Edward Conard

Top Ten New York Times Bestselling Author

  • “Unintended Consequences provides a provocative interpretation of the causes of the global financial crisis and the policies needed to return to rapid growth. Whether you agree or not, this analysis is well worth reading.” - Nouriel Roubini, New York University; Chairman, Roubini Global Economics
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “A full-throated defense of economic dynamism.” - The Wall Street Journal
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Monday, January 23, 2023

AI Summary. Talk of "reglobalization" is premature because no real deglobalization has occurred: Chinese exports of manufactures remain at a record level relative to global output, and China continues to draw a record amount of net demand from the rest of the world to sustain its unbalanced economy.

Brad Setser @Brad_Setser
Date Posted:

.@Brad_Setser shows that Chinese exports are still at a record level relative to global output and concludes, “Graph is clear; China never deglobalized.”

Has deglobalization actually occurred?

Core argument: Brad Setser argues that talk of "reglobalization" is misplaced because no real deglobalization has occurred, with Chinese exports of manufactures still at a record level relative to global output.

It is hard to “reglobalize” when there hasn’t yet been any real deglobalization. The world will start deglobalizing when Chinese exports of global manufactures are no longer at a record level relative to global output and when China no longer needs to draw a record amount of net demand from the world to sustain its unbalanced economy. The graph is clear; China never deglobalized.

Takeaways by Macro Roundup® AI

  1. Brad Setser argues that talk of "reglobalization" is misplaced because no real deglobalization has occurred, with Chinese exports of manufactures still at a record level relative to global output.
  2. Setser contends deglobalization will begin only when China no longer needs to draw a record amount of net demand from the world to sustain its unbalanced economy.

AI Summary. Tighter immigration policies followed by pandemic disruptions depressed the US foreign-born working-age population, pushing the foreign-born labor force as much as 2.8m below its long-term trend and leaving it 1.2m below trend two years later. The foreign-born labor force has since grown 110k per month, up from 42k per month in the earlier period.

Tim Krupa Goldman Sachs
Date Posted:
Is Database:
Database

Tim Krupa from @GoldmanSachs reports that the foreign-born labor force is rebounding from 2.8M below trend in September 2020 to 1.2M below trend in March 2022.

Is the foreign-born labor force recovering from its shortfall?

Core argument: The US foreign-born labor force fell 2.8 million below its long-term trend level in April 2020 and remained 1.2 million below trend in March 2022, following tighter immigration policies beginning in 2019 and pandemic disruptions.

Starting in 2019, tighter immigration policies under the Trump Administration followed by pandemic disruptions depressed the US foreign-born working-age population. The foreign-born labor force fell 2.8 million below its long-term trend level in April 2020 and remained 1.2 million below trend in March 2022. The foreign-born population has grown 137k per month in the past 18 months, compared to 68k per month from Jan. 2010 to Jan. 2019. The chart above shows the foreign-born labor force has grown 110k per month in the past 18 months, compared to 42k per month during the prior period.

Takeaways by Macro Roundup® AI

  1. The US foreign-born labor force fell 2.8 million below its long-term trend level in April 2020 and remained 1.2 million below trend in March 2022, following tighter immigration policies beginning in 2019 and pandemic disruptions.

“….Starting in 2019, tighter immigration policies under the Trump Administration followed by pandemic disruptions depressed the US foreign-born working-age population. The foreign-born labor force fell 2.8 million below its long-term trend level in April 2020 and remained 1.2 million below trend in March 2022. In Exhibit 1, the left panel shows the foreign-born population has grown 137k per month in the past 18 months, compared to 68k per month from Jan. 2010 to Jan. 2019. The right panel shows the foreign-born labor force has grown 110k per month in the past 18 months, compared to 42k per month during the prior period…..”

Tim Krupa, “The Immigration Rebound,” Goldman Sachs, January 19, 2023, https://idfs.gs.com/as/authorization.oauth2?response_type=token&client_id=2a47af2c425a4313bae0a25fe5ec7322&IdpAdapterId=GirWorkflowComp&access_token_manager_id=RefGir&response_mode=form_post&redirect_uri=https://publishing.gs.com/login/access/idfs/redirect&state=L2NvbnRlbnQvdGhlbWVzL2hvbWVwYWdlLmh0bWw=&reset=true

AI Summary. The US added $25tn in debt over two decades, with the largest and often bipartisan drivers being federal responses to the 2008 financial crisis and the pandemic recession. Those responses included a nearly $800bn stimulus and tax-cut package, over $3tn in pandemic aid, and a later $1.9tn stimulus plan.

Jim Tankersley New York Times
Date Posted:

.@jimtankersley notes that “America’s debt is now six times what it was at the start of the 21st century” and outlines how America added $25 trillion in debt over the past two decades.

What drove the $25 trillion in debt added over two decades?

Core argument: The U.S. added $25 trillion in debt over two decades, reaching $31 trillion in total, with the largest and often bipartisan drivers being federal responses to the 2008 financial crisis and the 2020 pandemic recession.

In just two decades, America has added $25 trillion in debt. The biggest — and often bipartisan — drivers of debt have been the federal responses to two sharp economic downturns: the 2008 financial crisis and the 2020 pandemic recession. Shortly after Mr. Obama took office in 2009, inheriting a recession, he pushed Congress to approve a nearly $800 billion package of tax cuts and stimulus spending. Safety-net spending continued at high levels for the next several years as the economy recovered sluggishly. Mr. Trump approved a much larger collection of aid packages, totaling more than $3 trillion after Covid-19 swept the world in 2020. Mr. Biden took office the next year and signed a $1.9 trillion stimulus plan soon after.

Takeaways by Macro Roundup® AI

  1. The U.S. added $25 trillion in debt over two decades, reaching $31 trillion in total, with the largest and often bipartisan drivers being federal responses to the 2008 financial crisis and the 2020 pandemic recession.
  2. President Obama pushed Congress in 2009 to approve a nearly $800 billion package of tax cuts and stimulus spending, and safety-net spending continued at high levels for several years as the economy recovered sluggishly.
  3. President Trump approved more than $3 trillion in aid packages after Covid-19 spread in 2020, and President Biden signed a $1.9 trillion stimulus plan soon after taking office the following year.

AI Summary. The analysis attributes over two-thirds of the US structural fiscal imbalance to the growth rates of federal health programs, especially Medicare and Medicaid, and argues federal finances will not stabilize until those growth rates moderate regardless of choices on taxes, income security, or annually appropriated spending. It finds more recent administrations have run far larger average deficits than earlier ones.

Charles Blahous Mercatus Center George Mason University
Date Posted:
Is Database:
Database

Charles Blahous @mercatus notes that America’s long-term Federal fiscal imbalance was largely set between 1965-72. The cost of programs enacted during that period is growing faster than economic output and neither party has made an effort to address this.

What drives most of the federal structural fiscal imbalance?

Core argument: Over two-thirds of the U.S. structural fiscal imbalance derives from the growth rates of federal health programs, most especially Medicare and Medicaid, which the analysis describes as unsustainable.

Over two-thirds of the structural fiscal imbalance derives from the unsustainable growth rates of federal health programs, most especially Medicare and Medicaid. Irrespective of future policy decisions in other areas such as tax policy, income security, and annually appropriated domestic and defense spending, federal finances will not be stabilized until Medicare and Medicaid’s growth rates are moderated. A survey of fiscal stewardship records produces the unsurprising result that more recent officeholders have tended to run far higher federal deficits than those countenanced by previously elected officials. The largest average federal deficits were operated during the Trump administration, followed, in turn, by the Obama, Ronald W. Reagan, and George H. W. Bush administrations.

Takeaways by Macro Roundup® AI

  1. Over two-thirds of the U.S. structural fiscal imbalance derives from the growth rates of federal health programs, most especially Medicare and Medicaid, which the analysis describes as unsustainable.
  2. Federal finances will not be stabilized until Medicare and Medicaid growth rates are moderated, irrespective of policy decisions on taxes, income security, and annually appropriated domestic and defense spending.
  3. A survey of fiscal stewardship records finds the largest average federal deficits were run during the Trump administration, followed by the Obama, Reagan, and George H. W. Bush administrations.

AI Summary. Stabilizing federal debt at 95% of GDP would require holding deficits near 3% of GDP, against baseline deficits rising past 6% over the next decade and 11% in three decades. Proposed steps include freezing annual discretionary appropriations, a roughly $400bn package of mandatory savings, and bipartisan groundwork on Social Security and Medicare, which drive nearly all long-term deficits.

Brian Riedl The Dispatch
Date Posted:
Is Database:
Database

.@Brian_Riedl offers practical suggestions on how Republicans could permanently stabilize the American debt at 95% of GDP, a goal that would start with running deficits at 3% of GDP relative to the current baseline of 6% over the next decade.

.@Brian_Riedl offers practical suggestions on how Republicans could permanently stabilize the American debt at 95% of GDP, a...

What would it take to stabilize federal debt at 95% of GDP?

Core argument: Stabilizing federal debt permanently at 95 percent of GDP would require holding deficits near 3 percent of GDP, against baseline deficits rising past 6 percent of GDP over the next decade and 11 percent of GDP in three decades.

Fiscal conservatives should aim to permanently stabilize the debt at 95 percent of GDP. This goal would mean keeping deficits near 3 percent of GDP, compared to the baseline deficits rising past 6 percent of GDP over the next decade and 11 percent of GDP in three decades.  In the short run, this means: Freezing annual discretionary appropriations. Building momentum for mandatory spending reforms with a modest package of savings (perhaps $400 billion over the decade) that address lower-hanging fruit such as leftover pandemic spending, program overpayments, and federal spending benefits for upper-income families. Begin working toward Social Security and Medicare reform—which drive nearly 100 percent of long-term deficits—by building bipartisan working groups behind the scenes.

Takeaways by Macro Roundup® AI

  1. Stabilizing federal debt permanently at 95 percent of GDP would require holding deficits near 3 percent of GDP, against baseline deficits rising past 6 percent of GDP over the next decade and 11 percent of GDP in three decades.
  2. The proposed short-run agenda for fiscal conservatives includes freezing annual discretionary appropriations and a modest savings package of perhaps $400 billion over the decade targeting leftover pandemic spending, program overpayments, and federal spending benefits for upper-income families.
  3. Social Security and Medicare drive nearly 100 percent of long-term deficits, and reform should begin with bipartisan working groups built behind the scenes.

AI Summary. An analysis argues that the Trump administration's fiscal record does not compare favorably with its immediate predecessors, though it inherited a $10tn 10-year baseline deficit, versus $4tn for Obama and a projected $6tn surplus for Bush. Economic and technical factors outside political control, mainly falling federal debt interest rates, produced $3.9tn in 10-year deficit reduction.

Brian Riedl Manhattan Institute
Date Posted:
Is Database:
Database

Last year @Brian_Riedl compared Trump, Obama, and George W. Bush’s fiscal records and found that Trump’s policies in one term cost $7.8T over a decade, relative to $5T for Obama and $6.9T for Bush.

How does this president's fiscal record compare with his predecessors'?

Core argument: President Trump inherited a $10 trillion 10-year baseline deficit, dwarfing the $4 trillion projected baseline deficit inherited by President Obama and the $6 trillion projected baseline surplus inherited by President Bush.

President Trump’s record on fiscal responsibility does not compare favorably to his immediate predecessors. Surely, it would not be fair to judge President Trump simply by the total budget deficits under his watch, however, as the $10 trillion 10-year baseline deficit that he inherited dwarfed the $4 trillion projected baseline deficit inherited by President Obama and the $6 trillion projected baseline surplus inherited by President Bush. That is far from a level playing field.  On the other hand, President Trump also received the largest automatic deficit reductions from his inherited baseline. During his presidency, economic and technical factors that fall mostly outside of political control produced $3.9 trillion in 10-year deficit reduction, mainly through falling interest rates on the federal debt.

Takeaways by Macro Roundup® AI

  1. President Trump inherited a $10 trillion 10-year baseline deficit, dwarfing the $4 trillion projected baseline deficit inherited by President Obama and the $6 trillion projected baseline surplus inherited by President Bush.
  2. Economic and technical factors largely outside political control produced $3.9 trillion in 10-year deficit reduction during President Trump's presidency, mainly through falling interest rates on the federal debt.
  3. President Trump's record on fiscal responsibility does not compare favorably to his immediate predecessors, though judging him solely by the total budget deficits under his watch would not be a level playing field.

AI Summary. The implied equity risk premium on the S&P 500 rose from 4.24% to 5.94% over the course of 2022, placing it near the top of its range since 1960, while the expected return on stocks of 9.82% is its highest since 1995. Whether the market is fairly valued turns on whether that risk premium is too high or too low.

Aswath Damodaran Musings on Markets
Date Posted:

.@AswathDamodaran writes that, if analyst earnings forecasts are correct, the equity risk premium has increased from 4.2% at the start of 2022 to 5.9% today, and equity markets are now priced to earn the highest expected return since 1996.

Are stocks fairly valued after the equity risk premium rose?

Core argument: Damodaran's implied equity risk premium for the S&P 500 rose from 4.24% at the start of 2022 to 5.94% at the start of 2023, closer to the top of the range of historical premiums since 1960.

I note the increase in equity risk premiums during 2022 from 4.24% at the start of 2022 to 5.94% at the start of 2023. I posited that any debate about whether the market, as it stands now, is fair, under or overvalued is really one about whether the equity risk premium at the start of 2023 is too high (in which case, the market is undervalued) or too low (in which case, it is overvalued). To answer that question, and address the question of where the expected return of 9.82% stands in historical context, I report the expected returns and equity risk premiums for the S&P 500 from 1960 to 2022: At 5.94%, the implied equity risk premium is closer to top of the range of historical risk premiums, but the most striking feature of 2022 is that the expected return on stocks, at 9.82%, is now at its highest level since 1995.

Takeaways by Macro Roundup® AI

  1. Damodaran's implied equity risk premium for the S&P 500 rose from 4.24% at the start of 2022 to 5.94% at the start of 2023, closer to the top of the range of historical premiums since 1960.
  2. The expected return on S&P 500 stocks stands at 9.82% at the start of 2023, its highest level since 1995, based on Damodaran's estimates spanning 1960 to 2022.
  3. Damodaran argues the debate over whether equities are fairly valued, undervalued or overvalued reduces to whether the 5.94% equity risk premium at the start of 2023 is too high or too low.

AI Summary. A Center for Strategic and International Studies report argues the U.S. defense industrial base is not prepared for the current security environment and operates in a manner better suited to peacetime. The study recommends reassessing total munitions requirements and stockpile replenishment needs, creating a strategic munitions reserve, and setting a sustainable procurement plan.

Gordon Lubold Wall Street Journal
Date Posted:

A new @CSIS study warns that the Russo-Ukrainian conflict has stressed the American defense industrial base and argues that the surge capacity needed for a potential Taiwan conflict is lacking. @SethGJones

A new @CSIS study warns that the Russo-Ukrainian conflict has stressed the American defense industrial base and argues that...

Is the US defense industrial base prepared for today's security environment?

Core argument: Seth Jones, a senior vice president at the Center for Strategic and International Studies, judges that the U.S. defense industrial base is not prepared for the existing security environment and is operating in a manner better suited to peacetime.

“The bottom line is the defense industrial base, in my judgment, is not prepared for the security environment that now exists,” said Seth Jones, a senior vice president at the Center for Strategic and International Studies. Industry now is operating in a manner “better suited to a peacetime environment.” Mr. Jones recommends that the U.S. reassess its total munition requirements, urging Congress to hold hearings on the matter. Chairman of the Joint Chiefs of Staff Army Gen. Mark Milley said in November that such an effort is already underway. The study also suggests reassessing American requirements for replenishing its stockpiles, creating a strategic munitions reserve, and determining a sustainable munitions procurement plan to meet current and future requirements.

Takeaways by Macro Roundup® AI

  1. Seth Jones, a senior vice president at the Center for Strategic and International Studies, judges that the U.S. defense industrial base is not prepared for the existing security environment and is operating in a manner better suited to peacetime.
  2. The CSIS study recommends that the U.S. reassess its total munition requirements and stockpile replenishment needs, create a strategic munitions reserve, and determine a sustainable munitions procurement plan for current and future requirements.
  3. Jones urges Congress to hold hearings on U.S. munition requirements, while Chairman of the Joint Chiefs of Staff Army Gen. Mark Milley said in November that such an effort is already underway.

Tuesday, January 24, 2023

AI Summary. Higher public debt raises the real return on capital, but the effect is small: the advanced-economy debt-to-GDP ratio rose from 75% to 82%, implying an increase of no more than 15–30 basis points under standard assumptions. That is insufficient to offset the earlier downward trend in safe rates.

Olivier Blanchard Peterson Institute for International Economics
Date Posted:
Is Database:
Database

.@ojblanchard1 argues that the secular stagnation environment – where real interest rates were low, often negative, and much lower than the economy’s rate of growth – will soon reassert itself and will then be the “prevalent regime for some time to come.”

.@ojblanchard1 argues that the secular stagnation environment – where real interest rates were low, often negative, and much...

Does higher public debt raise real interest rates much?

Core argument: The debt-to-GDP ratio in advanced economies rose from 75 percent in 2019 to 82 percent in 2022, which under standard assumptions implies an increase in the real return on capital of no more than 15–30 basis points.

Summers has argued that the increase in public debt due to the fiscal response to COVID will lead, other things equal, to an increase in r [real return on capital]. He is right about the sign of the increase in public debt’s impact on r, but the effect is likely to be quite small. The debt-to-GDP ratio in advanced economies has increased only from 75 percent in 2019 to 82 percent in 2022; under standard assumptions, this implies an increase in r of no more than 15–30 basis points. That would be insufficient to offset the pre-COVID downward trend in safe rates, let alone to close the gap between r and g [growth rate of output.]

Takeaways by Macro Roundup® AI

  1. The debt-to-GDP ratio in advanced economies rose from 75 percent in 2019 to 82 percent in 2022, which under standard assumptions implies an increase in the real return on capital of no more than 15–30 basis points.
  2. Summers is right about the sign of higher public debt's effect on the real return on capital following the COVID fiscal response, but the effect is likely to be quite small.
  3. An increase of 15–30 basis points would be insufficient to offset the pre-COVID downward trend in safe rates, let alone to close the gap between the real return on capital and the growth rate of output.

“…Summers has argued that the increase in public debt due to the fiscal response to COVID will lead, other things equal, to an increase in r [real return on capital]. He is right about the sign of the increase in public debt’s impact on r, but the effect is likely to be quite small. The debt-to-GDP ratio in advanced economies has increased only from 75 percent in 2019 to 82 percent in 2022; under standard assumptions, this implies an increase in r of no more than 15–30 basis points. That would be insufficient to offset the pre-COVID downward trend in safe rates, let alone to close the gap between r and g [growth rate of output]….” Steve Comment: I’ve been wondering if the capital intensity of the US economy is about to go up. Between 1987 and 2021 tangible investment in terms of private investment as a percentage of private GDP net residential investment down ticked by 4 percentage points from 12.5% to 8.5%. During the same period, growth in intangible investment rose to 16.75% of GDP for a net increase in overall private investment of 1 percentage point. https://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.36.3.3 A different measure with a different time frame gives directionally similar data. Between 1977 and 2017 overall nonresidential business investment relative to business sector gross value added grew from 21% to 26%. The tangible investment rate fell from 12.9% in 1977 to 10.6% in 2017. However, this was again offset by an increase in the intangible investment rate from 8.4% to 15.2 http://www.intaninvest.net/charts-and-tables/As you point out btw security demands (going back to a cold war era defense industrial base, the electrification process (Goldman Sachs recently forecast that globally $2.8T in annual investment is needed to meet zero carbon goals this decade. For example, meeting current goals will require an additional 1.8Mty of copper driven by increased demand for solar, wind and electric vehicles.) We need a great deal of really expensive tangible investment. https://www.goldmansachs.com/insights/pages/gs-research/2023-commodity-outlook-an-underinvested-supercycle/report.pdf Perhaps intangible investment has to decline in the face of demand from tangible investment so it nets out (hard to believe that given developments in say AI) but to me it suggests that there is going to be more competition for a limited pool of risk capital. I’m not sure of the implications of that other than hurdle rates continuing to rise. And already a project that in 2022 offered a return on equity of 7% no longer works. https://aswathdamodaran.substack.com/p/data-update-2-for-2023-a-rocky-year So my question is what does overall investment going up as a share of GDP imply?

Blanchard Comment: You ask some good questions. For the world as a whole, I think there has not been an increase in the investment to gdp ratio. (Figure 1-4 in the book shows no such trend in saving to gdp, and at the world level, saving=investment) But if I am wrong, an increase in capital intensity is what you would expect from a lower r, due to higher saving. (I do not think that the distinction between tangible and intangible investment is an essential one for the question at hand) Olivier Blanchard, “Secular stagnation is not over,” Peterson Institute For International Economics, January 24, 2023, https://www.piie.com/blogs/realtime-economics/secular-stagnation-not-over

Secular Stagnation Is Not Over

is secular stagnation over?

I do not think so. Today’s inflation will not last, but I believe that low rates will.

Secular stagnation, a concept put forward by the economist Alvin Hansen in 1938, refers to economies suffering from structurally low private demand, requiring very low interest rates to sustain demand and achieve potential output—indeed requiring interest rates so low that they are lower than the growth rate. This state is summarized by a formulation that has become famous (at least in macroeconomic discussions…): r < g, a safe interest rate lower than the growth rate of the economy. In 2013 Lawrence H. Summers stirred widespread interest by declaring that the advanced economies were in a state of secular stagnation.

The empirical evidence was indeed overwhelming that most economies were in such a state. Real interest rates (i.e., interest rates adjusted for inflation) had steadily declined since the mid-1980s and were much lower than growth rates, indeed typically negative. Accordingly, Summers and I (and many others) explored the fundamental implications of such a condition. I focused on the implications for fiscal policy, and my new book, drawing conclusions for fiscal policy, has just been published by MIT Press.

In the current inflationary context, however, the title of my book, Fiscal Policy under Low Interest Rates, seems like a provocation. Some will say the publication may be a nice history book but that it is already out of date because the world has changed. According to this view, interest rates are now high, not low, and we should now prepare for a world in which r > g on average. Indeed, Summers himself, at the recent meetings of the American Economic Association, opined that “we’ll not return to the era of secular stagnation.”

Disagreeing about secular stagnation with the first macroeconomist to identify it rightly as a contemporary phenomenon is something that one should do very carefully. Yet I must.

First, because the issue is a fundamental one: There may be no variable more important for macroeconomic policy than r − g.

Second, because I believe that global secular stagnation was and is driven by deep structural factors that neither COVID nor inflation have done anything to reverse. Once central banks have won the fight against inflation, which they will, we shall most likely return to a macroeconomic environment not dramatically different, at least in this respect, from the one before COVID. That means that safe interest rates—that is, rates for assets with no risk of default—will be low again. As a result, I see a high probability that r < g remains the prevalent regime for some time to come.

Why do I believe rates will remain low?

The decline in safe rates on government bonds (adjusted for expected inflation) has been a steady and global one since the 1980s. The decline may have started earlier in Japan, but essentially all advanced economies shared the condition until the post-COVID inflation of 2021. This trend did not result from particular events, say the global financial crisis or the COVID crisis: while these led to temporarily lower rates, these lower rates were short-lived deviations from an underlying downward trend.

WHAT MARKET RATES TELL US

This process was indeed interrupted by the rise of inflation starting in 2021, which has forced central banks to increase interest rates to get inflation down to target. But even now, at what may be close to the height of central bank interest rates in their fight against inflation, real interest rates are still surprisingly low (and real rates are what matters for r − g).

In the United States, the 10-year nominal rate on government bonds is currently 3.4 percent, while the 10-year inflation forecast by the Congressional Budget Office (CBO) is 2.4 percent, implying a 10-year real rate of 1.0 percent. At the same time, the 10-year CBO growth forecast is 1.7 percent, implying that, even today, the 10-year forecast for r − g is still negative: −0.7 percent. Similar computations for the eurozone and for Japan yield even more negative values for the 10-year r − g: −1.3 percent for the euro zone, −1.2 percent for Japan.

These are 10-year averages, and thus reflect both the forecasts of higher short rates in the near future and the depressing effects on long rates of quantitative easing on long rates. An alternative is to use data from the overnight index swaps curve for 1-year bonds 10 years out and from 1-year inflation swaps also 10 years out, together with the CBO forecast for 1-year growth 10 years out. These imply an even greater negative value of r − g: −1.2 percent 10 years out from today.

Or one can instead look at what the Fed expects to happen. The December “Summary of Economic Projections” based on forecasts from the Federal Open Market Committee gives a median long-run forecast for the policy rate of 2.5 percent, an inflation forecast of 2 percent, and a GDP growth forecast of 1.8 percent. These imply a real rate of 0.5 percent and a value for r − g of −1.3 percent.

Investors, and even the Fed, can be wrong, however. Indeed, they did not predict the current increase in nominal rates. So, one must dig deeper.

LOOKING AT FUNDAMENTALS

One must try to both identify the factors behind the earlier decline in rates and forecast their evolutions in the future. Conceptually, one can think of three sets of factors. The first two are the factors affecting saving and the factors affecting investment; together, they determine capital accumulation, and by implication the economy’s marginal product of capital and the distribution of real rates depending on their relative riskiness. The third are the factors that affect the preference for safety among investors, which in turn determines how low the safe rate is relative to more risky rates of return such as stock returns.

It is fair to say that, while the (abundant) literature has identified the likely factors at work, it has not pinned down the relative contributions of these three sets of factors. Some give a main role to stronger saving and weaker investment. Others focus on an increased demand for safe assets. Yet I believe that, for most of the relevant factors, there is no reason to expect a dramatic turnaround from their pre-COVID evolution.

Take saving. I see the two main forces behind high saving as demographics and higher income. To the extent that longer life expectancy—which dominates demographic evolutions in advanced economies—leads to a longer retirement, it induces people to save more in anticipation of their longer retirement.[1] Higher income levels (rather than higher income growth) increase the proportion of the population that is able to save, either for precautionary motives or for life cycle saving purposes. These factors will continue to be relevant in the future.

Summers has argued that the increase in public debt due to the fiscal response to COVID will lead, other things equal, to an increase in r. He is right about the sign of the increase in public debt’s impact on r, but the effect is likely to be quite small. The debt-to-GDP ratio in advanced economies has increased only from 75 percent in 2019 to 82 percent in 2022; under standard assumptions, this implies an increase in r of no more than 15–30 basis points. That would be insufficient to offset the pre-COVID downward trend in safe rates, let alone to close the gap between r and g.

Turn to the demand for safe assets. A rise in this demand was an important factor in leading to a larger discount on the safe rate pre-COVID. In particular, regulation requiring financial institutions to hold a higher proportion of liquid assets clearly played a role. This is unlikely to change. And, if anything, the world looks more uncertain than it was pre-COVID, leading not only to more precautionary saving but also to a higher proportion of wealth to be held in liquid and safe assets (and fewer countries’ assets being considered safe).

This leaves the likely evolution of investment, and this is where I freely admit that there is more uncertainty. The rate of technological progress is notoriously difficult to predict from decade to decade. If progress were to speed up again, the effect on r − g would be ambiguous: it would lead to higher growth, which would lead to an even lower r − g; but it would also trigger higher investment, which in turn would lead to a higher r and thus a higher r − g. Such a technological explosion did not happen in the last 40 years, but it could.

One can think of other reasons why investment might become stronger. Geopolitics suggest that defense spending, a form of investment, may go up. Reshoring and friendshoring, for security or other reasons, may imply both higher investment and possibly lower growth as some of the benefits of trade are lost. The fight against global warming will increase green investment, while at the same time potentially slightly decreasing growth. All these may lead to an increase in r − g and thus reduce the room for fiscal space and the use of fiscal policy.[2] It would however take an unusual investment boom to reverse the sign of r − g and this cannot be the baseline scenario.

In short, one can never be sure. But I see the inflation episode and the higher rates as an interlude. Looking beyond this episode, I see low interest rates and a negative r − g as the most likely scenario for the future. If I am right, this is the time to think about fiscal and monetary policy once the fight against inflation is won.[3]

NOTES

1. It has been argued that longer life expectancy means a larger proportion of dissavers and thus lower saving. This is incorrect. While it is true that the proportion of dissavers goes up, over their lifetime people need to save more in anticipation of a longer retirement, leading to a higher aggregate saving rate.

2. To be clear and as I argue in the book, such an increase in r, if it came from an increase in desirable investment, would be a good thing, even if it reduced fiscal space.

3. A summary of what I see as the main implications for macroeconomic policy in general, and for fiscal policy in particular, is in my previous blog.

AI Summary. US tax increases since 1950 of 2% of GDP or more occurred when overall tax receipts were a much smaller share of GDP than today. Restoring the ratio of entitlement to non-defense discretionary spending to its earlier level of 2.2x would require tax increases larger than those historical precedents.

Michael Cembalest J.P. Morgan
Date Posted:
Is Database:
Database

Michael Cembalest @jpmorgan notes that it has been difficult for legislators to increase tax receipts beyond 19% of GDP, and yet entitlement spending plus interest is likely to exceed that level by 2032.

Would rebalancing entitlement and discretionary spending require unprecedented tax increases?

Core argument: US tax increases of 2% of GDP or more have occurred since 1950, but only when overall federal tax receipts as a share of GDP were much lower.

The above chart plots the history of US tax increases since 1950 (as % of GDP and vs Federal receipts as a % of GDP). While there have been tax increases of 2% of GDP or more, they occurred when overall tax receipts were much lower. The red square shows the required increases in taxes, which if spent entirely on increasing discretionary spending, would reduce the ratio of entitlements to non-defense discretionary spending back to 2.2x (its 2006 level). The Sanders high net worth income and capital gains tax plan and the Warren wealth tax plan appear as well.

Takeaways by Macro Roundup® AI

  1. US tax increases of 2% of GDP or more have occurred since 1950, but only when overall federal tax receipts as a share of GDP were much lower.
  2. The chart's red square marks the tax increase needed to return the ratio of entitlements to non-defense discretionary spending to 2.2x, its 2006 level, if the revenue were spent entirely on increasing discretionary spending.
  3. The Sanders high-net-worth income and capital gains tax plan and the Warren wealth tax plan are plotted alongside the history of US tax increases since 1950 as a share of GDP.

Michael Cembalest notes that it has been difficult for legislators to increase tax receipts beyond 19% of GDP, and yet entitlement spending plus interest is likely to exceed that level by 2032. “…The above chart plots the history of US tax increases since 1950 (as % of GDP and vs Federal receipts as a % of GDP). While there have been tax increases of 2% of GDP or more, they occurred when overall tax receipts were much lower. The red square shows the required increases in taxes, which if spent entirely on increasing discretionary spending, would reduce the ratio of entitlements to non-defense discretionary spending back to 2.2x (its 2006 level). The Sanders high net worth income and capital gains tax plan and the Warren wealth tax plan appear as well….”

Michael Cembalest, “American Gothic,” J.P. Morgan, January 24, 2023, https://am.jpmorgan.com/us/en/asset-management/institutional/insights/market-insights/eye-on-the-market/american-gothic/

AI Summary. An analysis of Labor Department data found median weekly earnings for all workers up 7.4% year-over-year, with the bottom 10th of earners—making about $570 a week—gaining nearly 10% and Black full-time workers receiving a median raise of 11.3%.

Gabriel Rubin Wall Street Journal
Date Posted:
Is Database:
Database

.@WSJ reports that year-over-year wages for the bottom 10% of earners increased 9.8% relative to 7.4% for the median for all workers. Workers in the top 10% of earnings saw a 5.7% gain.

Are low-wage, young, and Black workers seeing the largest pay gains?

Core argument: Median weekly earnings for all U.S. workers rose 7.4% year-over-year at the end of 2022, while the bottom 10th of wage earners, making about $570 a week, saw pay rise nearly 10%, according to an analysis of Labor Department data.

Median weekly earnings for all workers were 7.4% higher, year-over-year, at the end of 2022, according to an analysis of newly released Labor Department data. The bottom 10th of wage earners—those that make about $570 a week—saw their pay increase by nearly 10%. Better pay increases late last year went to workers who attended college, a reversal from earlier in the pandemic when those who hadn’t completed high school saw outsize gains. The annual rate of wage growth for workers with less than a high school diploma touched a recent peak in the second quarter of 2022, when it was up 11.1% over the prior year, higher than the 7.6% wage growth during that period for workers with a bachelor’s degree or higher.  The median raise for Black Americans employed full-time was 11.3%, compared with the prior year.

Takeaways by Macro Roundup® AI

  1. Median weekly earnings for all U.S. workers rose 7.4% year-over-year at the end of 2022, while the bottom 10th of wage earners, making about $570 a week, saw pay rise nearly 10%, according to an analysis of Labor Department data.
  2. Black Americans employed full-time recorded a median raise of 11.3% compared with the prior year.
  3. Wage growth for workers with less than a high school diploma reached a recent peak of 11.1% year-over-year in the second quarter of 2022, against 7.6% for those with a bachelor's degree or higher, a pattern that reversed later in the year as college-educated workers received better raises.

Year-over-year wages for the bottom 10% of earners increased 9.8% relative to 7.4% for the median for all workers. Workers in the top 10% of earnings saw a 5.7% gain., “…Median weekly earnings for all workers were 7.4% higher, year-over-year, at the end of 2022, according to an analysis of newly released Labor Department data. The bottom 10th of wage earners—those that make about $570 a week—saw their pay increase by nearly 10%. Better pay increases late last year went to workers who attended college, a reversal from earlier in the pandemic when those who hadn’t completed high school saw outsize gains. The annual rate of wage growth for workers with less than a high school diploma touched a recent peak in the second quarter of 2022, when it was up 11.1% over the prior year, higher than the 7.6% wage growth during that period for workers with a bachelor’s degree or higher. The median raise for Black Americans employed full-time was 11.3%, compared with the prior year….”

Gabriel Rubin, “Biggest Pay Raises Went to Black Workers, Young People and Low-Wage Earners,” Wall Street Journal, January 23, 2023, https://www.wsj.com/articles/biggest-pay-raises-went-to-black-workers-young-people-and-low-wage-earners-11674425793

Biggest Pay Raises Went to Black Workers, Young People and Low-Wage Earners

Black workers, young workers and people on the bottom of the income scale were among those who saw the largest pay increases last year, when employers were readily handing out raises in a tight labor market and high inflation environment.

Median weekly earnings for all workers were 7.4% higher, year over year, at the end of 2022, according to an analysis of newly released Labor Department data. That outpaced the consumer inflation rate of 7.1% in the fourth quarter, from a year earlier.

For some workers, the gains were even larger. The median raise for Black Americans employed full time was 11.3%, compared with the prior year. Weekly pay for workers between 16- and 24-years old rose more than 10%. The bottom 10th of wage earners—those that make about $570 a week—saw their pay increase by nearly 10%.

The pay increases were welcome relief for those groups who have experienced “decades of pain” in the labor market, said Aaron Sojourner, an economist at the Upjohn Institute for Employment Research. “It’s been a struggle for those folks to find a productive place in the community where they can contribute and earn and build families and success.”

While the labor market remains tight, both wage gains and broader inflation have begun to cool, along with consumer spending. That is the result of the Federal Reserve’s efforts to stifle demand and bring down inflation. Workers’ ability to continue to receive large pay increases this year is likely under pressure. Economists surveyed by The Wall Street Journal forecast job losses in 2023, after recent strong hiring.

Here is a look at which Americans saw the largest, and smallest, raises in 2022.

Better pay increases late last year went to workers who attended college, a reversal from earlier in the pandemic when those who hadn’t completed high school saw outsize gains.

The annual rate of wage growth for workers with less than a high school diploma touched a recent peak in the second quarter of 2022, when it was up 11.1% over the prior year, higher than the 7.6% wage growth during that period for workers with a bachelor’s degree or higher.

But by the end of 2022, the median worker without a high school diploma was making $675 a week, or 3.7% more than during the last quarter of 2021. Wage gains for the less educated plummeted as more low-skilled jobs were filled and economic growth cooled.

The median worker with at least a bachelor’s degree, by contrast, saw 5.5% wage growth from a year earlier to $1,547 a week. Those who only finished high school saw a 5.3% annual raise.

Wage growth was uneven across racial groups.

The median Black worker’s weekly pay increased at the fastest rate among those measured, growing to $896 from $805 a year earlier. The median Hispanic or Latino worker saw a 4.8% raise to $837 a week. White and Asian workers saw wage growth slightly higher than the overall workforce.

Still, white and Asian workers continued to earn far more than other racial groups. Median weekly earnings for full-time Asian workers was $1,496, and white workers earned $1,111.

By sex, weekly wages for the median woman rose 5% to $975 in the fourth quarter, from a year earlier. The median man received a 6.6% raise to $1,176 a week. Women had median weekly earnings that were 82.9% of that for men.

The rate of raises between workers ages 16 to 24 and other age groups widened in 2022.

It isn’t unusual for young workers to experience faster wage growth in percentage terms, largely because they typically start from the lowest base. A person making $15 an hour who gets a 10% raise is now making $16.50 an hour.

That youngest cohort, earning a median of $716 a week, ended the year with 10.8% annual wage growth, compared with 7.2% for the next-strongest group, aged 25 to 54. The median worker in those prime working years earned $1,134 a week. At the end of 2021, younger workers had 5.2% annual wage growth, and prime-age workers saw a 4.4% gain.

Older workers, those in the 55-64 bracket and those over 65 years old, who often start from higher bases compared with younger cohorts, saw the slowest wage growth last year, at 2.8% and 3.9%, respectively.

The lowest-paid workers saw larger raises last year than the top 10% of wage earners.

Those in the bottom 10% saw weekly pay grow 9.8% from a year earlier at the end of 2022, to $571 a week. The top 10% received a raise of 5.7%, to $2,584 a week.

Gains for low-income and low-skilled workers drove broader wage growth throughout the post-reopening period of the pandemic, as employers who shed workers in 2020 scrambled to hire, and retain, workers. Quit rates soared as workers found that they could jump to another job for higher wages, with the mismatch between job openings and available workers at an all-time high.

Those fast gains have cooled. Hiring in sectors such as leisure and hospitality and retail eased toward the end of last year.

AI Summary. The author argues that the standard annual average inflation rate is biased toward older data and reflects the true price level with a six-month delay, and proposes an "instantaneous inflation" measure instead. By that measure, headline inflation in the US and Eurozone is back at the 2% target, while core inflation excluding food and energy is 4%.

Jan Eeckhout Working Paper
Date Posted:

.@jan_eeckhout suggests that, when the underlying inflation data is not especially noisy, it might be appropriate to use “instantaneous” measures of inflation, which consider only very recent data. “Instantaneous inflation” hit 2% in Dec ‘22.

Does annual average inflation lag the true price level?

Core argument: Instantaneous inflation in the US and the Eurozone is back at the 2% target, which the author takes as evidence that the high inflation period is over.

Current practice to measure inflation for monetary policy uses the average annual inflation rate. When inflation changes fast, whether increasing or decreasing, the annual average rate is biased towards data from too far in the past and conveys the true price level with six months delay. I propose to use instantaneous inflation as a more adequate measure of the price change. The measure trades off noise in the data with the precision of the instantaneous price change. Using the latest inflation numbers, it shows that instantaneous inflation in the US and the Eurozone is back to the target of 2% and that the high inflation period is over. Instantaneous core inflation, which excludes food and energy, is falling, but at 4%, it remains higher than the inflation target of 2%. The conventional measure of core inflation is at 5.7%.

Takeaways by Macro Roundup® AI

  1. Instantaneous inflation in the US and the Eurozone is back at the 2% target, which the author takes as evidence that the high inflation period is over.
  2. Instantaneous core inflation, excluding food and energy, is falling but remains at 4%, above the 2% target, while the conventional core measure stands at 5.7%.
  3. The author argues that when inflation changes fast, the average annual rate is biased toward data from too far in the past and conveys the true price level with a six-month delay.

AI Summary. Drawing on a survey of working arrangements across 27 countries, the authors estimate that working from home saved about two hours of commuting per week per worker and will save about one hour per week after the pandemic. That equals 2.2% of a 46-hour workweek, which they value at about 2.2% of after-tax earnings.

Cevat Giray Aksoy, Jose Maria Barrero, Nicholas Bloom, et al National Bureau of Economic Research
Date Posted:
Is Database:
Database

A @nberpubs analysis finds workers who are working from home in the US save an average of 55 minutes with 39% of those time savings being devoted to a primary or secondary jobs and 33% for leisure activities. @I_Am_NickBloom

How much commuting time does working from home save workers?

Core argument: Drawing on the Global Survey of Working Arrangements covering 27 countries, the authors estimate that working from home saved about two hours per week per worker in 2021 and 2022 and will save about one hour per week after the pandemic ends.

The pandemic-induced shift to work from home yielded large private benefits in the form of commute time savings. To gauge the magnitude of these benefits, we turn to the Global Survey of Working Arrangements and consider data on commute times and the extent of work from home in 27 countries. We estimate that work from home saved about two hours per week per worker in 2021 and 2022, and that it will save about one hour per week per worker after the pandemic ends. That amounts to 2.2 percent of a 46-hour workweek, with 40 paid hours plus six hours of commuting. As we discussed, the after-tax wage rate is a reasonable benchmark for the private value of commute time savings. Thus, we estimate that the private value of the commute time savings associated with work from home will be about 2.2 percent of after-tax earnings in the post-pandemic economy.

Takeaways by Macro Roundup® AI

  1. Drawing on the Global Survey of Working Arrangements covering 27 countries, the authors estimate that working from home saved about two hours per week per worker in 2021 and 2022 and will save about one hour per week after the pandemic ends.
  2. The estimated post-pandemic saving of about one hour amounts to 2.2 percent of a 46-hour workweek consisting of 40 paid hours plus six hours of commuting.
  3. Using the after-tax wage rate as a benchmark for the private value of commute time, the authors estimate that work-from-home commute time savings will be worth about 2.2 percent of after-tax earnings in the post-pandemic economy.

Analysis from New York Fed shows that Americans spend 60 million fewer commuting hours each day vs. pre-pandemic. They allocated this time primarily toward leisure activities and sleeping, while reducing overall work hours.

“…In the aggregate, Americans now spend 60 million fewer hours traveling to work each day. We investigate how people spend this saved time on other activities. The chart above shows how one hour of foregone commute time is allocated toward other activities. First, we find a substantial fall in time spent working. Overall paid-work hours fell because of substitution toward other activities throughout the day: we see notable increases in leisure time and sleeping. The rise in leisure was particularly pronounced among younger Americans, who reported spending more time at social events, eating at restaurants or bars, and exercising….” David Dam, Davide Melcangi, Laura Pilossoph, and Aidan Toner-Rodgers, “What Have Workers Done with the Time Freed up by Commuting Less?,” Federal Reserve Bank Of New York, https://libertystreeteconomics.newyorkfed.org/2022/10/what-have-workers-done-with-the-time-freed-up-by-commuting-less/

What Have Workers Done with the Time Freed up by Commuting Less?

The COVID-19 pandemic has dramatically changed the way Americans spend their time. One of the most enduring shifts has occurred in the workplace, with millions of employees making the switch to work from home. Even as the pandemic has waned, more than 15 percent of full-time employees remain fully remote and an additional 30 percent work in hybrid arrangements (Barrero, Bloom, and Davis). These changes have substantially reduced time spent commuting to work; in the aggregate, Americans now spend 60 million fewer hours traveling to work each day. In this post, we investigate how people spend this saved time on other activities. Using detailed data from the American Time Use Survey (ATUS), we find that employed individuals allocate their saved commute time toward leisure activities and sleeping, while reducing overall work hours.

Measuring Time Spent

The ATUS is a nationally representative survey that measures both the amount of time people spend on various activities and where these activities take place. ATUS respondents are randomly selected from a subset of households in the Current Population Survey, allowing us to link demographic and employment information to respondents’ time use information. Because COVID-19 disrupted the survey’s data collection between March 18 and May 9 of 2020, the survey results for 2020 reflect data only from May 10 to December 31. To make comparisons with prior years, we restrict the data to this period in the other years as well.

To examine how workers allocate their saved commute time, we apply the methodology of Aguiar, Hurst, and Karabarbounis to the COVID-19 period. For those interested in the details, we aggregate individual ATUS responses to the state-level and exploit variation across states in the extent of commute time reduction. After categorizing more than 400 time use activities into nine major categories, we regress yearly changes in time use for each category on changes in commute time. Our first-differences approach enables us to account for time-invariant state characteristics, and we also include a variety of state-level control variables to account for worker composition. Across specifications, we restrict our analysis to employed individuals in order to exclude reductions in commute times due to job loss. Additionally, to account for the possibility that COVID-19 induced firms to cut hours just as employees were shifting to remote work, we also consider a sample of only full-time employees and find similar results.

Changes in Time Use

The main results are presented in the chart below in which we show how one hour of foregone commute time is allocated toward other activities. First, we find a substantial fall in time spent working; the decrease in hours worked away from home is only partially offset by an increase in working at home. This is in line with results from Bloom, Han, and Liang, who find that remote work led to a decrease in overall hours worked. Moreover, our findings help reconcile earlier work on commute times, which found that even though employees reported allocating 35 percent of their saved commute time to work, they spent fewer total hours in paid employment (Barrero, Bloom, and Davis). Our results from the ATUS suggest that although individuals may have increased time working in the precise time-slot they used to commute, overall paid-work hours fell because of substitution toward other activities throughout the day.

Second, we see notable increases in leisure time and sleeping. The rise in leisure was particularly pronounced among younger Americans, who reported spending more time at social events, eating at restaurants or bars, and exercising. Older age groups, on the other hand, tended to allocate more time to nonmarket work, such as activities related to childcare, the maintenance of the household, repairs, and meal preparation.

Who Are the Activities Conducted With?

The ATUS also includes information on who physically accompanied the respondent during each activity. We use this variable to classify which activities were done with people outside of the immediate household. We categorize solitary activities and those with household members into one category, and activities with friends, co-workers, clients, and non-household family members into the other. As we would expect, the next chart shows that time spent on activities done alone or with household members increased, such as leisure (+2.30 hours) and nonmarket activities (+0.69). Differentiating by age, we see that younger people were the only group to significantly increase their leisure time with non-household members (+1.13), likely reflecting the differential risks of COVID-19.

Our results show important relationships in the substitutability of time use. The findings lend credence to the various reports on employees’ preferences for flexible work arrangements, given that cutting the commute enables people to spend their time on other activities, such as childcare or leisure. This added benefit of working from home—for those who want it—will be an important consideration for the future of flexible work arrangements.

AI Summary. The author argues the easiest stage of the stock market bubble's deflation is complete, with the most extreme froth wiped away but valuations still far above their long-term averages. The author estimates a trendline value for the S&P 500 of about 3200 and puts 3-to-1 odds that the index reaches that level and spends time below it.

Jeremy Grantham GMO
Date Posted:

Jeremy Grantham predicts that the S&P 500 will likely hit 3,200 at some point this year, noting that “valuations are still nowhere near their long-term averages.” @GMOInsights

Will stocks fall further toward long-term trendline valuations?

Core argument: Grantham calculates trendline value for the S&P 500, adjusted upward for trendline growth and expected inflation, at about 3200 by the end of 2023, and puts 3-to-1 odds on the index reaching that trend and spending some time below it this year or next.

The first and easiest leg of the bursting of the bubble we called for a year ago is complete. While the most extreme froth has been wiped off the market, valuations are still nowhere near their long-term averages. Further, in the past, they have usually overcorrected to below trend as fundamentals deteriorated. My calculations of trendline value of the S&P 500, adjusted upwards for trendline growth and for expected inflation, is about 3200 by the end of 2023. I believe it is likely (3 to 1) to reach that trend and spend at least some time below it this year or next. Not the end of the world but compared to the Goldilocks pattern of the last 20 years, pretty brutal.

Takeaways by Macro Roundup® AI

  1. Grantham calculates trendline value for the S&P 500, adjusted upward for trendline growth and expected inflation, at about 3200 by the end of 2023, and puts 3-to-1 odds on the index reaching that trend and spending some time below it this year or next.
  2. Grantham argues the first and easiest leg of the bubble's bursting is complete, with the most extreme froth wiped off the market but valuations still nowhere near their long-term averages.
  3. Grantham notes that valuations have usually overcorrected to below trend as fundamentals deteriorated, an outcome he calls not the end of the world but pretty brutal compared with the Goldilocks pattern of the last 20 years.