Edward Conard

Top Ten New York Times Bestselling Author

  • “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
  • “Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “…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 should be read by anyone who takes for granted the superiority of progressive taxation and has not thought carefully about the trade-offs involved.” - The New Republic
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “Unintended Consequences is full of substance, it is one of the must-read books of the year, and once I finish it I will be giving it a second read through right away.” - Tyler Cowen, Professor, George Mason University
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…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
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Friday, September 29, 2023

AI Summary. The mortality gap between American adults with and without a four-year college degree widened across three periods—falling mortality for both with larger gains for graduates, then diverging, then rising faster for the less educated during the pandemic—reaching an 8.5-year difference in adult life expectancy. Americans with a degree, treated as a separate country, would rank just below Japan.

Anne Case and Angus Deaton Brookings Papers On Economic Activity
Date Posted:

As of 2021, US adults with a college degree have a life expectancy at age 25 on par with Japan, but US adults without a BA have a life expectancy that’s 8.5 years lower, significantly below rich country norms.

How large is the mortality gap between college and noncollege Americans?

Core argument: The adult life expectancy gap between Americans with and without a four-year college degree reached 8.5 years by the end of 2021, after widening in each of three periods: 1992–2010, 2010–2019, and the COVID pandemic.

From 1992 to 2010, American adults with and without a four-year college degree saw falling mortality, but with greater improvements for the more educated; from 2010 to 2019, mortality continued to fall for those with a BA while rising for those without; during the COVID pandemic, mortality rose for both groups, but markedly more rapidly for the less educated. In consequence, the mortality gap between the two groups expanded in all three periods, leading to an 8.5-year difference in adult life expectancy by the end of 2021. One remarkable finding here is that Americans with a college degree, if they were a separate country, would be one of the best performers, just below Japan, though there was some decline in 2020 and 2021 during the pandemic.

Takeaways by Macro Roundup® AI

  1. The adult life expectancy gap between Americans with and without a four-year college degree reached 8.5 years by the end of 2021, after widening in each of three periods: 1992–2010, 2010–2019, and the COVID pandemic.
  2. From 2010 to 2019, mortality continued to fall for American adults with a BA while rising for those without one, and during the COVID pandemic mortality rose for both groups but markedly faster for the less educated.
  3. Americans with a college degree, treated as a separate country, would be one of the best performers, just below Japan, though their performance declined somewhat in 2020 and 2021.

Related Articles:

  • Why Are Americans Dying So Young? — One in 25 American five-year-olds is projected not to reach age 40, making deaths among the young a defining feature of US mortality. These deaths are overwhelmingly caused by external factors such as drug overdoses, gun violence, and dangerous driving.
  • Who Won the Cold War? Part II — Americans born around 1990 had higher death rates in their 20s than peers in affluent allied countries, and the gap widened across young adulthood. By age 29, US mortality for that cohort was about 2x New Zealand's, 2.5x France's, 3x Japan's, and 4x Italy's or Spain's.
  • Who Won the Cold War? Part III — In the US, death rates at age 39 for the cohort born in 1980 exceeded those of cohorts born in 1970 and 1960, and death rates at age 29 for the 1990 cohort were indistinguishable from the 1950 cohort's. In Japan, mortality at 29 fell over 80% across comparable cohorts versus under 8% in the US.

AI Summary. Nominal bank lending growth has slowed from 10% to 2% on a three-month annualized basis, which the authors attribute to deposit outflows and higher deposit rates alongside recession fears, noting that banks building larger loan-loss provisions slowed lending more. The authors expect the growth drag from tighter lending standards to fade.

Manuel Abecasis Goldman Sachs
Date Posted:

.@GoldmanSachs estimates that tighter financial conditions and lending standards will generate “a roughly 0.2pp drag on GDP growth next year, down from around 1.0pp in 2023 and 1.2pp in 2022.”

Why has bank lending growth slowed, and will the drag fade?

Core argument: Nominal bank lending growth has slowed from 10% to 2% on a 3-month annualized basis since the start of this year, attributed mainly to deposit outflows with higher deposit rates and to recession fears.

Nominal bank lending growth has slowed from 10% to 2% since the start of this year on a 3-month annualized basis, for two main reasons. First, deposit outflows and higher deposit rates have led banks to reduce lending to a degree roughly in line with the usual historical relationships. Second, recession fears have likely led banks to reduce lending, and we find that banks that built up more provisions for loan losses over the last year have slowed lending by more. We expect the drag on growth from tighter bank lending standards to fade because we expect bank lending standards to remain roughly unchanged in Q3—as fading recession fears and modestly higher bank stock prices roughly offset higher interest rates—and to start to normalize gradually next year.

Takeaways by Macro Roundup® AI

  1. Nominal bank lending growth has slowed from 10% to 2% on a 3-month annualized basis since the start of this year, attributed mainly to deposit outflows with higher deposit rates and to recession fears.
  2. Banks that built up more provisions for loan losses over the past year slowed lending by more, while the reduction tied to deposit outflows and higher deposit rates is roughly in line with usual historical relationships.
  3. The drag on growth from tighter bank lending standards is expected to fade, with standards roughly unchanged in Q3 as fading recession fears and modestly higher bank stock prices roughly offset higher interest rates, and normalizing gradually next year.

Related Articles:

  • All Clear — 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.
  • Outlook for Regional Banks — Small banks account for 30% of banking-sector assets and 40% of lending, and face higher funding costs, lower asset prices from higher interest rates, and greater regulatory scrutiny. Tightening bank credit conditions are argued to impose a significant drag on the economy.
  • Real-Estate Doom Loop Threatens America’s Banks — A Wall Street Journal analysis estimates banks' total commercial real-estate exposure at $3.6tn—about 20% of their deposits—including indirect lending, foreclosed properties, commercial mortgage-backed securities, and loans to nonbank mortgage lenders. Losses on these loans risk triggering a doom loop in which banks cut lending, pushing property prices down further and generating additional losses.

AI Summary. Bank of America internal data show average credit card balances for middle- and higher-income households at levels equivalent to 2019, while balances for lower-income households have risen more steeply and exceed their pre-pandemic range. Lower-income households continue to see faster wage growth, which offsets some of that pressure.

David Michael Tinsle, Anna Zhou, Taylor Bowley, and Liz Everett Krisberg Bank of America
Date Posted:

Bank of America transaction data suggests that consumer spending is broadly stable; faster wage growth for lower-income households helps offset pressure from higher credit card balances.

Are credit card balances rising faster for lower-income households?

Core argument: Bank of America internal data through August 2023 show average credit card balances for middle- and higher-income households at levels equivalent to 2019, after a dip in 2020 and increases over the last few years.

While stimulus was an important factor in limiting credit card-financed spending earlier in the pandemic, in recent times the strength of the labor market and the associated wage gains are likely a major reason why consumers have not had to resort to hitting their credit cards harder. Exhibit 7 shows that according to Bank of America internal data, average credit card balances have risen over the last few years, after a dip in 2020. The latest reading through August 2023 suggests that for middle- and higher-income households, credit card balances are at levels equivalent to that in 2019. However, card balances for lower-income households have seen a steeper rise and have exceeded their pre-pandemic range. The good news is that lower-income households continue to see faster wage growth, as suggested by Exhibit 8, which helps offset some of the pressure that the group is facing from higher card balances.

Takeaways by Macro Roundup® AI

  1. Bank of America internal data through August 2023 show average credit card balances for middle- and higher-income households at levels equivalent to 2019, after a dip in 2020 and increases over the last few years.
  2. Credit card balances for lower-income households have risen more steeply and exceeded their pre-pandemic range, according to Bank of America internal data.
  3. Lower-income households continue to see faster wage growth, which helps offset some of the pressure from higher card balances, and labor market strength with associated wage gains is likely a major reason consumers have not resorted to using credit cards harder.

Related Articles:

  • The Pandemic Has Broken a Closely Followed Survey of Sentiment — A statistical model using 13 economic variables including inflation, unemployment, and petrol prices explained 86% of the variation in the monthly US consumer-sentiment index between 1980 and 2016, but the correlation between sentiment and both current and future spending has vanished since the pandemic began. The same variables retain their power to forecast consumer spending.
  • What Has Policy Tightening Accomplished So Far? — Nominal consumer spending has slowed only modestly, from roughly 7% annualized to about 6%, a negligible change compared with the slowdown in inflation. The author argues most disinflation so far reflects improvements in businesses' ability to produce the real goods and services consumers want rather than a shift in monetary policy.
  • The Q4 Pothole: Student Loans, Shutdown, and Strikes — The authors estimate that resuming student loan payments will subtract 0.5 percentage point from quarterly annualized GDP growth, with a government shutdown cutting roughly 0.2pp and an auto workers' strike 0.05–0.10pp for each week it lasts. They project growth slowing to +1.3% before rebounding to +1.9% as these temporary drags fade and income growth reaccelerates.

AI Summary. The US, long the world's top exporter of corn, soy, and wheat, is facing persistent agricultural trade deficits, with the Agriculture Department estimating a $19bn shortfall for one fiscal year and projecting nearly $28bn the next. The trend is attributed in part to greater US consumption of imported produce alongside stagnating grain and oilseed exports.

Isis Almeida, Gerson Freitas, and Michael Hirtzer Bloomberg
Date Posted:

A new paper documents weaker technological diffusion in the economy and relates

Is the US shifting to persistent agricultural trade deficits?

Core argument: The US agricultural trade deficit is estimated at $19 billion for the fiscal year ending Sept. 30 and is forecast by the Agriculture Department to reach almost $28 billion in fiscal 2024.

The world’s top exporter of corn, soy, and wheat for much of the past seven decades, the US is now facing a future of persistent agricultural trade deficits. The shortfall for the fiscal year ending Sept. 30 is estimated at $19 billion and is expected to balloon to almost $28 billion in fiscal 2024, according to Agriculture Department forecasts. The trend is driven in part by a shift in Americans’ eating habits—for instance, households today consume more imported produce, such as Mexican avocados and Indian mangoes—but stagnating grain and oilseed exports are also a factor. Since 1974 the only other annual deficits were in 2019 and 2020, during President Donald Trump’s trade war with China.

Takeaways by Macro Roundup® AI

  1. The US agricultural trade deficit is estimated at $19 billion for the fiscal year ending Sept. 30 and is forecast by the Agriculture Department to reach almost $28 billion in fiscal 2024.
  2. Since 1974 the US recorded annual agricultural trade deficits only in 2019 and 2020, during President Donald Trump's trade war with China.
  3. The US shortfall is driven in part by American households consuming more imported produce such as Mexican avocados and Indian mangoes, alongside stagnating grain and oilseed exports.

Related Articles:

  • China Expands Farmland In Bid To Cut Foreign Food Reliance — China has set a target of maintaining 120mn hectares of cultivated land, a level Beijing views as necessary for food self-sufficiency, and has reclaimed more than 170,000 hectares of farmland in a drive to cut reliance on imported food. Analysts say the effort reflects preparation for a scenario in which confrontation with the US disrupts global food supply chains.
  • Could Economic Indicators Signal China’s Intent To Go To War? — China imports nearly three-quarters of the oil it consumes and holds reserves sufficient for about three months at current consumption, so a sustained buildup of those reserves would be among the clearest signals it is preparing for war. China is also the world's largest agricultural importer, with wheat reserves an official described as covering 18 months of demand.

AI Summary. The European Union's widening trade deficit with China reflects a surge in imports rather than a decline in exports, with EU exports to China roughly stable and import growth visible across broad manufacturing categories. Import volumes have since fallen about 10% from their peak and the total import bill about a quarter.

Martin Sandbu Financial Times
Date Posted:

A surge in imports caused the EU’s trade deficit with China to roughly triple from 2018 to 2022 to almost €400B, but the deficit has declined by about 25% this year.

Is Europe's widening trade deficit with China driven by rising imports?

Core argument: The EU's widening bilateral deficit with China is driven entirely by rising imports rather than falling exports, with EU exports to China roughly stable after the first lockdown-related swings while imports soared.

The ballooning bilateral deficit is entirely driven by a rise in imports rather than a fall in exports; the two grew more or less in parallel at the end of the last decade. Then, after the first lockdown-related swings, EU exports to China remained more or less stable, while imports soared. The change in imports is visible across broad categories of manufacturing, although machinery and transport equipment (think of China’s electric car boom) may be contributing more than its proportionate share. [In 2023] all of these changes have recently been going into reverse. Import volumes have fallen by about 10% since the peak in August last year; import prices by about 15%. The total import bill, consequently, is down by about quarter since a year ago.

Takeaways by Macro Roundup® AI

  1. The EU's widening bilateral deficit with China is driven entirely by rising imports rather than falling exports, with EU exports to China roughly stable after the first lockdown-related swings while imports soared.
  2. EU import volumes from China have fallen about 10% since their peak and import prices about 15%, leaving the total import bill down roughly a quarter from a year earlier.
  3. The rise in EU imports from China spans broad manufacturing categories, though machinery and transport equipment, including China's electric car boom, may be contributing more than its proportionate share.

Related Articles:

  • The Chinese Carmakers Planning to Shake Up The European Market — Chinese carmakers are expanding in Europe, with Chery planning up to 15,000 UK car sales and 50 UK showrooms, and Germany's largest car rental company agreeing to buy 100,000 BYD vehicles for its European operations. KPMG estimates Chinese groups could take a 15% share of new car sales in Europe, exceeding Renault's.
  • China’s Auto Export Wave Echoes Japan’s in the ’70s — The shift from petroleum-fueled internal combustion vehicles to electric vehicles moves resource leverage from Persian Gulf oil producers to critical minerals, with China holding more than half of global processing capacity for lithium, cobalt, and graphite and about a third for nickel. Chinese companies have spent $4.5bn acquiring stakes in nearly 20 lithium mines, mostly in Latin America and Africa.
  • Europe Can’t Decide How to Unplug from China — Europe is more economically exposed to China than the US: about 8% of listed European firms' revenues come from China versus 4% for American firms, and multinational investment in China equals 2% of Europe's GDP versus 1% for America. Total China exposure for Europe's big six reached 5.6% of combined GDP, up from 3.9%.

Monday, October 2, 2023

AI Summary. Shifts in consumer demand and in preferences for work and lifestyle during the pandemic created entrepreneurial opportunities, and applications to start businesses produced new firms and establishments that hired workers in large numbers. The authors argue these new businesses drew in quitting workers as founders or hires, implying economic restructuring across industry, geography, and firm size and age.

Ryan Decker and John Haltiwanger Brookings Papers On Economic Activity
Date Posted:

Ryan Decker and John Haltiwanger argue that the 30% increase in new business formation vs. 2019 implies “significant economic restructuring across industry, geography, and the firm size and age distribution.” @UpdatedPriors @JHaltiwanger_UM

Did the surge in new business formation drive economic restructuring?

Core argument: Pandemic-driven shifts in consumer demand and in preferences for work and lifestyle created entrepreneurial opportunities, prompting business applications that continued through mid-2023 and produced new firms and establishments that hired workers in large numbers.

The pandemic sparked rapid, dramatic changes to the composition of consumer demand and to preferences for work and lifestyle, and these patterns have continued to evolve through mid-2023. From the standpoint of potential entrepreneurs, these dramatic changes presented opportunities—both to meet newly formed consumer and business needs and to change the career trajectories of the entrepreneurs themselves. Entrepreneurs made plans and applied to start businesses both early on and through mid-2023; some of these plans have resulted in new firms and establishments that hired workers in large numbers. Entrepreneurial opportunities and the demand for employees at these new firms appear to have played an important role in the “Great Resignation,” as some quitting workers likely flowed toward new businesses (as either entrepreneurs or new hires). Taken together, these patterns imply significant economic restructuring across industry, geography, and the firm size and age distribution.

Takeaways by Macro Roundup® AI

  1. Pandemic-driven shifts in consumer demand and in preferences for work and lifestyle created entrepreneurial opportunities, prompting business applications that continued through mid-2023 and produced new firms and establishments that hired workers in large numbers.
  2. Entrepreneurial opportunities and hiring demand at newly formed firms appear to have played an important role in the "Great Resignation," with some quitting workers likely flowing toward new businesses as either entrepreneurs or new hires.
  3. The surge in business formation implies significant economic restructuring across industry, geography, and the distribution of firms by size and age.

Related Articles:

  • Surging Business Formation in the Pandemic: Causes and Consequences — US applications for new businesses dropped early in the COVID-19 pandemic and then rose to record levels, remaining historically elevated, including among applications with characteristics likely to result in hiring and growth. Business applications have historically tracked actual business formation closely.
  • Creative Destruction After the Pandemic — US establishment closures spiked and then returned to normal levels, while new establishment openings reached record highs—peaking at 379,000 in a single quarter—and have since cooled but remain far above any pre-2020 level. Much of this may be new businesses replacing those that closed, and it is unclear whether the new entrants are more productive than the firms they replaced.
  • Business Formation Boom — U.S. high-propensity business applications — those more likely to become employers — ran 40% above their 2019 average, according to Census Bureau data, with the elevated pace persisting after the pandemic. Business deaths also rose, but the net effect still points to strong growth in business formation.

AI Summary. Life insurers and pension funds invest monthly premium and contribution inflows across assets including Treasuries, amounting to Treasury purchases at an annual rate of roughly $100bn. That falls far short of the trillions in coupon-bearing Treasury debt to be issued annually, so these managers will not be the marginal buyer the market seeks.

Joseph Wang Fed Guy Blog
Date Posted:

.@FedGuy12 projects, “Real money managers will continue to increase the level of their Treasury holdings from asset inflows, but at a pace far slower than Treasury issuance.”

Can insurers and pension funds absorb rising Treasury issuance?

Core argument: Life insurers and pension funds have bought Treasuries at an annual rate of around $100bn in recent years, short of the trillions in coupon issuance expected each year for the foreseeable future.

Each month life insurers receive insurance premium payments and pension funds receive employee contributions that they invest. These inflows are then filtered through investment policies and then allocated into a range of assets, including Treasuries. Over the past few years, this has translated into Treasury purchases at an annual rate of around $100b. This does not come close to meeting the trillions in coupons that will be issued each year for the foreseeable future. Real money managers will not be the marginal buyer of Treasuries that the market is looking for.

Takeaways by Macro Roundup® AI

  1. Life insurers and pension funds have bought Treasuries at an annual rate of around $100bn in recent years, short of the trillions in coupon issuance expected each year for the foreseeable future.
  2. Monthly insurance premiums and employee pension contributions are filtered through investment policies and allocated across a range of assets, including Treasuries.
  3. Real money managers will not be the marginal buyer of Treasuries that the market is looking for.

Related Articles:

  • Resilience Redux in the US Treasury Market — The authors argue that large, persistent US federal deficits and limited dealer balance-sheet flexibility will cause outstanding Treasury debt to grow rapidly relative to the market's capacity to intermediate trades, absent significant changes in market structure. They contend broad central clearing, all-to-all trading, real-time post-trade reporting, capital-regulation changes, and transparent official purchase programs could strengthen market capacity and resilience.
  • Maxing Out — Hedge funds became a major buyer of US Treasuries after the Federal Reserve and commercial banks stepped back, financing those purchases through dealer repurchase agreements that grew rapidly and then stalled. If these leveraged buyers are hitting financing limits set by dealer balance sheet costs, a new marginal buyer must emerge to absorb upcoming issuance.
  • Who Has Been Buying U.S. Treasury Debt? — Net purchases of U.S. Treasury securities by the "households and nonprofits" category have soared, more than offsetting sales and redemptions by money market funds, the Federal Reserve, and banks; much of this buying likely reflects hedge funds. The composition of Treasury financing has shifted dramatically as bond prices fell.

AI Summary. The rise in interest rates reflects higher real interest rates rather than inflation expectations, since breakeven rates—the gap between yields on ordinary bonds and inflation-indexed bonds—indicate markets expect inflation to stay under control. Real rates well above 2%, up from below 1% before the pandemic, may prove transitory.

Paul Krugman Krugman Wonks Out
Date Posted:

.@paulkrugman argues that the sharp rise in real interest rates likely represents a market overreaction, but he notes, “That’s what I’d like to believe, so maybe you shouldn’t trust me here.”

Are higher interest rates driven by real rates rather than inflation expectations?

Core argument: Real interest rates have risen well above 2%, up from yields usually below 1% before the pandemic, accounting for the rate spike rather than inflation fears.

What’s causing this interest rate spike? You might be tempted to see rising rates as a sign that investors are worried about inflation. But that’s not the story. We can infer market expectations of inflation from breakeven rates, the spread between interest rates on ordinary bonds and on bonds indexed for changes in consumer prices; these rates show that the market believes that inflation is under control. What we’re seeing instead is a sharp rise in real interest rates — interest rates minus expected inflation. At this point, real interest rates are well above 2%, up from yields usually below 1% before the pandemic. And if these higher rates are the new normal, they have huge and troubling implications. My instinct is to say that the bond market is overreacting to recent data and that high interest rates, like high inflation, will be transitory.

Takeaways by Macro Roundup® AI

  1. Real interest rates have risen well above 2%, up from yields usually below 1% before the pandemic, accounting for the rate spike rather than inflation fears.
  2. Breakeven rates, the spread between yields on ordinary bonds and bonds indexed to consumer prices, indicate that markets believe inflation is under control.
  3. Krugman's instinct is that the bond market is overreacting to recent data and that high interest rates, like high inflation, will prove transitory, while higher rates as the new normal would carry troubling implications.

Related Articles:

  • Living with High Public Debt — High public debt ratios are likely to persist because large sustained primary budget surpluses are politically unrealistic, real interest rates are already very low, faster global growth is hard to engineer, inflation is not a sustainable route to reducing debt, and financial repression is less feasible amid liberalized markets.
  • Did the U.S. Really Grow Out of Its World War II Debt? — Decomposing U.S. debt-to-GDP movements, the authors find the post-World War II decline from 106% to a trough of 23% was explained mostly by primary budget surpluses and interest-rate distortions from surprise inflation and pegged nominal rates; absent those, the ratio would have fallen only to 74%.
  • American Gothic — US tax increases since 1950 of 2% of GDP or more occurred when overall tax receipts were a much smaller share of GDP than today. Restoring the ratio of entitlement to non-defense discretionary spending to its earlier level of 2.2x would require tax increases larger than those historical precedents.

AI Summary. Higher long-term US Treasury yields may reflect factors other than changed Federal Reserve rate expectations, including an unwind of leveraged bond trades, slower Chinese growth reducing purchases of Treasuries, the Federal Reserve shrinking its balance sheet, a US budget deficit of 6% of GDP, a US sovereign credit downgrade, rising Japanese yields, and larger planned Treasury auctions.

Torsten Sløk Apollo
Date Posted:

Torsten Sløk notes that a 60/40 portfolio has lost 5% over the past two months, and argues that “with an outlook of high rates and slowing earnings, the outlook for the 60/40 portfolio remains negative.” @apolloglobal

Why are long-term Treasury yields rising without changed Fed expectations?

Core argument: A US budget deficit of 6% of GDP, requiring more Treasury issuance now and in the future, is one potential explanation offered for long rates moving higher independent of Fed expectations.

If the [rising term premium] is not driven by changing Fed expectations, what are then the reasons why long rates are moving higher? There are several potential explanations: 1) First, with declining repo it could be an unwind of the basis trade that is pushing long rates higher, somewhat similar to what happened in March 2020. This has been getting a lot of attention, and maybe conditions for getting repo are tightening. 2) Another potential explanation is the slowing growth in China, which means that China is recycling fewer dollars into Treasuries because of declining Chinese exports. 3) Rates may also be moving higher because of the Fed still doing QT. Remember, the entire goal with QT is to put upward pressure on government bond yields. 4) The US budget deficit remains big at 6% of GDP, which requires more Treasury issuance today and in the future, and investors may be reacting to that. 5) The US sovereign downgrade has likely had a negative impact. 6) Japan exiting YCC has put upward pressure on JGB yields, which, despite high hedging costs, makes US yields less attractive. 7) There is a large stock of T-bills outstanding, and the Treasury intends over the next six months to increase auction sizes across the Treasury curve.

Takeaways by Macro Roundup® AI

  1. A US budget deficit of 6% of GDP, requiring more Treasury issuance now and in the future, is one potential explanation offered for long rates moving higher independent of Fed expectations.
  2. Declining repo could be pushing long rates higher through an unwind of the basis trade, similar to March 2020, alongside the Fed's continuing quantitative tightening, whose goal is to put upward pressure on government bond yields.
  3. Slowing Chinese growth and declining exports mean China is recycling fewer dollars into Treasuries, while Japan's exit from yield curve control has put upward pressure on JGB yields, making US yields less attractive despite high hedging costs.

Related Articles:

  • Breaking Down the Sources of US Economic Resilience — The US government has funded essentially all of its increased deficit by issuing short-term Treasury bills and drawing down cash reserves rather than selling longer-dated debt, limiting the effect on market liquidity so far. The authors expect that pressure is delayed rather than eliminated, with issuance shifting toward longer maturities as the deficit stays elevated.
  • Soft Landing Summer — The estimated 12-month US recession probability has been cut to 15%, matching the postwar unconditional average implied by a recession occurring roughly once every seven years, and far below the 60% Bloomberg consensus. The authors expect interest rates to fluctuate in a higher range than in the post-2008 period.

AI Summary. Large capital inflows into the US dollar and a negative term premium on US Treasuries both reflect a structural shortage of safe assets in global financial markets, according to the author, who argues this arrangement is beginning to unwind. Unless US authorities cap rising yields, the author warns the current duration crisis could become a credit crisis.

Michael Howell Capital Wars Blog
Date Posted:

Michael Howell argues that net inflows of $7.5T into US financial assets since 2009 have been a critical factor in US Treasury yields, and that declining inflows may require additional liquidity from the Fed. @crossbordercap

Does a safe asset shortage explain dollar inflows and Treasury yields?

Core argument: Two connected anomalies in world markets — huge capital inflows into the US dollar and a large negative term premium on US Treasuries — both reflect a structural shortage of 'safe' assets, and the early unwind stage has begun.

There are two connected anomalies, or ‘elephants’, in World markets (1) huge capital inflows into the US$ and (2) a large negative term premia on US Treasuries. Both reflect the structural shortage of ‘safe’ assets in global financial markets. We are now in the early unwind stage. China needs to unhook from the US dollar by further devaluing the Yuan. She is unlikely, as a result, to buy a lot more US Treasuries. Unless the US authorities do something to cap rising yields, the current duration crisis could turn into a more worrying credit crisis. China, for one, has already started to print money again. We expect others to follow.

Takeaways by Macro Roundup® AI

  1. Two connected anomalies in world markets — huge capital inflows into the US dollar and a large negative term premium on US Treasuries — both reflect a structural shortage of 'safe' assets, and the early unwind stage has begun.
  2. China needs to unhook from the US dollar by further devaluing the yuan and is therefore unlikely to buy many more US Treasuries.
  3. Unless US authorities act to cap rising yields, the current duration crisis could turn into a more worrying credit crisis; China has already resumed printing money, and others are expected to follow.

Related Articles:

  • The US Capital Glut and Other Myths — The US capital-output ratio remains close to its postwar average and the real return to capital has stayed roughly constant near 6%, at 5.84% in the 2000s and 6.42% in the 2010s. Market-based real returns averaged 5.52% from 1950-1989 versus 6.95% from 1990-2019, a rise rather than the decline a capital glut implies.
  • The Return of Quantitative Easing — The Congressional Budget Office projects the US government will need to sell an average of $2tn of Treasuries annually over the next decade, with Federal Reserve holdings of Treasuries rising to $7.5tn by 2033 from nearly $5tn. The author argues those spending projections are too low, implying holdings of at least $10tn.
  • Unstable Prosperity: How Globalization Made the World Economy More Volatile — The decline in the world real interest rate over roughly three decades suggests global demand for financial assets outpaced growth in their supply, driven by faster emerging-market growth, changes in financial structure, and shifts in advanced-economy public debt. Advanced economies' net foreign assets fell from near zero to about -20% of their combined GDP.

AI Summary. Equity risk premiums have fallen back to pre-pandemic levels, leaving less cushion for stocks as bond yields rise. Although US nominal and real bond yields have returned to pre-financial-crisis levels, price-to-earnings ratios remain much higher and earnings growth much lower, setting a higher bar for equities absent stronger corporate profit growth.

Peter Oppenheimer Goldman Sachs
Date Posted:

.@goldmansachs has a “neutral” view on equities. They write, “At 2.25% a risk-free and inflation-protected return makes equities look stretched unless there is significant growth.”

Do shrinking equity risk premiums leave stocks vulnerable to rising yields?

Core argument: Equity risk premia have fallen sharply back to pre-pandemic levels, leaving equities with much less buffer as rates rise.

[The] headwind from rising yields should not be a surprise given that equity risk premia have fallen sharply back to pre pandemic levels, providing much less buffer for equities as rates rise (Exhibit 5). Some argue that this makes sense; if the post-pandemic tail-risk of deflation has now eroded, then equity risk premia should fall as term premia rises. However, while nominal and real bond yields are back to pre financial crisis levels, at least in the US, the PE remains much higher, and earnings growth much lower. In the absence of much better growth in corporate profits, the significant increase in both nominal and real interest rates create a much higher bar for equities to beat.

Takeaways by Macro Roundup® AI

  1. Equity risk premia have fallen sharply back to pre-pandemic levels, leaving equities with much less buffer as rates rise.
  2. Nominal and real US bond yields have returned to pre-financial-crisis levels, while the PE remains much higher and earnings growth much lower.
  3. Without much better growth in corporate profits, the significant increase in both nominal and real interest rates creates a much higher bar for equities to beat.

Related Articles:

  • Breaking Down the Sources of US Economic Resilience — The US government has funded essentially all of its increased deficit by issuing short-term Treasury bills and drawing down cash reserves rather than selling longer-dated debt, limiting the effect on market liquidity so far. The authors expect that pressure is delayed rather than eliminated, with issuance shifting toward longer maturities as the deficit stays elevated.
  • Soft Landing Summer — The estimated 12-month US recession probability has been cut to 15%, matching the postwar unconditional average implied by a recession occurring roughly once every seven years, and far below the 60% Bloomberg consensus. The authors expect interest rates to fluctuate in a higher range than in the post-2008 period.
  • The Price of Risk: With Equity Risk Premiums, Caveat Emptor! — Historical correlations between equity risk premiums or earnings yields and future stock returns do not translate easily into profitable market timing, because market and economic structures can shift and undercut predictions based on past data. Even when such relationships hold, statistical noise in the estimates can disrupt portfolios before predictions play out.

AI Summary. New-home prices in Beijing, Shanghai, Guangzhou, and Shenzhen reached roughly 1.7x to 2x their 2014 levels, and China's housing market is valued at 4x GDP, versus 1.6x in the US and 2.1x in Japan. Housing accounts for more than a quarter of Chinese economic activity and two-thirds of household wealth, while the population, including the home-buying-age cohort, is shrinking.

Yi Fuxian Project Syndicate
Date Posted:

.@fuxianyi argues that the correction in Chinese real estate markets is only just getting underway. The value of China’s housing market is 4x GDP, relative to 1.6x in the US and 2.1x in Japan.

Is China's housing market overvalued relative to its shrinking population?

Core argument: By 2022, new-home prices in Beijing, Shanghai, Guangzhou, and Shenzhen stood at 1.73, 1.81, 1.80, and 1.97 times their 2014 levels, respectively.

By 2022, the prices of new homes sold in Beijing, Shanghai, Guangzhou, and Shenzhen were 1.73 times, 1.81 times, 1.80 times, and 1.97 times their 2014 levels, respectively. The value of China’s housing market is four times the country’s GDP, compared to 1.6 in the US and 2.1 in Japan. Accounting for more than one-quarter of all economic activity and two-thirds of household wealth. Now that China’s total population is shrinking, especially the home-buying-age cohort, the collapse of the property dam seems inevitable.

Takeaways by Macro Roundup® AI

  1. By 2022, new-home prices in Beijing, Shanghai, Guangzhou, and Shenzhen stood at 1.73, 1.81, 1.80, and 1.97 times their 2014 levels, respectively.
  2. China's housing market is valued at four times GDP, against 1.6 in the US and 2.1 in Japan, and accounts for more than one-quarter of all economic activity and two-thirds of household wealth.
  3. With China's total population shrinking, especially the home-buying-age cohort, the collapse of the property dam appears inevitable.

Related Articles:

  • How China Can Avoid the Japan Trap — China's high savings, concentrated among controllers of capital, now exceed what can be productively invested, so income needs to shift toward those who will spend it. The risk is chronically weak demand rather than a financial crisis, since China is a creditor country whose debts are in its own currency.
  • Can China’s Long-Term Growth Rate Exceed 2–3 Percent? — China invests roughly 42–44% of its GDP, while more mature, capital-intensive economies typically invest about 15–20%. Modeling a ten-year path that lowers China's investment share to 30% of GDP, the author argues the resulting growth rate depends mainly on how fast consumption grows.
  • The Neoclassical Growth of China — China's per capita GDP growth path closely tracks those of Japan, South Korea, and Taiwan from similar starting income levels, indicating nothing unusual about its growth rate. The authors' model projects China's per capita GDP will level off at about 41% of the US level, reflecting a slowdown in productivity catch-up.