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, March 20, 2023

AI Summary. Historical patterns suggest large declines in real interest rates after major shocks tend to fade, and structural forces — surging public and private debt, green transition costs, rising defence spending, and populist fiscal pressures — point upward. Central banks may therefore need to hold interest rates higher than in the prior decade to keep inflation stable.

Ken Rogoff Financial Times
Date Posted:

.@krogoff argues that we can’t count on the low borrowing rates associated with secular stagnation to reassert themselves. Given inflation near 5% and extreme stress in the banking system, Rogoff thinks the Fed decision on Mar 21-22 is especially tough.

.@krogoff argues that we can’t count on the low borrowing rates associated with secular stagnation to reassert...

Will central banks need to hold interest rates higher than last decade?

Core argument: Central banks may need to keep the general level of interest rates higher over the next decade than in the last one, even after inflation abates, simply to keep inflation stable.

Ultra-low borrowing rates are not something that can be counted on this time around. If one looks at long-term historical patterns in real interest rates major shocks — for example, the big drop after the 2008 financial crisis — tend to fade over time. There are also structural reasons: for one thing, global debt (public and private) exploded after 2008, partly as an endogenous response to the low rates, partly as a necessary response to the pandemic. Other factors that are pushing up long-term real rates include the massive costs of the green transition and the coming increase in defence expenditure around the world. The rise of populism will presumably help alleviate inequality, but higher taxes will lower trend growth even as higher spending adds to upwards pressure on rates. What this means is that even after inflation abates, central banks may need to keep the general level of interest rates higher over the next decade than they did in the last one, just to keep inflation stable.

Takeaways by Macro Roundup® AI

  1. Central banks may need to keep the general level of interest rates higher over the next decade than in the last one, even after inflation abates, simply to keep inflation stable.
  2. Long-term historical patterns in real interest rates suggest major shocks, such as the drop after the 2008 financial crisis, tend to fade over time, so ultra-low borrowing rates cannot be counted on this time.
  3. Structural forces pushing long-term real rates up include the explosion of global public and private debt after 2008 and during the pandemic, the costs of the green transition, coming increases in defence spending worldwide, and populist tax and spending pressures.

AI Summary. Amid banking-system turmoil, the Federal Reserve's balance sheet expanded $297bn in a week — equivalent to reversing about 15 weeks of balance-sheet shrinkage in roughly half a week — though it remained $315bn smaller than a year earlier. The author argues this is not quantitative easing, since quantitative easing creates reserves that persist at the central bank's discretion.

Chris Marsh Money: Inside and Out
Date Posted:

The Fed’s balance sheet expansion through March 15th offset fifteen weeks of quantitative tightening but doesn’t signal a return to quantitative easing. @GeneralTheorist

Is emergency lending that expands the central bank balance sheet quantitative easing?

Core argument: The Federal Reserve's balance sheet expanded $297bn in the week through Wednesday the 15th following turmoil that began with Silicon Valley Bank, though it remains $315bn smaller than a year earlier.

Following a week of turmoil in the banking system, starting with the tension around Silicon Valley Bank, this week (through Weds. 15th) the Federal Reserve’s balance sheet expanded USD297bn (though still falling USD315bn over the past year). This is equivalent to offsetting 15 weeks of quantitative tightening (QT) in about half a week. It is tempting to conclude that the resumption of balance sheet expansion reflects a return of QE. A brief inspection of the transactions involved reveals this is not the case. In the case of QE, asset purchases and reserves created can be expected to remain in place for an extended period, at the discretion of the central bank. It represents outside money for the private sector, an asset with no associated liability, which cannot be disposed of in the aggregate but to which all must adjust.

Takeaways by Macro Roundup® AI

  1. The Federal Reserve's balance sheet expanded $297bn in the week through Wednesday the 15th following turmoil that began with Silicon Valley Bank, though it remains $315bn smaller than a year earlier.
  2. The $297bn expansion is equivalent to offsetting 15 weeks of quantitative tightening in about half a week.
  3. The balance sheet expansion does not amount to a return of quantitative easing, under which asset purchases and created reserves stay in place for an extended period as outside money the private sector cannot dispose of in the aggregate.

AI Summary. The Federal Reserve and five other major central banks shifted from weekly to daily dollar auctions through their swap lines to ease strains in global funding markets amid banking-sector turmoil. The swap network lets banks outside the US obtain dollars by pledging collateral at their own central banks in exchange for domestic currency.

Colby Smith and Martin Arnold Financial Times
Date Posted:

The Federal Reserve has set up swap lines with other major central banks to improve dollar liquidity, running daily dollar auctions for the first time since the 2020 Covid crisis @FinancialTimes.

The Federal Reserve has set up swap lines with other major central banks to improve dollar liquidity, running daily dollar...

Are central banks expanding dollar auctions to ease global funding strains?

Core argument: The Federal Reserve and five other central banks switched from weekly to daily dollar auctions beginning Monday, saying the move would ease strains in global funding markets amid turmoil in the banking sector.

The Federal Reserve and five other leading central banks have taken fresh measures to improve global access to dollar liquidity as financial markets reel from the turmoil hitting the banking sector. In a joint statement on Sunday, the central banks said that from Monday, they would switch from weekly to daily auctions of dollars in an effort to “ease strains in global funding markets”. The daily swap lines between the Fed and the European Central Bank, Bank of England, Swiss National Bank, Bank of Canada and Bank of Japan would run at least until the end of April, the officials said. The Fed’s swap line network, first set up in 2007, has provided an important funding backstop for global banks during periods of acute market stress. Lenders outside the US can use the swap lines to access dollars in exchange for their domestic currencies by pledging collateral at their respective central banks.

Takeaways by Macro Roundup® AI

  1. The Federal Reserve and five other central banks switched from weekly to daily dollar auctions beginning Monday, saying the move would ease strains in global funding markets amid turmoil in the banking sector.
  2. The daily swap lines between the Fed and the European Central Bank, Bank of England, Swiss National Bank, Bank of Canada and Bank of Japan will run at least until the end of April.
  3. The Fed's swap line network, first set up in 2007, lets lenders outside the US access dollars in exchange for their domestic currencies by pledging collateral at their respective central banks.

AI Summary. Banks' securities holdings shifted from a mix of unrealized gains and losses under relatively low interest rates to declining bond portfolio values as the Federal Reserve raised interest rates. Measuring these unrealized losses as a share of each bank's total assets is one way to gauge stress in the financial sector.

Nate Rattner and Alana Pipe Wall Street Journal
Date Posted:

Banks unrealized losses increased in 2022 as the Fed continued its hiking cycle. @WSJecon

How do rising interest rates create unrealized losses on bank securities?

Core argument: Banks' unrealized gains and losses on securities holdings, measured as a share of each bank's total assets, offer one lens on the turmoil in the financial sector.

One way to understand what is happening in the financial sector is to look at banks’ unrealized gains and losses, or how much their securities holdings have risen or fallen in value. In 2021, it was a mix of gains and losses, and interest rates were relatively low. Last year, as the Federal Reserve raised interest rates, the value of banks' bind portfolios declined. Unrealized losses are shown as a share of each bank's total assets.

Takeaways by Macro Roundup® AI

  1. Banks' unrealized gains and losses on securities holdings, measured as a share of each bank's total assets, offer one lens on the turmoil in the financial sector.
  2. In 2021, when interest rates were relatively low, banks' securities portfolios showed a mix of unrealized gains and losses.
  3. As the Federal Reserve raised interest rates, the value of banks' bond portfolios declined.

AI Summary. Foreign sales of listed American and European companies have grown about 2% a year since 2010, down from 8% in the 2000s and 10% in the 1990s. China accounts for less than one-eighth of Western firms' foreign revenues—8% of European companies' total revenues and 4% of American ones—according to Morgan Stanley.

Economist Staff The Economist
Date Posted:

The foreign sales of American firms have grown 2% a year since 2010 relative to 8% annually in the previous decade. American multinational’s sales were flat in China btw 2017-2020 during the same period they grew 6% annually in India. @TheEconomist

Has foreign sales growth slowed for Western companies?

Core argument: Foreign sales of listed American and European companies have grown just 2% a year since 2010, down from 8% in the 2000s and 10% in the 1990s.

Since 2010 the foreign sales of listed American and European companies have grown by a meager 2% per year, down from 8% in the 2000s and 10% in the 1990s. Look across all industries, and China is responsible for less than one-eighth of Western firms’ foreign revenues, according to Morgan Stanley, an investment bank—a much smaller share than American and European sales across the Atlantic or to the rest of the emerging world. Only 8% of European companies’ total revenues come from China. For their American counterparts, the figure is 4%. According to bea figures, American multinationals’ sales in China were flat between 2017 and 2020. In India they grew by 6% a year in the same period. Western multinationals are, then, becoming somewhat less Chinese. Between 1990 and 2021 the average return on equity of American and European listed companies with less than $1bn in sales fell from 8% to 4%. That for firms with revenues of $10bn or more rose from 12% to 18%. And being big is easier if you are international. In 2021 American and European listed companies with $10bn-plus in revenue generated 43% of their sales abroad on average, compared with just 32% for those with sales below $1bn. Global reach is, in other words, more important than ever.

Takeaways by Macro Roundup® AI

  1. Foreign sales of listed American and European companies have grown just 2% a year since 2010, down from 8% in the 2000s and 10% in the 1990s.
  2. China accounts for less than one-eighth of Western firms' foreign revenues, according to Morgan Stanley, supplying 8% of European companies' total revenues and 4% of American companies'.
  3. Average return on equity for American and European listed firms with $10bn-plus in sales rose from 12% in 1990 to 18% in 2021, while that for firms under $1bn fell from 8% to 4%.

AI Summary. A combined 7% of US survey respondents who were not working cited caregiving as the reason — 5% caring for children and 2% for elderly relatives. Daycare and preschool costs have risen more than 10% since the start of the pandemic, and Bank of America internal data show 7% fewer customers making childcare payments than at the start of 2020.

Anna Zhou, Dale Lin, Peter Su and Ana Maxim Bank of America Institute
Date Posted:

New @BankofAmerica research shows 7% fewer customers were spending money on child care relative to the start of 2020 suggesting the higher cost of childcare is keeping lower earning workers out of labor force.

Are rising childcare costs keeping workers out of the labor force?

Core argument: In the Household Pulse Survey with data as of January 17, 2023, 7% of respondents not working cited caregiving as the reason, split between 5% caring for children and 2% for elderly relatives.

Caregiving responsibilities have prevented some from returning to the workforce. In the latest Household Pulse Survey with data as of January 17, 2023, a combined 7% of respondents not working reported caregiving as the reason. This was broken down further: 5% were looking after children and 2% elderly relatives. The lack of affordable and quality childcare has forced some parents to stay at home instead of returning to work. According to the Consumer Price Index, daycare and preschool costs have increased by more than 10% since the start of the pandemic. This is an even bigger burden for lower-income households, which could partly explain the larger labor force exits at the lower end of the income spectrum. However, across the board, it seems that fewer parents are sending their kids to daycare relative to prepandemic days. Bank of America internal data shows that the number of customers making childcare payments as of December 2022 was 7% lower than at the beginning of 2020

Takeaways by Macro Roundup® AI

  1. In the Household Pulse Survey with data as of January 17, 2023, 7% of respondents not working cited caregiving as the reason, split between 5% caring for children and 2% for elderly relatives.
  2. Daycare and preschool costs have risen more than 10% since the start of the pandemic, according to the Consumer Price Index, a burden weighing more heavily on lower-income households that could partly explain larger labor force exits at the lower end of the income spectrum.
  3. Bank of America internal data shows the number of customers making childcare payments as of December 2022 was 7% lower than at the beginning of 2020.

AI Summary. A revised chart of 20-year price changes puts delivery services — private-sector package and document delivery — at the top rather than health care, indicating the largest increases are not confined to government-dominated sectors. The author argues the key distinction is whether an item is a labor-intensive service or a good, not regulation.

Mike Konczal Rortybomb
Date Posted:
Is Database:
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.@mtkonczal updates @Mark_J_Perry price changes graph and argues the implication isn’t government regulation drives price shifts but that goods have deflated and services have inflated.

Do the largest 20-year price increases reflect labor-intensive services rather than regulation?

Core argument: In this version of the AEI 20-year inflation chart, the number one item is not health care but "delivery services" — fees for delivery of letters, documents, and packages at non-US Postal Service facilities such as UPS or FedEx.

In our version of the AEI chart the number one item isn’t health care but ‘delivery services,’ which is “fees for delivery of items such as letters, documents, and packages at non-US Postal Services facilities.” Think UPS or FedEx. This is pretty far from a government monopoly, indeed it’s the private sector alternative to a government program. But it is services and it is labor intensive. The biggest thing, to me, isn’t “regulations” but whether it’s a service or a good. This is academically well known, check out The Missing Inflation Puzzle: The Role of the Wage-Price Pass-Through, which finds that the low inflation of pre-pandemic era “can be traced to a growing disconnect between unemployment and core goods inflation” and that “increased import competition and rising market concentration reduce pass-through from wages to prices” when it comes to goods.

Takeaways by Macro Roundup® AI

  1. In this version of the AEI 20-year inflation chart, the number one item is not health care but "delivery services" — fees for delivery of letters, documents, and packages at non-US Postal Service facilities such as UPS or FedEx.
  2. Delivery services are a labor-intensive private-sector alternative to a government program rather than a government monopoly, which supports the argument that whether an item is a service or a good matters more than regulation.
  3. "The Missing Inflation Puzzle: The Role of the Wage-Price Pass-Through" traces pre-pandemic low inflation to a growing disconnect between unemployment and core goods inflation, finding that increased import competition and rising market concentration reduce wage-to-price pass-through for goods.

AI Summary. US nuclear generation has been flat for decades as retirements of aging plants offset additions, with the only recent new capacity additions coming decades apart. New capacity of 2.2 GW at Georgia's Vogtle plant is expected to add roughly 17-18 TWh per year, pushing US nuclear output back toward, but not reaching, 800 TWh annually.

Gregor Macdonald The Gregor Letter
Date Posted:

Nuclear power generation capacity will increase in the US for the first time since 2016 as Georgia’s Vogtle plant comes online. @GregorMacdonald

Why has US nuclear generation stayed flat for decades?

Core argument: Georgia's Vogtle brings 2.2 GW of new nuclear capacity online in the US this year, producing about 17–18 TWh annually once output flows by summer, having achieved initial criticality.

Nuclear power generation in the United States will finally bump up a little this year, as 2.2 GW of new capacity comes online at Georgia’s Vogtle. The last new nuclear capacity to come online in the US was the second phase of Watts Bar, in 2016; and then twenty years prior with the first phase of Watts Bar, in 1996, and before then the second phase of Comanche Peak in 1993. The US has of course lost a great deal of nuclear capacity as plants like Pilgrim in Massachusetts and San Onofre in California simply got too old, and retired. Accordingly, US power generation from nuclear has been on a treadmill of no-growth for decades. To set the context, compare nuclear’s output since 2010 with combined wind and solar. Vogtle is currently ramping up, and achieved initial criticality earlier this month. By summer, output will be flowing and will produce about 17-18 new TWh per year. You can visit the interactive version of the above chart and roughly see that these new 17-18 TWh per year will likely push total US output back towards 800 TWh per year, without quite getting there.

Takeaways by Macro Roundup® AI

  1. Georgia's Vogtle brings 2.2 GW of new nuclear capacity online in the US this year, producing about 17–18 TWh annually once output flows by summer, having achieved initial criticality.
  2. The last new US nuclear capacity came online with Watts Bar's second phase in 2016, preceded by Watts Bar's first phase in 1996 and Comanche Peak's second phase in 1993.
  3. US nuclear generation has seen no growth for decades as aging plants such as Pilgrim in Massachusetts and San Onofre in California retired, with Vogtle's addition likely pushing total output back toward, without quite reaching, 800 TWh per year.

Tuesday, March 21, 2023

AI Summary. Every wave of technological innovation has been unleashed by something costly becoming cheap enough to waste, and large language models are collapsing the cost and complexity of producing software. The authors argue that decades of underproduced software have left society with immense technical debt that is poised to contract, releasing a wave of innovation.

Paul Kedrosky and Eric Norlin Irregular Ideas
Date Posted:

.@pkedrosky argues that AI like ChatGPT is going to bend the cost curve on software production allowing us to run off “immense, society-wide technical debt,” resulting in significant consumer surplus as better software diffuses through the economy.

Will collapsing software production costs unleash a wave of innovation?

Core argument: The authors argue every wave of technological innovation has been unleashed by something costly becoming cheap enough to waste, and ask what follows if the cost of software production falls to something like zero.

There is immense hyperbole about recent developments in artificial intelligence, especially Large Language Models like ChatGPT. Observers are missing two very important things. Every wave of technological innovation has been unleashed by something costly becoming cheap enough to waste. Software production has been too complex and expensive for too long, which has caused us to underproduce software for decades, resulting in immense, society-wide technical debt. This technical debt is about to contract in a dramatic, economy-wide fashion as the cost and complexity of software production collapses, releasing a wave of innovation What if the cost of software production is following similar curves, perhaps even steeper curves, and is on its way to falling to something like zero?

Takeaways by Macro Roundup® AI

  1. The authors argue every wave of technological innovation has been unleashed by something costly becoming cheap enough to waste, and ask what follows if the cost of software production falls to something like zero.
  2. Software production has been too complex and expensive for too long, in the authors' account, causing decades of underproduced software and immense, society-wide technical debt.
  3. The authors contend that as the cost and complexity of software production collapses, this technical debt will contract in a dramatic, economy-wide fashion, releasing a wave of innovation.

AI Summary. Widely cited financial conditions indexes from Goldman Sachs and Bloomberg showed relatively easy conditions followed by rapid tightening. Gavekal Research argues these gauges track financial-market risk appetite rather than whether real-economy conditions support credit growth, and its alternative measure—using money supply, the yield curve, bank health, investment returns and housing affordability—already indicated very tight money.

John Authers Bloomberg
Date Posted:
Is Database:
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.@johnauthers cites work by @willdenyer of Gavekal Research whose gauge of financial conditions suggests that financial conditions are now extremely tight.

Do popular financial conditions indexes measure risk appetite rather than credit conditions?

Core argument: The widely cited financial conditions indexes from Goldman Sachs and Bloomberg show conditions were relatively easy until recently and then tightened rapidly, with neither index reaching particularly extreme levels.

How exactly should financial conditions be measured? It proves to be a difficult issue. The most widely cited benchmarks incorporating a range of market indicators, produced by Goldman Sachs and by Bloomberg, both suggest that conditions were relatively easy until very recently, and then tightened rapidly. Neither is particularly extreme. But what exactly are we (and Goldman) measuring? Will Denyer of Gavekal Research suggests that these indexes are of limited use. Discussing the Bloomberg index, he said: “It comprises credit spreads in the money and bond markets, the S&P 500, and volatility measures including the VIX index. As a result, it is probably better thought of as an indicator of financial market risk appetite, rather than as a measure of whether or not conditions in the real economy are conducive to credit growth.” He offers his own gauge, which he dubs the “true financial conditions index,” an ambitious undertaking that incorporates money supply growth, the yield curve, metrics of vitality in the banking sector, the spread between the rate of return on corporate investments in real assets and the real cost of financing those investments, and measures of housing affordability (using real mortgage rates, deflated by inflation expectations). Put all of this together, and it looks like money was already very tight last week, ahead of the Credit Suisse weekend, when this chart was produced.

Takeaways by Macro Roundup® AI

  1. The widely cited financial conditions indexes from Goldman Sachs and Bloomberg show conditions were relatively easy until recently and then tightened rapidly, with neither index reaching particularly extreme levels.
  2. Will Denyer of Gavekal Research argues the Bloomberg index — built from money and bond market credit spreads, the S&P 500, and volatility measures including the VIX — is better understood as an indicator of financial market risk appetite than of real-economy credit conditions.
  3. Denyer's "true financial conditions index," incorporating money supply growth, the yield curve, banking sector vitality, the spread between returns on corporate real-asset investments and their real financing cost, and housing affordability, indicated money was already very tight ahead of the Credit Suisse weekend.

Since the March 2020 sellout, the average S&P 500 stock has outperformed the NYSE FANG+ index. “It is only now that investors have fully grasped that [FANGs] shouldn’t be valued as though the pandemic conditions would continue forever.”

“…This incident is very much about mega-cap tech and the premium it deserves over the rest of the market. Looking at the ratio between the S&P 500 Equal Weight Index, in which each stock has a 0.2% weighting regardless of its size, and the standard S&P 500 benchmark, illustrates just how much tech shares weigh down the index when the average stock isn’t doing so badly. The average stock has comfortably beaten the index so far this year. The average S&P 500 stock has now outperformed the NYSE FANG+ index since the nadir of the Covid-19 selloff in March 2020….”

John Authers, “Wile E. Coyote Moment as Tech Goes Off the Cliff,” Bloomberg, October 28, 2022, https://www.bloomberg.com/opinion/articles/2022-10-28/tech-s-fangs-plummet-in-wile-e-coyote-moment-on-earnings?sref=U3dOGIDF

Wile E. Coyote Moment as Tech Goes Off the Cliff

Crash Landing

There is no character in the entire canon of world literature and drama more useful for explaining markets than Wile E. Coyote. In the Roadrunner cartoons, he would run off the edge of a cliff, and continue running into midair. Only once he stopped, looked down, and realized that he was in midair, did he fall. He thus gave the market the invaluable concept of a Wile E. Coyote moment, when investors realize they’ve been running without support for a long time, and prices that should have long since been gradually coming down suddenly collapse.

The laws of physics make what the coyote does impossible. But markets are driven by human nature and crowd psychology. Coyotes can defy gravity for years in the markets — but generally there comes a point when the game is up. And this week has seen the FANGs (the acronym for the huge internet platform groups that originally stood for Facebook, Amazon, Netflix and Google when coined) respond to gravity at last.

Netflix had well-received results last week; but Microsoft Corp., Google-owner Alphabet Inc., Amazon.com Inc. and even Apple Inc. have all this week suffered sharp writedowns, while the treatment meted out to Meta Platforms Inc., the Facebook parent, has been savage. Since Tuesday evening when its results came out, Meta’s stock has been punished horribly for a disappointing revenue forecast, despite Mark Zuckerberg asking for patience given the social-media giant’s growing investments, particularly in the metaverse. The stock has plunged 25% Thursday and 70% year-to-date:

The fall from grace has been staggering. As of Thursday’s close, Meta has underperformed the benchmark S&P 500 since it went public, even excluding dividends. The following graph shows the performance of the social media giant, the benchmark index and the S&P 500 Total Return Index, which is calculated intraday by the S&P based on both price changes and reinvested dividends. For investors who thought they were betting on the next big thing, it won’t be surprising if they are starting to think twice.

Or let’s put that another way. After Thursday’s carnage, Meta trades at just over nine times trailing earnings (having traded as high as 37 times earnings little more than a year ago). The S&P 500 as a whole trades at 18. One of the most exciting growth stocks on the planet, with all its greatest days still ahead of it, is somehow now regarded as so weak that it should only trade at half the market multiple. That kind of judgment is a recognition that Meta should never have been valued so richly in the first place.

Another important way to illustrate the scale of what’s going on involves comparing market capitalizations. The market value of Meta has slipped by $676 billion this year, pushing it out of the world’s top 20 largest companies. At one point it was the fifth-largest in the US, valued at more than $1 trillion, and almost three times the size of the biggest US bricks-and-mortar retailer, Walmart Inc. Now, for the first time since 2015, Meta is smaller than Walmart:

Naturally Meta’s numbers and predictions were disappointing, but its greatest problem was a sudden return by investors to the basics of cash flow and balance sheet analysis. The decline in Meta’s free cash flow drew an apology even from previously ardent backer Jim Cramer on CNBC. And Neil Campling of Mirabaud Equity Research made this telling observation: “For every $1 Apple spends on operating costs, it generates $6.80 in revenue. For every $1 Meta spends on operating costs, it generates $1.17 in revenue.”

This is all a tad reminiscent of the period of a few weeks in early 2000 when dot-com investors suddenly moved from metrics like “clicks per eyeball” to “burn rate” — an old metric with a new name, referring to how quickly startup companies were burning through their cash flow. Meta has become a vastly more substantial and tangible concern than the entities that evaporated 22 years ago, but the sudden and swift realization that it had been valued far too generously still rings those bells.

The FANGs’ crisis of confidence is all the more interesting because it comes just as bond yields are falling and optimism is growing that central banks will soon relent (of which more below). In fact, the pessimism from Meta, given the company’s sheer size, even overshadowed the positive gross domestic product data Thursday, according to Nicole Webb, SVP and financial adviser at Wealth Enhancement Group. The stock’s slide has had “such a global impact” that it may prompt a broader market recalibration: “I appreciate seeing a slowdown in the mega-cap tech companies. I have always had this thesis that trades don’t grow from the sky. And I think Silicon Valley is showing a bit of its age in that they really ever had to be thoughtful about hiring, layoffs and restructuring.”

She may be right. This incident is very much about mega-cap tech, and the premium it deserves over the rest of the market. Looking at the ratio between the S&P 500 Equal Weight Index, in which each stock has a 0.2% weighting regardless of its size, and the standard S&P 500 benchmark, illustrates just how much tech shares weigh down the index when the average stock isn’t doing so badly. The average stock has comfortably beaten the index so far this year:

Perhaps even more impressively, the average S&P 500 stock has now outperformed the NYSE FANG+ index since the nadir of the Covid-19 selloff in March 2020. For more than a year, investors worked on the assumption that these companies would benefit from the pandemic, which they unquestionably did — but it is only now that investors have fully grasped that they shouldn’t be valued as though the pandemic conditions would continue for ever:

Strategically, Webb suggests that the selloff could offer a good point to enter tech again, although tactically it appears to be a good time to stay in the bricks-and-mortar stocks that are reviving at present. Today’s defensive trades are more about existing in a lower-growth environment for a time, which will create a more sustainable market “and gives us a launching pad to the next wave of growth.”

For Anthony Saglimbene, chief market strategist at Ameriprise Financial, what’s happening is simply the divergence between the old economy and the new economy.

Old economy stocks, he said, comprise those that are value-based, which typically perform better due to their stable earning streams. This is where investors are gravitating now, especially since they are less sensitive to rate increases. The new economy, on the other hand, include high-growth tech names that are prone to fears of rising interest rates, since many of them are valued based on their projected profits far into the future. And as the Fed forges on with its most aggressive tightening monetary policy in decades, the future profits of tech firms will be worth far less.

Unfortunately for the tech sector, the bad news continued at the end of the day, when it was the turn of Amazon.com Inc. to feel the market’s wrath in after-hours trading. Its third-quarter earnings were above prior expectations, but a particularly sanguine warning that the coming holiday season isn’t going to be a good one for sales prompted investor flight. The stock plummeted 20% at one point in extended trading.

The numbers involved are vast. The price at which Amazon’s shares came to rest implied a fall of $159 billion in market cap. This would leave it in the club of trillion-dollar companies, but only just, at $1.02 trillion. This seems like quite a reckoning, as the tech companies fall coyote-like toward the canyon floor. But to Saglimbene, who is overweight tech, the headwinds are only temporary until interest rates find their equilibrium.

For now, other parts of the market are enjoying a boost — companies that warmly fill tummies, bring us to exciting places, and entertain us with endless movies. To Webb, it’s simply a matter of everyone getting their time, as companies that were hurt by the pandemic return to normal: “McDonalds is such a great story in the psyche of the consumer as is Chipotle as is Boeing… When you think about the world today, kids are back in school so it’s not surprising Netflix has new subscribers again. Well now we are back to the school year, winter is coming. Everyone is back to normal activity. Return to normalcy will prevail the trade.”

More telling still was the judgment of Louis Navellier, a veteran growth investor who has cheered fast-growing tech stocks in the past, and has made a fortune by looking at growth prospects rather than valuations. He pointed out that Meta’s spending on the metaverse would likely have a long payback, and that the Dow Jones Industrial Average was still up for the day thanks to strong numbers from McDonald’s Corp. and a range of other old-world names that earn their money from making things and selling them to people, including Honeywell International Inc., Caterpillar Inc., Boeing Co. and Merck & Co. Inc. Amid the bloodbath for tech companies, McDonald’s shares have somehow managed to rise slightly for the year so far.

Navellier suggests that assumptions about tech that have survived for the best part of a quarter century are at last being revised: “Consider that both Microsoft and ExxonMobil are currently generating roughly the same amount of free cash flow yet Exxon has a market value of only 25% of Microsoft. If the economy continues to slow as the Fed intends, the leadership that tech has enjoyed for many years may be brought back down to earth by valuation adjustments.”

And as the Wile E. Coyote moment demonstrates, now that those valuations are at last being examined critically, not even the prospect of lower interest rates can keep the FANGs levitating.

Cruise Path to a Soft Landing (???)

While the FANGs made a crash landing, the top-down macro world is providing much news that investors had been hoping to hear. The European Central Bank met and hiked rates by 75 basis points as expected, but President Christine Lagarde signaled very clearly in her press conference (which you can see here) that we should expect the rate of increases to slow down from now on. Previously, the ECB had alerted that it expected to raise rates at “the next several meetings.” Now, under questioning, Lagarde was much more hedged: “Our sense is that we have already made significant progress, as I said. We are not done yet. There is more ground to cover, and the question of what that pace will be — what will be the magnitude of future rates — will be determined meeting by meeting and will be data dependent.”

That had an immediate impact on the implicit path of interest rates projected by the overnight index swaps market. Expectations had risen sharply over the summer, but Lagarde’s words helped cut projected rates for next year by 25 basis points:

This isn’t a “pivot” toward lower rates. Lagarde said inflation was “far too high, and will stay high for a while,” and predicted an economic slowdown, but it’s plainly a deceleration and it makes it that much easier for the Federal Reserve also to start paving the way to slow its pace during next week’s meeting. It also weakened the euro, which had just exceeded parity to the dollar for the first time in a month.

Shortly after, US GDP numbers for the third quarter were released, and were almost perfectly “Goldilocks” (not too hot, not too cold) as far as the market is concerned. GDP is growing, but consumption is slowing, a combination that should allow some kind of “soft landing.” Bond yields did reduce, with the 10-year Treasury yield dropping below 4% for the first time in two weeks, but not in a way that saved the stock market from a tough day.

One reason for this is that the third quarter’s GDP number of 2.6% is already well in the past. Friday’s release of Personal Consumption Expenditure inflation data, the Fed’s favorite measure and within days of a monetary policy decision, promises to be far more important. Expectations for PCE are widely dispersed, but everyone thinks that they will show a rise. If the number comes in at the bottom of the range of expectations, that could have a much powerful effect on bond yields:

Friday also brings the employment cost index, which comes out only quarterly and is closely monitored by the Fed for any sign of an incipient wage-price spiral. That could have a major impact on the central bank’s flight path from here. Tom Hainlin, national investment strategist at US Bank Wealth Management, said by phone: “Is it a shallow glide lower? Is it a big stair step lower in terms of the outlook for 2023? That’s still unknown. GDP was backward looking. It’s not really going to be a key driver of the market. That employment cost number is going to be a key driver.”

As the FANGs continue their crash landing, there are still hopes of a soft landing for the bond market. That could yet translate into one for the stock market as well, as some ludicrous valuations are corrected, and capital diverts to some places that have been starved of it but could use it. The readjustment from the pandemic seems to be over — but bonds and tech stocks are reassessing assumptions that have stood for a couple of decades or more. This is tricky to engineer. The path to a safe landing might exist, but it’s a perilous one.

AI Summary. Banks raised holdings of Treasury securities and federally backed mortgage securities to 20% of total assets from 12%, while the uninsured share of domestic deposits rose to 45% from 38%. Silicon Valley Bank and Signature Bank were outliers, with uninsured deposits at 94% and 90% respectively, according to S&P Global Market Intelligence.

Greg Ip Wall Street Journal
Date Posted:

.@greg_ip notes that between 2007 and 2022 the share of Treasurys as a percentage of banks total assets went from 12% to 20% over the same period the uninsured share of domestic deposits rose from 28% to 45%.

Did banks' shift toward government securities and uninsured deposits create vulnerability?

Core argument: Banks raised holdings of Treasurys and federally backed mortgage securities to 20% of total assets in 2022 from 12% in 2007.

Between 2007 and 2022, banks boosted their holdings of Treasurys and federally backed mortgage securities to 20% from 12% of total assets, while the uninsured share of domestic deposits rose to 45% from 38%. SVB and Signature Bank went to extremes, with uninsured deposits at 94% and 90%, respectively, according to S&P Global Market Intelligence.

Takeaways by Macro Roundup® AI

  1. Banks raised holdings of Treasurys and federally backed mortgage securities to 20% of total assets in 2022 from 12% in 2007.
  2. The uninsured share of domestic bank deposits rose to 45% from 38% between 2007 and 2022.
  3. SVB and Signature Bank held uninsured deposits of 94% and 90%, respectively, according to S&P Global Market Intelligence.

AI Summary. Banks are asked to be both safe places for the public's money and profit-seeking risk-takers, a combination that produces costly instability, and post-crisis reforms have neither made the system crisis-proof nor created a smooth way to resolve a failing bank. Federal Reserve data show US commercial banks holding about $2,137bn of equity against roughly $22,800bn of assets.

Martin Wolf Financial Times
Date Posted:

Chart from @martinwolf_ shows in nominal terms bank failures in 2023 at $330b are on par with 2008’s $374b if you net out Bear Stearns and Lehman’s assets.

Are banks inherently unstable because they mix public safekeeping with risk-taking?

Core argument: According to the Federal Reserve, US commercial banks on March 8 2023 held $2,137bn of equity — the difference between the book value of assets and debt liabilities — backing assets notionally worth $22,800bn.

Banks are designed to fail. And so they do. Governments want them to be both safe places for the public to keep their money and profit-seeking takers of risk. They are at one and the same time regulated utilities and risk-taking enterprises. The result is costly instability. Yes, leverage of banking systems has fallen since the crisis. But it remains dangerously high. According to the Federal Reserve, on March 8 2023, the difference between the book value of the assets and debt liabilities of US commercial banks was $2,137bn. This slice of equity backed assets that were notionally worth $22,800bn. At this stage, it is still not clear how bad this crisis is going to be. But it is already evident that the reforms after the last one, though vastly better than nothing, were not enough. They have not guaranteed a crisis-proof system. They have not provided a smooth way to resolve a bank in crisis, especially if the latter risks becoming systemic.

Takeaways by Macro Roundup® AI

  1. According to the Federal Reserve, US commercial banks on March 8 2023 held $2,137bn of equity — the difference between the book value of assets and debt liabilities — backing assets notionally worth $22,800bn.
  2. Banks are designed to fail because governments want them to be both safe places for the public's money and profit-seeking takers of risk, making them at once regulated utilities and risk-taking enterprises, with costly instability the result.
  3. Post-crisis reforms, though vastly better than nothing, have neither guaranteed a crisis-proof system nor provided a smooth way to resolve a bank in crisis, especially one risking becoming systemic, and banking system leverage remains dangerously high despite falling.

AI Summary. Welfare enrollment continued growing even as unemployment fell from a 14.7% peak to 3.7%, with food-stamp recipients up 1.4m and Medicaid recipients up 18.5m. One major reason is that eligibility rules excluded over $1tn in pandemic stimulus checks, expanded child tax credits, and enhanced unemployment benefits from counting as income.

Matt Weidinger Wall Street Journal
Date Posted:

Matt Weidinger @AEIecon highlights how continued extension of Covid-era emergency declarations, and not counting pandemic payments against means tests, allowed the Biden administration to expand welfare rolls despite very tight labor markets.

Matt Weidinger @AEIecon highlights how continued extension of Covid-era emergency declarations, and not counting pandemic...

Why did welfare enrollment keep rising as unemployment fell to historic lows?

Core argument: Medicaid enrollment rose by 18.5 million and food-stamp recipients by 1.4 million between April 2020 and October 2022, even as the U.S. unemployment rate fell from a 14.7% peak to 3.7%.

Welfare rolls are supposed to grow in bad times and shrink when jobs and incomes recover. Instead, they’ve recently continued growing even as unemployment plunged to historic lows. One major reason is that welfare programs didn’t count as “income” more than $1 trillion in stimulus checks and other pandemic benefits. That allowed people who weren’t poor and wouldn’t normally qualify to end up on welfare. That includes three rounds of stimulus checks ($869 billion), expanded child-tax-credit checks ($110 billion), and unprecedented expansions in unemployment checks ($449 billion). The federal government turned a blind eye to all $1.4 trillion in determining eligibility for Medicaid and to more than $1 trillion of it in calculating eligibility for food stamps. The nationwide unemployment rate peaked at 14.7% in April 2020 and had fallen to 3.7% by October 2022 (the most recent month for which benefit data are available). During the same period, the number of food-stamp recipients rose by 1.4 million and the number of Medicaid recipients by 18.5 million.

Takeaways by Macro Roundup® AI

  1. Medicaid enrollment rose by 18.5 million and food-stamp recipients by 1.4 million between April 2020 and October 2022, even as the U.S. unemployment rate fell from a 14.7% peak to 3.7%.
  2. Welfare programs excluded more than $1 trillion in pandemic stimulus and benefits from counted "income," which the author argues allowed people who weren't poor and wouldn't normally qualify to enroll.
  3. The pandemic payments included $869 billion in three rounds of stimulus checks, $449 billion in expanded unemployment checks and $110 billion in expanded child-tax-credit checks, with all $1.4 trillion disregarded in determining Medicaid eligibility.

AI Summary. Since the Glen Canyon Dam on the Colorado River began blocking sediment, Lake Powell has accumulated silt enough to bury Manhattan 126 feet deep, averaging the equivalent of 61 large barge-loads of sand and mud daily. With Powell 23% full and Lake Mead 28%, the author argues Powell should be abandoned.

Dale Maharidge New York Times
Date Posted:

.@DaleMaharidge reports on silt that has been settling in Lake Powell. He argues that Lake Powell should be returned to its natural state and the water stored in Lake Mead.

Should a silt-filled reservoir be abandoned and its water stored downstream?

Core argument: Sediment equivalent to 61 supersize Mississippi River barge-loads of sand and mud has been deposited in Lake Powell each day on average for the past 60 years, enough to bury the length of Manhattan 126 feet deep.

In 1963, humans stopped time, when the brand new Glen Canyon Dam on the Utah-Arizona border cut off the reddish sediment that naturally eroded the Grand Canyon. Today the river runs vodka clear from the base of the dam. But the silt never ceased arriving in Lake Powell, the reservoir above the dam. Each day on average for the past 60 years, the equivalent of 61 supersize Mississippi River barge-loads of sand and mud have been deposited there. The total accumulation would bury the length of Manhattan to a depth of 126 feet — close to the height of a 12-story building. With Lake Powell just 23 percent full, and Lake Mead, outside of Las Vegas, at 28 percent capacity, it’s time to stop trying to “save” Lake Powell. It should be abandoned and its water stored in Lake Mead.

Takeaways by Macro Roundup® AI

  1. Sediment equivalent to 61 supersize Mississippi River barge-loads of sand and mud has been deposited in Lake Powell each day on average for the past 60 years, enough to bury the length of Manhattan 126 feet deep.
  2. Lake Powell stands at 23 percent full and Lake Mead outside Las Vegas at 28 percent of capacity, which the author argues warrants abandoning Lake Powell and storing its water in Lake Mead.
  3. The Glen Canyon Dam on the Utah-Arizona border cut off in 1963 the reddish sediment that naturally eroded the Grand Canyon, leaving the river running clear from the base of the dam.