than average pay for retail workers, according to the Labor Department, down from a 40% premium for factory workers 10 years ago. Factory work pays 56% more than restaurant and fast-food jobs, the data shows, down from 83% a decade ago….”

Companies in Certain Industries Receive More Auditor Warnings About Survival (Mark Maurer, Wall Street Journal) ($)
“…The number of U.S. public companies labeled with auditor warnings about the ability to stay afloat declined overall during the 12 months ended May 31, but they rose in certain industries hard hit by the pandemic, such as transportation, construction and energy….The percentage of these going-concern filings increased in three industry sectors, which are categorized based on codes some U.S. government agencies use: construction; finance, insurance and real estate; and transportation, communication, electric and gas. Going-concern opinions for these three segments rose to 10.7%, 8.3% and 13.5%, respectively, up 1.1, 1.8 and 0.3 percentage points compared with the prior-year period, according to data provider MyLogIQ. Of a total of 5,891 listed companies, 18.8% received such warnings from their auditor in the past year, down from 21.3% in the prior-year period, MyLogIQ said. U.S. bankruptcy filings dropped 3.8% to 581 during that same period, compared with the previous 12 months, according to market research firm S&P Global Market Intelligence…”

Tesla investor warns of ‘deep sickness’ in UK capital markets (Harriet Agnew + Joshua Oliver, Financial Times) ($)
“…A “deep sickness” in UK capital markets has stifled the growth of homegrown tech entrepreneurs and left London’s blue-chip FTSE 100 looking like an index from the 19th century, according to one of Britain’s top fund managers….“Why have we not grown any giant companies? Of course I’m not expecting everybody to be like…Jeff Bezos. But it seems to me there is a real problem here,” Anderson, joint manager of Baillie Gifford’s Scottish Mortgage Investment Trust, told the Financial Times. “The FTSE 100 is really a 19th century and not even a 20th century index,” he added, pointing to a scarcity of innovative and fast-growing companies in Britain….The roughly £18bn trust has delivered 1,500 per cent returns for shareholders since Anderson began running it in 2000, compared with 277 per cent for the FTSE All World benchmark…”

Chip Shortages Are Starting to Hit Consumers. Higher Prices Are Likely (Asa Fitch, Wall Street Journal) ($)
“…The global chip shortage is pushing up prices of items such as laptops and printers and is threatening to do the same to other top-selling devices including smartphones….Consumers are starting to feel the pinch. Prices of popular models of some laptop computers have crept up over the past two months, among other electronics becoming more expensive at retailers. A laptop geared toward videogamers—made by Taiwanese manufacturer ASUSTek Computer Inc. —that Amazon lists as its bestseller rose from $900 to $950 this month, according to Keepa, a site that tracks prices. The cost of a popular HP Inc. Chromebook rose to $250 from $220 at the beginning of June….”

Goldman Sees Another $500 Billion Being Plowed Into U.S. Stocks (Kit Rees + Michael Msika, Bloomberg) ($)
“…Households and corporations will buy an additional $500 billion of U.S. stocks through the year-end…Goldman strategists led by David J. Kostin wrote in a note…”

U.S. Existing Home Sales Fell for a Fourth Straight Month in May (Olivia Rockeman, Bloomberg) ($)
“…Sales of previously owned U.S. homes fell for a fourth straight month in May as higher home prices and lean inventories weighed on home buying. Contract closings decreased 0.9% from the prior month to an annualized 5.8 million, according to data out Tuesday from the National Association of Realtors. The median forecast in a Bloomberg survey of economists called for a 5.73 million rate in May….”

New Econ Research

The Macro Effects of Climate Policy Uncertainty (Stephie Fried, Kevin Novan, + William Peterman, Federal Reserve Bank Of San Francisco)
“Uncertainty surrounding if and when the U.S. government will implement a federal climate policy introduces risk into the decision to invest in capital used in conjunction with fossil fuels. To quantify the macroeconomic impacts of this climate policy risk, we develop a dynamic, general equilibrium model that incorporates beliefs about future climate policy. We find that climate policy risk reduces carbon emissions by causing the capital stock to shrink and become relatively cleaner. Our results reveal, however, that a carbon tax could achieve the same reduction in emissions at less than half the cost.”

Can Competitiveness predict Education and Labor Market Outcomes? Evidence from Incentivized Choice and Survey Measures (Buser, Niederle, + Oosterbeek, NBER)
“We assess the predictive power of two measures of competitiveness for education and labor market outcomes using a large, representative survey panel. The first is incentivized and is an online adaptation of the laboratory-based Niederle-Vesterlund measure. The second is an unincentivized survey question eliciting general competitiveness on an 11-point scale. Both measures are strong and consistent predictors of income, occupation, completed level of education and field of study. The predictive power of the new unincentivized measure for these outcomes is robust to controlling for other traits, including risk attitudes, confidence and the Big Five personality traits. For most outcomes, the predictive power of competitiveness exceeds that of the other traits. Gender differences in competitiveness can explain 5-10 percent of the observed gender differences in education and labor market outcomes.”

New Numbers

21st Annual Edelman Trust Barometer (Edelman)
“…Business (61 percent) has emerged as the most trusted institution, replacing government (53 percent), which fell substantially since its 11-point surge in our mid-year update last May. Business is the only institution deemed ethical and competent; business outscores government by 48 points on competency and is approaching NGOs in ethics. Over the last five months, business seized the high ground of trust by proactively developing vaccines in record time and finding new ways to work. Trust continues to move local, with respondents placing even higher reliance on ‘my employer’ at 76 percent, and ‘my employer CEO’ at 63 percent….”

New Science

Large mesopelagic fishes biomass and trophic efficiency in the open ocean (Xabier Irigoien, et al., Nature Communications) ($)
“With a current estimate of ~1,000 million tons, mesopelagic fishes likely dominate the world total fishes biomass. However, recent acoustic observations show that mesopelagic fishes biomass could be significantly larger than the current estimate. Here we combine modelling and a sensitivity analysis of the acoustic observations from the Malaspina 2010 Circumnavigation Expedition to show that the previous estimate needs to be revised to at least one order of magnitude higher. We show that there is a close relationship between the open ocean fishes biomass and primary production, and that the energy transfer efficiency from phytoplankton to mesopelagic fishes in the open ocean is higher than what is typically assumed. Our results indicate that the role of mesopelagic fishes in oceanic ecosystems and global ocean biogeochemical cycles needs to be revised as they may be respiring ~10% of the primary production in deep waters.”

In Our Airpods

Jack be nimble: the Party-State Vs. the Tech Titans (The Little Red Podcast, Australian National University)

MONDAY, JUNE 21, 2021

BLOGS/OP-EDS

The Filibuster Helps Nobody, and That Means You (Mike Solon + Bill Greene, Wall Street Journal) ($)
Mike Solon and Bill Greene make the case that the filibuster helps to create policy stability that helps businessmen entrepreneurs and investors take the calculated risks needed to grow the economy, “…What happens if the filibuster ends? Legislating, now slow and tedious, would become fast, furious and radical. Partisan laws would flood across our landscape, from the left and the right, making extreme lurches the norm….The filibuster allows Americans to live free from constant political risk. With the filibuster, nobody in America needs to be good at politics to enjoy a good life….”

The Housing Conundrum (Bill McBride, Calculated Risk)
Bill McBride worries about animal spirits in the housing market but wonders if this time is different,“…My Spidey senses are tingling again, however it isn’t obvious why this time – or what the outcome will be….Now, I’d argue house prices are too high based on historical fundamentals. I wouldn’t call this a “bubble” because of the lack of both speculation and loose lending….But I am concerned about house prices….My concern is that house prices seem to be out of line with historical measures of fundamentals (price-to-income, price-to-rent, real prices), and there seems to be a buying frenzy and FOMO (fear of missing out)….graph using the Case-Shiller National and Composite 20 House Price Indexes. This graph shows the price to rent ratio (January 2000 = 1.0). This suggested prices were way too high during the housing bubble, and also suggests prices might be high now – but not as high as the housing bubble. If we factor in low rates, demographics, and if low supply persists (I think inventory will increase this year), maybe prices are only a little out of line…. The recent price increases make sense from a supply and demand perspective, but prices do seem too high. And I suppose the frenzy is bothering me…”

High Housing Valuations Move Inland (William Emmons, (Federal Reserve Bank Of St. Louis)
FRBSL’s William Emmons on the Great Inland Housing Boom, “…If I assume average house price-to-rent ratios in January 1991 approximated “fair value,” the current housing boom has lifted all nine census divisions significantly above their respective fair-value levels. Moreover, the average U.S. housing valuation now exceeds its 2006 peak, albeit by a small amount. The regional pattern of the current housing boom differs notably from the boom that peaked 15 years ago. Housing valuations in inland regions of the country have increased more than valuations in coastal census divisions, exceeding their peaks in the 2005-07 period. If housing markets in coastal regions join their counterparts inland in appreciating rapidly, the current housing boom could substantially exceed what was, at the time, considered a historic housing bubble….”

What’s Behind the Recent Rise in Core Inflation? (Adam Hale Shapiro, Federal Reserve Bank Of San Francisco)
Adam Hale Shapiro from the FRBSF points out that changes in Medicare related to the pandemic will reverse or roll off by early 2022 which will likely have a disinflationary impact, “… Health-care services is one of the largest components of core PCE inflation, representing close to 20% of core expenditures….The prices of health-care services in the PCE price index are based on payments made by health insurers to providers, such as physicians and hospitals. As the single largest payer to health-care providers, Medicare directly contributes to measurable changes in health services inflation. Furthermore, changes in Medicare prices tend to spill over directly into private prices, impacting overall health-care services inflation….A number of pandemic-related legislated changes to Medicare payments have gone into effect over the past year. These include a 20% add-on payment for COVID treatments, a temporary moratorium of the 2013 Medicare sequestration 2% payment cuts, and a temporary 3.75% increase in payments to physicians. Overall, these factors have led to a 0.6pp increase in the contribution of health-care services, triple its average contribution between 2015 and 2019. Importantly, these payment changes are temporary and are expected to either roll off or reverse by early 2022. Thus, what is now a boost to inflation coming from health-care services is likely to become a drag by next year….”

Doctor Copper (David Balass and Igor Vasilachi, Verdad)
David Balass and Igor Vasilachio on copper’ relationship with the business cycle “… As with previous booms in copper, the necessary ingredient for this cyclical upturn is the prospect of surging demand coupled with sticky and finite supply, both of which seem likely. On the demand side, the “green transition” is likely to lead to a surge in copper demand due to the metal’s crucial role in both the electrification of the economy and the development of renewable energy, so much so that the 2020s may prove to be the strongest period of volume growth in global demand for copper in history. On the supply side, copper cycles tend to be longer than the average commodity cycle because it takes significantly longer to establish new mining projects and extend existing mines. The macro-economic environment is also supportive. The high-yield spread is below its 10-year trailing median and falling on a three-month basis, suggesting the economy is in or heading toward exactly the stage when copper performs best: expansion….. if, over the last three months, the high-yield spread has fallen, then our strategy goes long copper futures. In the event of rising spreads, we tested three alternative scenarios: the first one involves keeping the capital out of the market entirely when not invested in copper futures (“L/Out”); the second scenario goes long 10-year US Treasurys when not invested (“L/10Y T”); and the third scenario adopts a shorting component based on the same high-yield signal, which ensures that the investor is either long or short copper futures at all times (“L/S”). Below we compare the performance of this strategy and its various constructions with a simple buy-and-hold approach in copper. Evidently, timing the business cycle based on the high-yield spread dramatically improves copper performance. In the “L/Out” scenario, when the portfolio earns 0% nearly half the time, the signal helps improve performance by 300bps while reducing drawdowns by a third. Similar to our results for oil, the winning strategy is to go long 10-year Treasurys when spreads are rising, as doing so produces the highest returns, lowest drawdowns, and highest Sharpe ratio of all four combinations….”

Has Market Power of U.S. Firms Increased? (Mary Amiti + Sebastian Heise, Federal Reserve Bank of New York)
Mary Amiti and Sebastian Heise of the FRBNY blog about their recent research on concentration we previously highlighted, “…our findings suggest that the market power of large U.S. firms has actually fallen in many industries since their share in the overall market has declined. In sum, our analysis suggests that the increasing concentration among U.S. firms themselves is entirely consistent with lower markups of these firms because of tougher import competition….”

Of course there’s a STEM crisis (Noah Smith, Noahpinion) ($)
Noah Smith on the first order impact of the U.S. constrained supply of properly trained talent, “…Agglomeration is about the concentration of overall economic activity. Producers want to be near both consumers and suppliers, while workers want to be near employers. As a result, economic activity gets bunched up in certain areas. Paul Krugman, Fujita Masahisa, and Anthony Venables came up with a good mathematical description for this effect, and showed how it can lead to many (most?) of the urbanization and development patters we see in the real world. Here’s the thing, though — the United States, and North America in general, is just very disadvantaged when it comes to agglomeration. The reason is that we have very few people compared to Asia. Always remember this famous map:… Research shows that innovation is a highly contagious activity; the more innovative people you know, the more likely you are to innovate. My podcast co-host Brad DeLong always emphasizes the idea of “communities of engineering practice”. Also, research shows that importing a bunch of foreign STEM workers into a city raises the total number of jobs and boosts wages for high-skilled native-born people in the area (as well as for the general public, via local multipliers). So producing more people who can do STEM innovation is probably going to increase the number of people doing STEM innovation. But there are several important caveats here…it’s not clear whether the people who currently study humanities would actually be good at STEM if they studied it. They might dislike the field and perform at only a mediocre level as a result. That could mean they wouldn’t contribute much to the “communities of engineering practice” that drive true innovation….”

News

Tight Labor Market Returns the Upper Hand to American Workers (Eric Morath + Greg Ip, Wall Street Journal) ($)
“…Low-wage workers found something unexpected in the economy’s recovery from the pandemic: leverage….Pay for those with only high school diplomas is rising faster than for college graduates, according to the Federal Reserve Bank of Atlanta….Whereas demand for labor drove wage gains in 2019, now both demand and a smaller pool of workers are at play. The share of the working-age population either holding or seeking a job has fallen to 61.6% in May from 63.3% in February 2020—a loss of 3.5 million potential employees. This may have raised what economists call the “reservation” wage, the lowest pay for which someone is willing to work. Workers without a college degree have increased their annual reservation wage to $61,000 from $52,000 in late 2019, according to surveys by the Federal Reserve Bank of New York….If lower-wage workers can retain the upper hand, it would have little modern precedent, harking back a half-century to when many more of those employees were represented by labor unions. It could also spell tougher times for small firms unable to match what bigger more productive companies can pay, such as the nation’s two largest private-sector employers, Amazon.com Inc. and Walmart Inc….”

Treasury, U.K. Yield Curves Weighed Down by Rethink on Reflation (Stephen Spratt, Livia Yap, + Jill Ward, Bloomberg) ($)
“…The pressure on long bond yields is going global, led by Treasuries and U.K. gilts, as investors reconsider reflation expectations and brace for an eventual pullback of central bank stimulus. The Treasury five- to 30-year yield spread, which reflects the balance between the interest-rate outlook and inflation expectations, narrowed to the smallest gap since August. Its U.K. counterpart narrowed the least since December. That compression was driven by 30-year yields’ decline to the lowest levels since February, before trading little changed at 2.03% in the U.S. and 1.2% in Britain as of 6:30 a.m. in New York….”

The World Relies on One Chip Maker in Taiwan, Leaving Everyone Vulnerable (Yang Jie, Stephanie Yang, + Asa Fitch, Wall Street Journal) ($)
“…TSMC has emerged over the past several years as the world’s most important semiconductor company, with enormous influence over the global economy. With a market cap of around $550 billion, it ranks as the world’s 11th most valuable company…Its technology is so advanced, Capital Economics said, that it now makes around 92% of the world’s most sophisticated chips, which have transistors that are less than one-thousandth the width of a human hair. Samsung Electronics Co. makes the rest. Most of the roughly 1.4 billion smartphone processors world-wide are made by TSMC…Analysts say it will be difficult for other manufacturers to catch up in an industry that requires hefty capital investments…Semiconductors have become so complex and capital-intensive that once a producer falls behind, it’s hard to catch up. Companies can spend billions of dollars and years trying, only to see the technological horizon recede further. A single semiconductor factory can cost as much as $20 billion. One key manufacturing tool for advanced chip-making that imprints intricate circuit patterns on silicon costs upward of $100 million, requiring multiple planes to deliver. TSMC’s own expansion plans call for spending $100 billion over the next three years. That’s nearly a quarter of the entire industry’s capital spending, according to semiconductor research firm VLSI Research… And TSMC can’t make enough chips to satisfy everyone—a fact that has become even clearer amid a global shortage, adding to the chaos of supply bottlenecks, higher prices for consumers and furloughed workers, especially in the auto industry. The situation is similar in some ways to the world’s past reliance on Middle Eastern oil, with any instability on the island threatening to echo across industries. Companies in Taiwan, including smaller makers, generated about 65% of global revenues for outsourced chip manufacturing during the first quarter of this year, according to Taiwan-based semiconductor research firm TrendForce. TSMC generated 56% of the global revenues…”

Supply Crunch Risks Extending Into 2022, Stoking Inflation (David Harrison, Wall Street Journal) ($)
“…The squeeze on U.S. businesses shows little sign of letting up, particularly in the manufacturing sector.The pace of manufacturing production and hiring slowed in May from the prior month even though new orders and order backlogs accelerated, according to the May Purchasing Managers Index published by the Institute for Supply Management. actory activity in the U.S. also has been slow to recover from the pandemic, despite a surge in demand for goods from housebound consumers. Manufacturing output rose 0.9% in May after falling 0.1% in April. Overall industrial output, which also includes mining and utilities, remains 1.4% lower than it was before the pandemic….”

The New Test for Central Bankers’ Cool: Booming House Prices (Jon Sindreu, Wall Street Journal) ($)
“…Residential property markets around the world are rallying. Norway’s looked frothy far before the pandemic and home prices have risen 12% from January 2020. In the U.S., the U.K. and Germany, prices are up 15%, 13% and 16%, respectively. In China, property is once again emerging as a key driver of economic growth….So far, shelter costs remain subdued relative to 2019 trends. Some analysts counter that imputed rents—the theoretical rent that statisticians attribute to owner-occupiers—simply track market rents and don’t show the true housing costs that result from rising property prices. But it is rents, not house prices, that reflect what people are willing to pay to live somewhere, just as earnings are the gauge of a company’s profitability, not its stock price. Asset valuations can move up and down for other reasons. In this case, they are likely reacting to low interest rates, which have also pushed mortgage costs down over the past year….”

A Millennial Economist Helps Power a Tax Evasion ‘Brain Trust’ (Alan Rappeport, New York Times) ($)
“…Secretary Janet L. Yellen has created a team to tackle the issue and staffed the agency with economists and others who have spent years studying how the government can hunt down money that it is owed but fails to collect. The group, known internally as the “compliance brain trust,” includes four members of Treasury’s career staff along with Kimberly A. Clausing, deputy assistant secretary for tax analysis, and Natasha Sarin, a 32-year-old Harvard-trained economist who has written extensively on closing the gap…“She’s never interested in the math problem just as a math problem. She’s interested in how it drives toward a solution that will contribute to the best policy,” Mr. Summers said….”

U.S. Military to Withdraw Hundreds of Troops, Aircraft, Antimissile Batteries From Middle East (Lubold, Youssef, + Gordon, Wall Street Journal) ($)
“…The Pentagon is pulling approximately eight Patriot antimissile batteries from countries including Iraq, Kuwait, Jordan and Saudi Arabia, according to officials. Another antimissile system known as a Terminal High Altitude Area Defense, or Thaad system, is being withdrawn from Saudi Arabia, and jet fighter squadrons assigned to the region are being reduced, those officials said….Most of the military hardware being removed is coming from Saudi Arabia, officials said…”

New Econ Research

Beholding Inequality: Race, Gender, and Returns to Physical Attractiveness in the U.S. (Ellis Monk, Michael Esposito, + Hedwig Lee, American Journal of Sociology) ($)
“Physical attractiveness is an important axis of social stratification associated with educational attainment, marital patterns, earnings, and more. Still, relative to ethnoracial and gender stratification, physical attractiveness is relatively understudied. In particular, little is known about whether returns to physical attractiveness vary by race or significantly vary by race and gender combined. In this study, we use nationally representative data to examine whether (1) socially perceived physical attractiveness is unequally distributed across race/ethnicity and gender subgroups and (2) returns to physical attractiveness vary significantly across race/ethnicity and gender subgroups. Notably, the magnitude of the earnings disparities along the perceived attractiveness continuum, net of controls, rivals and/or exceeds in magnitude the black-white race gap and, among African-Americans, the black-white race gap and the gender gap in earnings. The implications of these findings for current and future research on the labor market and social inequality are discussed.”

Entrepreneurial Reluctance: Talent and Firm Creation in China (Chong-En Bai, Ruixue Jia, Hongbin Li, Xin Wang, National Bureau Of Economic Research) ($)
“The theoretical literature has long noted that talent can be used in both the entrepreneurial and non-entrepreneurial sectors, and its allocation depends on the reward structure. We test these hypotheses by linking administrative college admissions data for 1.8 million individuals with the universe of firm registration records in China. Within a college, we find that individuals with higher college entrance exam scores – the most important measure of talent in this context – are less likely to create firms, but, when they do, their firms are more successful than those of their lower-score counterparts. Additional survey data suggest that higher-score individuals enjoy higher wages and are more likely to join the state sector. Moreover, the score-to-firm creation relationship varies greatly across industry, according to the size of the state sector. These findings suggest that the score is positively associated with both entrepreneurial ability and wage-job ability but higher-score individuals are attracted away by wage jobs, particularly those of the state sector.”

New Science

Delta variant begins to spread, threatening EU’s Covid progress (Anna Gross, Leila Abboud, + John Burn-Murdoch, Financial Times) ($)
“…The Delta coronavirus variant that swept the UK has become dominant in Portugal and appeared in clusters across Germany, France and Spain, prompting European health officials to warn further action is needed to slow its spread. While the new strain, which first emerged in India, still only accounts for a fraction of the total coronavirus cases in mainland Europe, it is gaining ground, according to a Financial Times analysis of global genomic data from the virus tracking database Gisaid. It accounts for 96 per cent of sequenced Covid-19 infections in Portugal, more than 20 per cent in Italy and about 16 per cent in Belgium, the FT’s calculations show….many experts believe that wherever the Delta variant is introduced, it will eventually become dominant. The key, they say, will be to increase the proportion of fully vaccinated people…”

In Our Airpods

The Trucking Episode: Why the Industry Is Such a Mess (Bloomberg Odds Lots)