Edward Conard

Top Ten New York Times Bestselling Author

  • “…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 fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “Unintended Consequences is far smarter and more thought-provoking than most economics written for the general public” - Greg Mankiw, Harvard University, Former Chairman of the Council of Economic Advisors
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “A full-throated defense of economic dynamism.” - The Wall Street Journal
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Monday, April 24, 2023

AI Summary. The dollar's share of international reserves stands at 59%, down from just above 70% in 1999 but higher than in 1995 by one analysis. China's renminbi remains a small share of reserves because of its capital controls, and Europe's participation in financial sanctions on Russia weakens the argument that US sanctions use is eroding dollar dominance.

Niall Ferguson Bloomberg
Date Posted:

.@nfergus argues that the dollar will not be replaced as the global reserve currency anytime soon, citing @Brad_Setser data that shows the dollar share of international reserves is higher today than in 1995.

Is the dollar losing its dominance as a reserve currency?

Core argument: The dollar's share of international reserves, conventionally measured, has fallen from just above 70% in 1999 to 59%, but Brad Setser of the Council on Foreign Relations notes that extending the series back to 1995 shows the dollar share is higher today than then.

It’s true that, conventionally measured, the dollar now accounts for a smaller share of international reserves than it did in 1999 — down from just above 70% then to 59%. However, as Brad Setser of the Council on Foreign Relations has pointed out, if you take the X-axis back to 1995, you can see that the dollar share of international reserves is higher today than it was back then. The fact that the euro area countries joined the US in imposing financial sanctions on Russia greatly weakens the argument that it is American overuse of sanctions that is undermining dollar dominance. It is not hard to explain why the Chinese renminbi remains such a small share of international reserves: “capital controls” are the only two words you need to say to end the discussion. Former Treasury Secretary Larry Summers had a good line about all this back in 2019. “You cannot replace something with nothing,” he said. What other currency is preferable to the dollar as a reserve and trade currency “when Europe’s a museum, Japan’s a nursing home, China’s a jail, and Bitcoin’s an experiment?”

Takeaways by Macro Roundup® AI

  1. The dollar's share of international reserves, conventionally measured, has fallen from just above 70% in 1999 to 59%, but Brad Setser of the Council on Foreign Relations notes that extending the series back to 1995 shows the dollar share is higher today than then.
  2. Euro area countries joined the US in imposing financial sanctions on Russia, which greatly weakens the argument that American overuse of sanctions is undermining dollar dominance.
  3. Capital controls explain why the Chinese renminbi remains a small share of international reserves, and former Treasury Secretary Larry Summers argued in 2019 that "you cannot replace something with nothing," calling Europe a museum, Japan a nursing home, China a jail, and Bitcoin an experiment.

AI Summary. College-educated voters are now more likely to identify as Democrats while those without degrees back Republicans, with educational attainment increasingly correlated with views on abortion, LGBTQ+ rights, and religion's relationship to government. This sorting leaves most states politically uncompetitive, with eight states near the national average in education levels holding 97 electoral votes in play.

Doug Sosnik Brunswick Group
Date Posted:

Doug Sosnik documents that voting behavior has polarized around educational attainment resulting in a new political geography of eight battleground states which have educational levels near the national average.

How is education sorting voters and shrinking the electoral battleground?

Core argument: Democrats are projected to enter the 2024 general election with 222 electoral votes versus 219 for Republicans, leaving eight states and 97 electoral votes — Arizona, Georgia, Michigan, New Hampshire, North Carolina, Nevada, Pennsylvania, and Wisconsin — undecided.

In a sharp contrast to a previous era, college educated voters are now more likely to identify as Democrats, and those without college degrees - particularly white voters, but increasingly all Americans – support Republicans. Culturally, a person’s educational attainment increasingly correlates with their views on a wide range of issues, including abortion, attitudes about LGBTQ+ rights, and the relationship between government and organized religion. This educational sorting has made the vast majority of states no longer politically competitive. It is the battleground states in the middle - where education levels are neither disproportionately high nor low - that will decide the 2024 presidential election. Democrats will likely enter the General Election with 222 electoral votes, compared to 219 for Republicans. That leaves only eight states, with 97 electoral votes – Arizona, Georgia, Michigan, New Hampshire, North Carolina, Nevada, Pennsylvania, and Wisconsin – up for grabs. The education levels in these states are at or near the national average - Pennsylvania (23rd), Georgia (24th), North Carolina (25th), Wisconsin (26th), Arizona (30th), and Michigan (32nd) - not disproportionately highly educated nor toward the bottom.

Takeaways by Macro Roundup® AI

  1. Democrats are projected to enter the 2024 general election with 222 electoral votes versus 219 for Republicans, leaving eight states and 97 electoral votes — Arizona, Georgia, Michigan, New Hampshire, North Carolina, Nevada, Pennsylvania, and Wisconsin — undecided.
  2. College-educated voters now lean Democratic while voters without degrees, particularly white voters and increasingly all Americans, back Republicans, a sharp contrast to a previous era.
  3. Educational attainment increasingly correlates with views on abortion, LGBTQ+ rights, and the relationship between government and organized religion, a sorting that has left the vast majority of states no longer politically competitive.

AI Summary. Millennials as a group are not broke: Federal Reserve Bank of St. Louis analysis found families headed by people born in the 1980s had median wealth 34% below expectations based on earlier generations using 2016 data, narrowing to 11% with 2019 data, with gaps larger for those without college degrees and Black Millennials.

Jean Twenge The Atlantic
Date Posted:

Millennial wealth is now keeping pace with prior generations at this point in their life cycles. @jean_twenge

Have Millennials closed the wealth gap with earlier generations?

Core argument: The St. Louis Fed found that median wealth of families headed by people born in the 1980s was 34 percent below what prior generations held at the same age, using data through 2016, and theorized Millennials might be a "lost generation" for wealth.

Millennials, as a group, are not broke—they are, in fact, thriving economically. That wasn’t true a decade ago, and prosperity within the generation today is not evenly shared. But since the mid-2010s, Millennials on the whole have made a breathtaking financial comeback. The Federal Reserve Bank of St. Louis made big headlines in 2018 when it announced that among families headed by people born in the 1980s (older Millennials), median wealth was 34 percent lower than what you’d expect based on the wealth of previous generations at the same age. The report, which analyzed data through 2016, theorized that Millennials might be a “lost generation” when it came to wealth. But when the St. Louis Fed updated its analysis of Millennial wealth a few years later, using 2019 data, it found significant progress. By then, older Millennials lagged only 11 percent behind previous generations at the same age. That progress was uneven: The gap was larger for Millennials without a college degree (19 percent) and even more so for Black Millennials (50 percent). Younger Millennials (born in the ’90s and still in their mid-20s at the time) also faced a bigger gap. Still, since 2019, both housing and the stock market have increased in value, last year’s swoon notwithstanding. Recent analysis by the Fed, including data through the middle of 2022, has shown average Millennial wealth to be neck and neck with the wealth of Gen X at the same age.

Takeaways by Macro Roundup® AI

  1. The St. Louis Fed found that median wealth of families headed by people born in the 1980s was 34 percent below what prior generations held at the same age, using data through 2016, and theorized Millennials might be a "lost generation" for wealth.
  2. Federal Reserve analysis including data through mid-2022 shows average Millennial wealth neck and neck with Gen X wealth at the same age, after housing and stock values rose since 2019.
  3. The St. Louis Fed's update using 2019 data put older Millennials 11 percent behind prior generations, with wider gaps for those without a college degree (19 percent) and for Black Millennials (50 percent).

AI Summary. Private fusion companies have raised more than $5bn, with seven firms raising at least $200m each, and roughly 75% of that fundraising occurring since 2021. Improvements in large-scale machine learning have sped up experiments and helped several companies reach or approach the extreme temperatures and pressures fusion reactions require.

Emily Anthes Wall Street Journal
Date Posted:

There has been at least $5 billion in private investment into fusion with 75% of the funding taking place since 2021. Seven firms have raised at least $200M. @WSJ

There has been at least $5 billion in private investment into fusion with 75% of the funding taking place since 2021. Seven...

Is private investment in fusion energy accelerating?

Core argument: The Washington, D.C.-based Fusion Industry Association has tracked more than $5 billion in private fusion funding, with seven firms raising at least $200 million each, and PitchBook data show roughly 75% of fusion fundraising has occurred since 2021.

The Fusion Industry Association, based in Washington, D.C., has tracked more than $5 billion in private funding, with seven firms raising at least $200 million. Around 75% of fusion fundraising has happened since 2021, according to PitchBook. “There’s a reasonable probability at least one, maybe two companies will demonstrate fusion conditions in this decade,” said Ernest Moniz, who is the chief executive of the nonprofit research group Energy Futures Initiative and a former U.S. Energy Secretary. Mr. Moniz, a physicist, said that improvements in large-scale machine learning have sped experiments and helped several companies achieve or approach the extreme temperatures and pressures needed for fusion reactions.

Takeaways by Macro Roundup® AI

  1. The Washington, D.C.-based Fusion Industry Association has tracked more than $5 billion in private fusion funding, with seven firms raising at least $200 million each, and PitchBook data show roughly 75% of fusion fundraising has occurred since 2021.
  2. Ernest Moniz, chief executive of the nonprofit Energy Futures Initiative and a former U.S. Energy Secretary, said there is a reasonable probability that at least one, and maybe two, companies will demonstrate fusion conditions this decade.
  3. Moniz, a physicist, said improvements in large-scale machine learning have sped experiments and helped several companies achieve or approach the extreme temperatures and pressures fusion reactions require.

AI Summary. The U.S. Centers for Disease Control and Prevention reported that an H5N1 bird flu sample from a hospitalized Chilean man carried two mutations shown in animal studies to help the virus replicate in mammalian cells. Officials said public risk remains low and the sample lacked other changes needed for efficient human-to-human spread.

Emily Anthes New York Times
Date Posted:

There is evidence that the ongoing avian influenza pandemic shows signs of adaptation to mammals according to the @CDCgov. @NYTScience

There is evidence that the ongoing avian influenza pandemic shows signs of adaptation to mammals according to the @CDCgov....

Does a bird flu sample showing mammalian mutations raise human risk?

Core argument: A sample of H5N1 avian influenza from a hospitalized Chilean man contains two mutations in the PB2 gene that experimental animal studies have shown help the virus replicate better in mammalian cells, CDC officials said.

A sample of avian influenza isolated from a Chilean man who fell ill last month contains two genetic mutations that are signs of adaptation to mammals, officials from the Centers for Disease Control and Prevention said. In experimental animal studies, the mutations, both of which are in what is known as the PB2 gene, have previously been shown to help the virus replicate better in mammalian cells. The risk to the public remains low, health officials said, and no additional human cases have been linked to the Chilean man, who remains hospitalized. Moreover, the sample was missing other critical genetic changes that scientists believe would be necessary for the virus, known as H5N1, to spread efficiently among humans, including mutations that would stabilize the virus and help it bind more tightly to human cells

Takeaways by Macro Roundup® AI

  1. A sample of H5N1 avian influenza from a hospitalized Chilean man contains two mutations in the PB2 gene that experimental animal studies have shown help the virus replicate better in mammalian cells, CDC officials said.
  2. The Chilean sample lacked other genetic changes scientists believe necessary for efficient spread among humans, including mutations that would stabilize the virus and help it bind more tightly to human cells.
  3. Health officials said the risk to the public remains low, and no additional human cases have been linked to the Chilean man.

AI Summary. About $1tn in US federal tax incentives and loans for green energy is drawing a flood of corporate investment into rural counties and reshaping local economies. Estimates of the total private and public spending driven over the next decade range from several hundred billion dollars to roughly $3tn.

Phred Dvorak and Amrith Ramkumar Wall Street Journal
Date Posted:

Spending from the Inflation Reduction Act is flowing into rural America in a way that could reshape local economies. @WSJ

Are federal green energy incentives reshaping rural local economies?

Core argument: Federal green-energy tax incentives and loans totaling $1 trillion are drawing a flood of corporate investment, one of the biggest taxpayer-financed industrial stimulus outlays since Franklin D. Roosevelt's New Deal.

Colleton County in South Carolina is a quiet rural district best known for its hunting, fishing and, recently, a sensational murder trial. Now it is also a player in America’s new gold rush: a scramble for $1 trillion in federal tax incentives and loans for green energy that is fueling a flood of corporate investments and reshaping local economies. The spending is one of the biggest outlays of taxpayer-financed industrial stimulus since Franklin D. Roosevelt’s New Deal. If successful, it could transform the nation’s economy by creating millions of jobs and driving up to $3 trillion in total clean-energy investments during the next decade. Estimates of the total private-sector and public spending over the next decade driven by the Inflation Reduction Act alone range from several hundred billion to about $3 trillion.

Takeaways by Macro Roundup® AI

  1. Federal green-energy tax incentives and loans totaling $1 trillion are drawing a flood of corporate investment, one of the biggest taxpayer-financed industrial stimulus outlays since Franklin D. Roosevelt's New Deal.
  2. Estimates of total private-sector and public spending over the next decade driven by the Inflation Reduction Act alone range from several hundred billion dollars to about $3 trillion.
  3. Colleton County, South Carolina, a rural district known for hunting, fishing and a sensational murder trial, has become a participant in the scramble for federal clean-energy incentives that is reshaping local economies.

AI Summary. Youth unemployment in China among those aged 16 to 24 has reached 19.6%, remaining above 16% for a year, while the broader jobless rate has hovered around 5%. With a record 11.6mn college graduates entering a tight labour market, Beijing is urging graduates to lower their ambitions and take up manual work.

Sun Yu Financial Times
Date Posted:

State media in the PRC is increasingly urging college educated workers to seek employment in blue collar fields as youth unemployment nears 20%, the second highest level on record. @FT

Is China responding to record graduate unemployment by urging manual labor?

Core argument: China's youth unemployment rate for ages 16–24 hit 19.6% in March, the second-highest level on record, and has exceeded 16% for a full year, while the broader jobless rate has hovered at about 5%.

Unemployment in March among those aged 16 to 24 reached 19.6 per cent — the second-highest level on record — and has now stood above 16 per cent for a full year. By contrast, the country’s broader jobless rate has hovered at about 5 per cent. A record 11.6mn college graduates are expected to enter the already tight labour market this year. A survey last November of 100 China-based employers by 51job, a job listings website, found that more than half of respondents planned to reduce hiring in 2023. As appealing job opportunities dry up, Beijing has begun asking graduates to lower their ambitions and take up the kind of modest manual labour that drove China’s dramatic economic rise.

Takeaways by Macro Roundup® AI

  1. China's youth unemployment rate for ages 16–24 hit 19.6% in March, the second-highest level on record, and has exceeded 16% for a full year, while the broader jobless rate has hovered at about 5%.
  2. A record 11.6mn Chinese college graduates are expected to enter the labour market this year, and more than half of 100 China-based employers surveyed by job listings website 51job in November planned to reduce hiring in 2023.
  3. Beijing has begun asking graduates to lower their ambitions and take up the kind of modest manual labour that drove China's economic rise as appealing job opportunities dry up.

AI Summary. Weapons makers face a shortage of skilled workers needed to fulfill an influx of orders driven by higher arms demand, with US shipbuilding among the sectors hardest hit by pandemic-era retirements. General Dynamics, a large US Navy shipbuilder, hired 24,000 staff in a year but raised net head count only 3,400, to 106,500.

Alistair MacDonald and Doug Cameron Wall Street Journal
Date Posted:

Arms manufacturers in both Europe and the United States are facing labor constraints. American manufacturers are increasingly working with apprentice schools and community colleges to train workers given a dearth of skilled workers. @WSJ

Are labor shortages limiting weapons makers' ability to meet rising arms demand?

Core argument: General Dynamics hired 24,000 staff last year, but attrition and retirements left its net head count up only 3,400, at 106,500, as weapons makers work to staff up for orders driven by Russia's invasion of Ukraine.

Russia’s invasion of Ukraine has turbocharged demand for weapons. Now arms makers face the challenge of hiring thousands of skilled workers to capitalize on an influx of orders. In the U.S., shipbuilding was one of the sectors hit hardest by pandemic retirements. General Dynamics Corp., a large U.S. Navy shipbuilder, hired 24,000 staff last year, yet attrition and retirements left its net head count up only 3,400 at 106,500. Chris Kastner, chief executive of Huntington Ingalls Industries Inc., which also makes Navy ships and submarines, said the company is focusing on recruiting from apprentice schools and community colleges rather than advertising jobs more widely.

Takeaways by Macro Roundup® AI

  1. General Dynamics hired 24,000 staff last year, but attrition and retirements left its net head count up only 3,400, at 106,500, as weapons makers work to staff up for orders driven by Russia's invasion of Ukraine.
  2. U.S. shipbuilding was among the sectors hit hardest by pandemic retirements, and arms makers need thousands of skilled workers to capitalize on an influx of orders.
  3. Huntington Ingalls Chief Executive Chris Kastner said the Navy ship and submarine maker is focusing recruiting on apprentice schools and community colleges rather than advertising jobs more widely.

AI Summary. Philippine and US forces have conducted their largest joint military exercise in more than 30 years, including air assault and amphibious landing drills on strategically located islands off northern Luzon for the first time. The allies are seeking to strengthen military ties in response to an increasingly assertive China.

Kathrin Hille Financial Times
Date Posted:

The United States and the Philippines undertook their largest joint exercises in 30 years in the northern Philippines over the weekend. @FT

Are the US and Philippines expanding joint drills against China?

Core argument: The annual Balikatan exercise, the largest joint US-Philippine drill in more than 30 years, for the first time included manoeuvres in the strategically located islands off northern Luzon as the allies strengthen military ties in the face of an increasingly assertive China.

This past weekend, Batan hosted exercises where Philippine and US troops defended against an aggressor, part of the allies’ largest joint drill in more than 30 years as they seek to strengthen military ties in the face of an increasingly assertive China. As part of the effort, hundreds of Marines and soldiers from the US and Philippines were airlifted on to a grassy plateau to practise securing the terrain against a potential invader. Below, a US Army amphibious landing craft surveyed the beach for suitability to unload Himars mobile rocket systems, which have played a forceful role in the war on Ukraine, to keep enemy ships at bay. It is the first time Balikatan, the annual US-Philippine exercise, includes manoeuvres in the strategically located islands off northern Luzon. Last Friday and Saturday, the two militaries staged similar air assault drills on the neighbouring islands of Fuga and Calayan.

Takeaways by Macro Roundup® AI

  1. The annual Balikatan exercise, the largest joint US-Philippine drill in more than 30 years, for the first time included manoeuvres in the strategically located islands off northern Luzon as the allies strengthen military ties in the face of an increasingly assertive China.
  2. On Batan, hundreds of US and Philippine Marines and soldiers were airlifted onto a grassy plateau to practise securing terrain against a potential invader, with similar air assault drills staged on the neighbouring islands of Fuga and Calayan.
  3. A US Army amphibious landing craft surveyed a Batan beach for suitability to unload Himars mobile rocket systems, which have played a forceful role in the war in Ukraine, to keep enemy ships at bay.

AI Summary. The equity risk premium for the S&P 500 — the gap between stocks' earnings yield and the 10-year Treasury yield — has fallen to 1.59 percentage points, its lowest since October 2007 and well below the 3.5-point average since 2008. That leaves the reward for holding stocks over bonds near its long-term average of 1.62 points since 1957.

Eric Wallerstein Wall Street Journal
Date Posted:
Is Database:
Database

@EricWallenstein The equity risk premium (ERP) for the S&P 500 has fallen to 1.59pp, its lowest since October 2007, below the average ERP of 3.5pp since 2008.

How narrow has the reward for holding stocks over bonds become?

Core argument: The S&P 500's equity risk premium — the gap between stocks' earnings yield and the 10-year Treasury yield — has fallen to 1.59 percentage points, its lowest since October 2007 and well below the 3.5-point average since 2008.

The equity risk premium (ERP) for the S&P 500, which measures the gap between the earnings yield of stocks and the yield of 10-year Treasurys, has fallen to 1.59pp, its lowest since October 2007. This is significantly below the average ERP of 3.5pp since 2008, indicating that the reward for holding stocks over bonds is at its slimmest since before the 2008 financial crisis. The current ERP is closer to the long-term average of 1.62pp since 1957, suggesting a return to historical norms. However, rising bond yields and a dimming corporate earnings outlook challenge equities' attractiveness. The Federal Reserve's efforts to manage inflation and prevent a banking crisis further cloud the stock market's prospects. Despite these challenges, some analysts argue that high nominal growth supported by inflation could sustain earnings, while others see opportunities in value stocks, which are relatively cheap compared to growth stocks amid current economic conditions.

Takeaways by Macro Roundup® AI

  1. The S&P 500's equity risk premium — the gap between stocks' earnings yield and the 10-year Treasury yield — has fallen to 1.59 percentage points, its lowest since October 2007 and well below the 3.5-point average since 2008.
  2. At 1.59 percentage points, the S&P 500's equity risk premium sits near its long-term average of 1.62 points since 1957, while rising bond yields and a dimming corporate earnings outlook weigh on equities' attractiveness.
  3. Some analysts argue high nominal growth supported by inflation could sustain earnings, while others point to value stocks as relatively cheap compared with growth stocks.

The S&P 500’s equity risk premium is currently at 1.59pp, its lowest level since October 2007. Since 2008 the mean ERP has been 3.5pp above its post 1957 mean of 1.62pp.

Stocks Havent Looked This Unattractive Since 2007: Extended Excerpt Image 1


“…The equity risk premium—the gap between the S&P 500’s earnings yield and that of 10-year Treasurys—sits around 1.59 percentage points, a low not seen since October 2007. That is well below the average gap of around 3.5 points since 2008. The current equity risk premium is closer to the longer-term norm. The average premium since 1957 is around 1.62 points, BlackRock research shows….”

Eric Wallerstein, "Stocks Haven’t Looked This Unattractive Since 2007,"Wall Street Journal, April 6, 2023, https://www.wsj.com/articles/stocks-havent-looked-this-unattractive-since-2007-78fc374c

Stocks Haven’t Looked This Unattractive Since 2007

The reward for owning stocks over bonds hasn’t been this slim since before the 2008 financial crisis.

The equity risk premium—the gap between the S&P 500’s earnings yield and that of 10-year Treasurys—sits around 1.59 percentage points, a low not seen since October 2007.

That is well below the average gap of around 3.5 points since 2008. The reduction is a challenge for stocks going forward. Equities need to promise a higher reward than bonds over the long term. Otherwise, the safety of Treasurys would outweigh the risks of stocks losing some, if not all, of investors’ money.

Stocks Havent Looked This Unattractive Since 2007: Extended Excerpt Image 2


The allure of stocks dimmed recently when bond yields shot higher and the corporate-earnings picture continued to darken. The Federal Reserve now faces the dual challenge of raising interest rates to cool inflation while reaching into its toolbox to prevent a full-blown banking crisis from erupting—both of which cloud the outlook for stocks.

The S&P 500 has clawed back some of last year’s 19% decline, rising 6.9% in 2023. The Bloomberg U.S. Aggregate Bond index has jumped 4.2%, boosted by an early-year rally and elevated yields.

The S&P 500 added 0.4% on Thursday after employment data pointed to the Fed gaining ground in its battle with the record-hot labor market. Bond yields edged higher.

Bonds are offering a “once in a generation opportunity, but not once in a lifetime,” said Tony DeSpirito, BlackRock Inc.’s chief investment officer of U.S. fundamental equities.

The current equity risk premium is closer to the longer-term norm: The average premium since 1957 is around 1.62 points, BlackRock research shows. That means stocks should still offer a better return than bonds given their historical outperformance, Mr. DeSpirito added.

The equity risk premium falls when bond yields rise, or a stock’s price/earnings ratio jumps—either due to weaker earnings or higher stock prices. The earnings yield, meanwhile, is the ratio of profits from the past year to current stock prices.

October 2007 would turn out to mark a precarious time in markets. Stocks had recently hit their highest level on record, and the federal-funds rate was near its current level at around 4.8%.

Over the following year, the S&P 500 would go on to drop roughly 45%, and the Fed would cut rates to near zero. Bloated stock valuations reset; bond yields cratered. By March 2009 when the stock market bottomed, stocks’ premium over Treasurys had risen above 7 points and a new bull market was born.

Stocks look pricey again today, and markets are facing a new host of challenges. By at least one valuation measure, U.S. equities are currently more expensive than those of any other country or region, Research Affiliates’ data show. That is based on the S&P 500’s price level relative to inflation-adjusted corporate earnings over the past 10 years, or the CAPE ratio. Although well off prior peaks seen in the late 1990s and 2021, the U.S. stock benchmark trades at a multiple around 29, pricier than it has been more than 90% of the time since 1881.

Stocks Havent Looked This Unattractive Since 2007: Extended Excerpt Image 3


Valuations have historically plummeted during economic recessions, though some analysts say lofty valuations won’t prevent stock prices from continuing to rise.

“We have seen the peak for stock-market valuations, but that doesn’t necessarily mean we’ve seen peak prices yet in this cycle,” said Jawad Mian, founder of macro-advisory firm Stray Reflections.

The economy is much more resilient to high interest rates than it has been in the past, said Mr. Mian. High nominal growth—boosted by inflation—will continue to support earnings more than Wall Street’s consensus currently sees, preventing a significant drop in stock prices, he said.

Analysts expect earnings among companies in the S&P 500 to edge up roughly 1.6% in 2023, according to FactSet. At the end of last year, they were calling for a 5% increase.

Since 1957, equities have beaten out fixed income more than two-thirds of the time when they were held for at least a year, BlackRock research shows. Stocks’ favorability improves as holding periods lengthen.

Focusing on stocks’ slim risk premium misses part of the picture, Mr. DeSpirito of BlackRock says. Fed intervention—suppressing short-term rates and buying up long-term bonds—created an abnormal risk-reward profile for stocks after the 2008 financial crisis. He encourages investors to seek stocks with resilient margins and strong earnings growth, while avoiding overvalued companies.

Some investors say frothy valuations mean value stocks—those trading at a discount to their book value, or net worth—warrant consideration.

Value stocks are “dirt cheap” relative to growth, now more discounted than they have been four-fifths of the time in U.S. stock-market history, according to Rob Arnott, founder and chairman of Research Affiliates.

Although value stocks trumped their growth-oriented peers during last year’s rout, growth stocks are back in the lead. The Russell 3000 Growth Index has jumped 13% in 2023, while the Russell 3000 Value Index has edged up 0.1%.

When inflation has run between 4% to 8% a year, value stocks have outperformed their growth peers by 6 to 8 percentage points annually, Mr. Arnott said. Consumer prices rose 6% in February from the year before, the smallest increase since September 2021.

“Inflation is wonderful for value,” he added.

AI Summary. The largest 20 stocks in the S&P 500 have gained $2tn in value while the remaining 480 stocks gained only $170bn combined, indicating a narrowly concentrated market rally rather than broad-based growth expectations.

Torsten Sløk Apollo
Date Posted:
Is Database:
Database

The largest 20 stocks in the S&P 500 have surged by $2tn in value since start of 2023, while the remaining 480 stocks have gained only $170bn.

Is the stock market rally concentrated in a few large companies?

Core argument: Since the start of 2023, the 20 largest S&P 500 stocks have gained $2tn in value while the other 480 stocks added just $170bn combined.

Since the start of 2023, the largest 20 stocks in the S&P 500 have surged by $2tn in value, while the remaining 480 stocks have collectively gained only $170bn. This disparity highlights a concentrated market rally, not reflective of broad-based growth expectations. The market's performance is largely influenced by interest rate dynamics, especially following the collapse of SVB [Silicon Valley Bank]. This trend suggests that investors are focusing on a narrow segment of the market, raising concerns about the sustainability and inclusivity of the current economic recovery. The concentration of gains in a few stocks underscores the importance of monitoring macroeconomic factors and interest rate changes for future market movements.

Takeaways by Macro Roundup® AI

  1. Since the start of 2023, the 20 largest S&P 500 stocks have gained $2tn in value while the other 480 stocks added just $170bn combined.
  2. The concentration of S&P 500 gains in a small number of stocks indicates the rally does not reflect broad-based growth expectations.
  3. S&P 500 performance has been driven largely by interest rate dynamics, particularly following the collapse of Silicon Valley Bank.

Torsten Slok @apolloglobal notes that the largest 20 stocks in the S&P 500 have gained $2T in value since the start of the year with the remaining 480 stocks gaining only $170B.

SP500 Driven by Just 20 Stocks: Extended Excerpt Image 1


“…The rally in the S&P500 since the beginning of the year has been driven by 20 stocks, the market cap of the remaining 480 stocks has basically not gone up, see chart below. The implication for investors is that this market is not driven by broad-based higher growth expectations but instead by what has happened with rates, in particular after SVB went under….”

Torsten Sløk, "S&P500 Driven by Just 20 Stocks,"Apollo, April 4, 2023, https://apolloacademy.com/sp500-driven-by-just-20-stocks/

S&P500 Driven by Just 20 Stocks

The rally in the S&P500 since the beginning of the year has been driven by 20 stocks, the market cap of the remaining 480 stocks has basically not gone up, see chart below.

The implication for investors is that this market is not driven by broad-based higher growth expectations but instead by what has happened with rates, in particular after SVB went under.

Tuesday, April 25, 2023

AI Summary. Data and commentary indicate the banking panic has ended and had only a limited effect on credit availability, with overall bank lending little changed and still growing, reflecting problems at a few poorly managed banks rather than a systemic crisis. Recognition that the banking sector is not collapsing has already prompted some repricing of expected interest rate cuts.

Joseph Wang Fed Guy Blog
Date Posted:

.@FedGuy12 writes that multiple indicators suggest that the banking sector is largely back to normal, and he cites evidence that loan growth was not meaningfully impacted by the March panic.

Has the banking panic ended with little impact on credit?

Core argument: Overall bank lending activity was little changed in March and continued to grow in April, indicating the banking panic had only a limited impact on credit availability.

A wide range of data and commentary indicate that both the banking panic is over and that it had only a limited impact on credit availability. The March panic was fundamentally a problem of a few poorly managed banks and not a crisis. Investors are no longer running to money funds and now appear comfortable again with the banking system. Overall bank lending activity was little changed in March and continues to grow in April. Out of an abundance of caution, the Fed scuttled a potentially higher rate path and the market priced in aggressive rate cuts in the second half of 2023. The realization that the banking sector is not collapsing has prompted some repricing, and the eventual realization that it is actually healthy may prompt a further repricing.

Takeaways by Macro Roundup® AI

  1. Overall bank lending activity was little changed in March and continued to grow in April, indicating the banking panic had only a limited impact on credit availability.
  2. The March banking panic stemmed from a few poorly managed banks rather than a systemic crisis, and investors are no longer running to money funds and appear comfortable again with the banking system.
  3. The Federal Reserve scuttled a potentially higher rate path out of an abundance of caution and markets priced in aggressive rate cuts for the second half of 2023, with the realization that banks are not collapsing prompting some repricing.

AI Summary. Goldman Sachs estimates that composition-adjusted real wages for the bottom 50% of earners were 6.2% above 2019 levels, implying roughly $150bn a year in added spending power, or $250bn including sources such as social security. Because lower-income consumers spend more of each extra dollar on goods, goods consumption should stay high.

Robert Armstrong and Ethan Wu Financial Times
Date Posted:

.@EthanYWu highlights a research note from GS’s Spencer Hill, which finds that real wage levels for bottom 50 percent earners were almost 10% higher than in 2017, supporting sustainably higher levels of consumer spending.

Are rising real wages for lower earners keeping goods spending high?

Core argument: Goldman Sachs' Spencer Hill estimates that, after adjusting for composition effects, real wage levels for the bottom 50 percent of earners were 6.2 percent higher in the first quarter of this year than in 2019 and 9.6 percent higher than in 2017.

In a note to clients published on Sunday, Spencer Hill of Goldman Sachs argues that something has changed. “Sustainably stronger consumer finances” have created fresh spending power for people at the bottom of the income distribution. After adjusting for composition effects, Hill estimates that real wage levels for the bottom 50 percent of earners were 6.2 percent higher in the first quarter of this year than in 2019 — and 9.6 percent higher than in 2017. That implies something like $150bn per year in additional spending power for the bottom half. The number rises to $250bn once you throw in other disposable income sources such as social security payments. This matters for two reasons: lower-income consumers spend more of each extra dollar earned, and they spend more of each extra dollar earned on goods, specifically. So long as bottom-half consumers have money to spend, goods consumption should stay high.

Takeaways by Macro Roundup® AI

  1. Goldman Sachs' Spencer Hill estimates that, after adjusting for composition effects, real wage levels for the bottom 50 percent of earners were 6.2 percent higher in the first quarter of this year than in 2019 and 9.6 percent higher than in 2017.
  2. Hill estimates those wage gains imply roughly $150bn per year in additional spending power for the bottom half of earners, rising to $250bn once other disposable income sources such as social security payments are included.
  3. Hill argues goods consumption should stay high so long as bottom-half consumers have money to spend, because lower-income consumers spend more of each extra dollar earned and spend more of it on goods.

AI Summary. A study of 5,179 customer support agents finds that access to a generative AI conversational assistant raised issues resolved per hour by 14% on average, with the largest gains for novice and low-skilled workers and minimal effect on experienced, highly skilled ones. The authors also find AI assistance improved customer sentiment, reduced requests for managerial intervention, and improved employee retention.

Erik Brynjolfsson, Danielle Li and Lindsey Raymond National Bureau of Economic Research
Date Posted:

Using evidence from the roll-out of a new AI-based tool for customer support agents, @erikbryn @Danielle__Li @LindseyRRaymond found an overall 14% increase in productivity driven by low-skilled workers, with minimal impact on highly skilled workers.

Does generative AI raise worker productivity most for less-skilled workers?

Core argument: Access to a generative AI conversational assistant raised customer support productivity, measured by issues resolved per hour, by 14 percent on average across 5,179 agents studied under a staggered rollout.

We study the staggered introduction of a generative AI-based conversational assistant using data from 5,179 customer support agents. Access to the tool increases productivity, as measured by issues resolved per hour, by 14 percent on average, with the greatest impact on novice and low skilled workers, and minimal impact on experienced and highly skilled workers. We provide suggestive evidence that the AI model disseminates the potentially tacit knowledge of more able workers and helps newer workers move down the experience curve. In addition, we show that AI assistance improves customer sentiment, reduces requests for managerial intervention, and improves employee retention.

Takeaways by Macro Roundup® AI

  1. Access to a generative AI conversational assistant raised customer support productivity, measured by issues resolved per hour, by 14 percent on average across 5,179 agents studied under a staggered rollout.
  2. The productivity gains from the AI assistant were greatest among novice and low-skilled workers, with minimal impact on experienced and highly skilled agents.
  3. Suggestive evidence indicates the AI model disseminates the potentially tacit knowledge of more able workers, while AI assistance improves customer sentiment, reduces requests for managerial intervention, and improves employee retention.

AI Summary. A shrinking working-age population across rich countries means companies must work harder to attract prime-age workers and tap new demographic pools, while a growing older population raises demand for caregivers and home helpers. Job vacancies in the US reached 11m, most of them frontline roles in retail, health care, hotels, restaurants, and call centers.

Adrian Wooldridge Bloomberg
Date Posted:

.@adwooldridge argues that tighter labor will require management teams to spend more time managing low-skilled workers.

Will shrinking working-age populations force firms to compete for frontline workers?

Core argument: The United States had 11m job vacancies in March 2022, most of them frontline jobs in retail, health care, hotels, restaurants, and call centers, with similar shortages emerging across the rich world.

The shrinking of the working-age population across the rich world means that companies will have to work harder to attract prime-age workers while also finding new demographic pools to fish in. The simultaneous rise in the number of older people will increase demand for caregivers and home helps. In March 2022, the United States suffered from 11 million job vacancies — most of them frontline jobs in retail, health care, hotels, restaurants, call centers, etc. Similar shortages emerged across the rich world. Zeynep Ton reports that in 2019-20 Nissan’s Smyrna, Tennessee, assembly plant suffered from a 38% turnover rate among its technicians; the direct cost of replacing each technician was $15,000.

Takeaways by Macro Roundup® AI

  1. The United States had 11m job vacancies in March 2022, most of them frontline jobs in retail, health care, hotels, restaurants, and call centers, with similar shortages emerging across the rich world.
  2. Zeynep Ton reports that Nissan's Smyrna, Tennessee assembly plant had a 38% turnover rate among technicians in 2019–20, with a direct replacement cost of $15,000 per technician.
  3. The shrinking working-age population across the rich world means companies will have to work harder to attract prime-age workers and find new demographic pools, while the rising number of older people increases demand for caregivers and home helps.

AI Summary. Mexico attracts companies seeking production sites outside Asia because of its proximity to American consumers, relatively cheap labor compared with other North American workers, and free-trade membership with the U.S. and Canada that avoids tariffs on many Asian imports. Importers say shorter shipping distances cut inventory needs, offsetting higher manufacturing costs.

Paul Berger Wall Street Journal
Date Posted:

China’s share of American imports of electrical and electronics declined from 36.1% in 2013 to 26.8% last year. During the same period, Mexico’s share increased 1.3pp and Vietnam’s increased 5.6pp as American firms start to pursue nearshoring strategies.

Does Mexico offer cost advantages for companies moving production out of Asia?

Core argument: Mexico attracts companies seeking production sites outside Asia because of its proximity to American consumers, labor that is relatively cheap compared with other North American workers, and membership in a free-trade agreement with the U.S. and Canada.

Mexico appears to be ideal for some companies seeking sites outside Asia to make goods more cheaply than in the U.S. It is close to American consumers, has a relatively cheap labor force compared with other North American workers and is a member of a free-trade agreement with the U.S. and Canada, saving the cost of tariffs that are imposed on a raft of imports from Asia. Importers say that although the cost of manufacturing in Mexico may be higher than in some parts of Asia, the country also delivers cost savings from shorter shipping distances that reduce the need to carry so much inventory and that offset the risk of production disruptions and lost sales because of freight delays.

Takeaways by Macro Roundup® AI

  1. Mexico attracts companies seeking production sites outside Asia because of its proximity to American consumers, labor that is relatively cheap compared with other North American workers, and membership in a free-trade agreement with the U.S. and Canada.
  2. Mexico's membership in the free-trade agreement with the U.S. and Canada saves the cost of tariffs imposed on a raft of imports from Asia.
  3. Importers say manufacturing costs in Mexico may exceed those in parts of Asia, but shorter shipping distances reduce the need to carry so much inventory and offset the risk of production disruptions and lost sales from freight delays.

AI Summary. China's Ministry of Agriculture and Rural Affairs plans to raise domestic self-sufficiency in grain — mainly rice, wheat, corn and soybeans — to 88.4% within a decade from 82%. The plan would cut grain imports to 122m metric tonnes from 146.9m.

Mia Nulimaimaiti South China Morning Post
Date Posted:

China’s autarky drive continues with China aiming to grow 90% of its grain supply by 2032 up from its current level of 82%. @SCMPNews

China’s autarky drive continues with China aiming to grow 90% of its grain supply by 2032 up from its current level of...

Will China raise grain self-sufficiency and cut imports?

Core argument: China's Ministry of Agriculture and Rural Affairs plans to raise domestic grain self-sufficiency — mainly rice, wheat, corn and soybeans — to 88.4 per cent within a decade, up from 82 per cent, in its Agricultural Outlook Report for 2023-32.

The flagship Agricultural Outlook Report for 2023-32 by the Ministry of Agriculture and Rural Affairs sets out China’s plan to grow 88.4 per cent of the grain – mainly referring to rice, wheat, corn and soybeans – it needs within a decade from the current level of 82 percent. It also plans to reduce grain imports to 122 million metric tonnes from last year’s 146.9 million metric tonnes, according to the report released by the agriculture ministry’s outlook committee on Monday.

Takeaways by Macro Roundup® AI

  1. China's Ministry of Agriculture and Rural Affairs plans to raise domestic grain self-sufficiency — mainly rice, wheat, corn and soybeans — to 88.4 per cent within a decade, up from 82 per cent, in its Agricultural Outlook Report for 2023-32.
  2. China plans to cut grain imports to 122 million metric tonnes from 146.9 million metric tonnes the previous year, according to the report from the agriculture ministry's outlook committee.

AI Summary. US shale investors recovered about 50 cents for each dollar invested from 2010 to 2020, while the boom lowered oil prices, created jobs, and gave the US leverage against oil-rich adversaries. Goldman Sachs estimates publicly listed shale companies cut reinvestment from 120% of operating cash flow in 2012 to 40% a decade later.

Javier Blas Bloomberg
Date Posted:

.@JavierBlas argues that shale investors’ capital losses, 50 cents on the dollar, were a powerful tailwind for the American economy as investors subsidized lower energy prices. Capital discipline and lower investment signal a end to this subsidy.

Are shale investors starting to profit after a decade of losses?

Core argument: US shale investors recovered roughly 50 cents per dollar invested during 2010–2020, a period the author calls the most profitable example of capital destruction the energy industry has ever seen.

Over the last decade, the US shale industry had become a byword for capital destruction. Shale investors recovered about 50 cents for each dollar they invested during the 2010-2020 period. For nearly two decades, shale was ruinous for its shareholders, but it was hugely beneficial for the rest of America. It kept oil prices lower and provided jobs and investment. Just as significantly, shale gave the White House a powerful geopolitical lever to face oil-rich foes like Iran and Russia. Let me say this: The shale boom was the most profitable example of capital destruction the energy industry has ever seen. Investors lost, but the US and most of its allies won. As of last week, 590 rigs were drilling in the US, down from the most recent peak of 627 rigs set in November. That was already significantly lower than the 888 recorded in 2018 and the high point before that — 1,609 rigs in 2014. Goldman Sachs Group Inc. estimates that US publicly listed shale companies reinvested the equivalent of 120% of their operating cash flow into new wells in 2012. Ten years later, that rate plunged to 40%.

Takeaways by Macro Roundup® AI

  1. US shale investors recovered roughly 50 cents per dollar invested during 2010–2020, a period the author calls the most profitable example of capital destruction the energy industry has ever seen.
  2. Goldman Sachs estimates US publicly listed shale companies reinvested the equivalent of 120% of their operating cash flow into new wells in 2012, a rate that fell to 40% ten years later.
  3. US drilling rigs numbered 590, down from a recent peak of 627 in November and below the 888 recorded in 2018 and the 1,609 of 2014.