Edward Conard

Top Ten New York Times Bestselling Author

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

Macro Roundup


Thursday, November 16, 2023

AI Summary. Greater exposure to labor-saving automation technologies is associated with lower worker earnings and a higher probability of involuntary job loss over the following five years, with effects largely unrelated to observable worker skill. Exposure to labor-augmenting technologies is associated with smaller earnings declines, concentrated among white-collar, older, and higher-paid workers.

Leonid Kogan, Dimitris Papanikolaou, Lawrence Schmidt and Bryan Seegmiller National Bureau of Economic Research
Date Posted:
Is Database:
Database

An @NBERpubs study finds that, unlike labor-saving technologies that drive earnings declines and job losses for all affected workers, labor-augmenting technologies disproportionately impact white-collar, older, and higher-paid workers. @DimitrisPapan20

How does exposure to new technologies affect worker earnings and job loss?

Core argument: Moving from the median to the 90th percentile of exposure to labor-saving (automation) patents is associated with a 2.5 pp decline in workers' total earnings over the next five years and a 1.2 pp rise in the probability of involuntary job loss.

Improvements in labor-saving (automation) technologies are negatively related to the wage earnings of workers in affected occupation–industry cells. For instance, an increase in our exposure measure from the median to the 90th percentile is associated with a 2.5 pp decline in the total earnings of the average worker over the next five years. These earnings losses are concentrated on a subset of workers, since exposed workers experience a 1.2pp increase in the probability of involuntary job loss over the next five years. Importantly, the magnitude of these wage declines or job loss probabilities are essentially unrelated to observable measures of worker skill—measured by age, level of wage earnings relative to other workers in the same industry and occupation, and college education. Perhaps surprisingly, but consistent with our model, new labor-augmenting technologies also lead to a decline in earnings for exposed workers, though the average magnitudes are smaller. An increase in our exposure measure from the median to the 90th percentile is associated with a 1.3pp decline in earnings growth and a 0.5pp increase in the likelihood of involuntary job loss. However, unlike in the case of labor-saving technology, the effects of exposure to labor-augmenting technologies are fairly heterogeneous: it disproportionately affects white-collar workers (defined as those with college degrees, or those employed in non-manufacturing industries or in occupations emphasizing cognitive tasks); older workers; and workers that are paid more relative to their peers (other workers with similar characteristics in the same industry and occupation).

Takeaways by Macro Roundup® AI

  1. Moving from the median to the 90th percentile of exposure to labor-saving (automation) patents is associated with a 2.5 pp decline in workers' total earnings over the next five years and a 1.2 pp rise in the probability of involuntary job loss.
  2. The earnings and job-loss effects of labor-saving technology exposure are essentially unrelated to observable worker skill measures, including age, college education, and wage earnings relative to peers in the same industry and occupation.
  3. Labor-augmenting technologies also lower earnings for exposed workers, with a median-to-90th-percentile exposure increase associated with a 1.3 pp decline in earnings growth and a 0.5 pp rise in involuntary job loss, disproportionately affecting white-collar, older, and higher-paid workers.

Related Articles:

  • Perspectives on the Labor Share — The share of US income going to labor fell roughly 5 percentage points between 1929 and 2022, with declines across most US industries and in most countries of Europe, Asia, and emerging markets. The author argues the most plausible causes are technological, including the information age and automation.
  • AI Isn’t Good Enough — The US labor force is roughly 5M workers smaller than if it had grown in line with history and GDP, down from a gap of about 7M, and retirements, aging, and skill mismatches make closing it quickly unlikely. The author argues the current wave of artificial intelligence is near its end and has displaced workers without delivering matching productivity gains.
  • The Economics of Inequality in High-Wage Economies — United States Income, Wealth, Consumption, and Inequality Diana Furchtgott-Roth

AI Summary. Nearly all lending in the federal funds market comes from Federal Home Loan Banks, which cannot earn interest on reserves and use the market to earn a return on cash. Regulators are encouraging these banks to shift cash into interest-bearing deposit accounts, which would shrink the federal funds market.

Joseph Wang Fed Guy Blog
Date Posted:

New rules will likely effectively end the relevance of the Fed funds market leaving the Secured Overnight Financing Rate as the official policy rate. @FedGuy12

Will regulatory pressure on home loan banks shrink the federal funds market?

Core argument: Almost all lending in the federal funds market comes from Federal Home Loan Banks, which are ineligible for interest on reserves and lend in the funds market to earn a return on their cash.

The Federal Funds market has been in an undead state for over a decade, but may now finally wither away and allow Secured Overnight Funding Rate to become the official policy rate. Almost all lending in the funds market is from Federal Home Loan Banks, who are ineligible for interest on reserves and lend in the funds market to earn a return on their cash. Regulators are encouraging Federal Home Loan Banks to shift the composition of their cash investments away from fed funds and into interest bearing deposit accounts. The Fed funds market will likely shrink as Federal Home Loan Banks shift their cash investments towards interest bearing deposit accounts.

Takeaways by Macro Roundup® AI

  1. Almost all lending in the federal funds market comes from Federal Home Loan Banks, which are ineligible for interest on reserves and lend in the funds market to earn a return on their cash.
  2. Regulators are encouraging Federal Home Loan Banks to shift their cash investments out of fed funds and into interest-bearing deposit accounts, a move that would likely shrink the federal funds market.
  3. The federal funds market, in an undead state for over a decade, may finally wither away and allow the Secured Overnight Financing Rate to become the official policy rate.

Related Articles:

  • Neutralizing QT — Declining balances in the Federal Reserve's reverse repurchase facility are projected to eventually outweigh the Fed's balance-sheet runoff and produce a net increase of money in the financial system. As money market funds lend to the Treasury, that cash flows through government spending into the banking system, mechanically increasing bank reserves and deposits.
  • Probing LCLoR — Bank reserves stand around $3.2t versus a common Federal Reserve estimate of roughly $2.2t (8% of GDP) for the lowest comfortable level, and reserves are on track to approach that level within months. Growth in reverse repo balances and rebuilding of the Treasury's cash account would draw reserves down.

AI Summary. Bank of America data show a "Payroll Disruptions Rate" — the share of customers with 12 consecutive months of payroll deposits who then go three months without any — that has been rising and sits above its level in the two years before the pandemic. The authors note a persistent rise likely indicates a weakening labor market.

David Michael Tinsley Bank of America
Date Posted:

According to @BankofAmerica microtransaction data, the proportion of customers with a 3-month gap in payroll deposits is now above its level during 2018-19, suggesting a weakening labor market.

Do rising payroll disruptions signal a weakening labor market?

Core argument: Bank of America's "Payroll Disruptions Rate" — the share of customers with 12 straight months of payroll deposits who then go three months without any — rose over most of 2023 and stands above its level in the two pre-pandemic years.

Pay disruptions have been rising over most of 2023 Using Bank of America data, we define the ‘Payroll Disruptions Rate’ as the proportion of customers who previously had 12 months of regular payroll payments into their accounts, but then had three months of no payments, relative to the total number of customers with 12 consecutive months of payroll. The rate has been rising over most of 2023. Even with a drop back in the latest October data, the Payroll Disruptions Rate is higher than the two years prior to the pandemic. Pay disruptions will likely occur for a number of reasons. Most obviously if someone loses their job and takes over three months to find another. If someone exited their job for other reasons, such as the need to take care of children, this would also increase the Payroll Disruptions Rate, as would someone taking over three months to set up a direct payment into their account. But a persistent rise in the rate, is likely to indicate a weakening labor market. It remains to be seen if the October drop is just noise, or a more consequential break in the upward trend.

Takeaways by Macro Roundup® AI

  1. Bank of America's "Payroll Disruptions Rate" — the share of customers with 12 straight months of payroll deposits who then go three months without any — rose over most of 2023 and stands above its level in the two pre-pandemic years.
  2. Bank of America notes that pay disruptions can arise from job loss lasting over three months, exits for reasons such as childcare, or delays in setting up a direct payment, but a persistent rise in the rate is likely to indicate a weakening labor market.
  3. The Payroll Disruptions Rate dropped back in Bank of America's October data, leaving open whether the decline is noise or a more consequential break in the upward trend.

Related Articles:

  • Gig Work Back In Favor As Wages Slide — Bank of America internal data show the share of its customers receiving income from gig platforms rose to 3% from 2.7%, an increase concentrated in ridesharing and younger workers. An increased supply of ridesharing gig workers has driven average monthly ridesharing gig pay down.
  • The Low-Wage Pay Surge Is Over, Threatening the Consumer Boom — Wage growth for workers in the bottom quarter of the wage distribution slowed from 7.2% to 5.9%, according to Federal Reserve Bank of Atlanta data based on a 12-month moving average of median hourly wage growth. Wage growth for workers overall declined by less, from 6.3% to 5.8%.
  • U.S. Wage Growth Is Slowing, Somewhat — U.S. wage growth has slowed substantially without a large rise in joblessness, though wages are still rising faster than in the decade before the pandemic, at a pace comparable to the late 1990s and 2006-2007. The author argues much of the earlier outsized pay gains reflected one-off job market churn and sectoral shifts.

AI Summary. China's shipyards build 46% of the world's ships, letting it produce several warships and submarines a year, while the U.S. holds under 1% of capacity and its Navy faces late, over-budget deliveries from a few yards lacking workers. China is also the largest drone producer.

Greg Ip Wall Street Journal
Date Posted:

China’s “large and adaptive manufacturing base” is an increasingly important military advantage versus the atrophied US defense industrial base. @greg_ip @danwwang

How does China's manufacturing scale translate into military advantage over America?

Core argument: China's shipyards build 46% of the world's ships and turn out several new warships and submarines a year, while U.S. shipbuilding holds less than 1% of world capacity despite a century of protection.

China’s manufacturing prowess is also a formidable military asset. Its gigantic and modernized shipyards already build 46% of the world’s ships, enabling it to churn out several new warships and submarines a year. By contrast the U.S. shipbuilding industry, despite a century of protection, has less than 1% of world capacity, leaving the Navy to rely on just a handful of shipyards that lack the necessary workforce to handle rising demand. Deliveries are consistently late and over budget. The shift in warfare toward cheaper, unmanned vehicles also favors China, the world’s largest producer of drones. Dan Wang, a visiting scholar at Yale Law School’s Tsai China Center said the U.S. leads mainly in knowledge-intensive technologies such as artificial intelligence and biotech rather than physical products. “Imagine a future scenario in which these countries are in serious conflict and trade stops, who do you want to bet on: the country with all the large language models and biotech and business software, or the country with large and adaptive manufacturing base? My money would be on the latter.”

Takeaways by Macro Roundup® AI

  1. China's shipyards build 46% of the world's ships and turn out several new warships and submarines a year, while U.S. shipbuilding holds less than 1% of world capacity despite a century of protection.
  2. The U.S. Navy depends on a handful of shipyards that lack the workforce to meet rising demand, with deliveries consistently late and over budget.
  3. Dan Wang, a visiting scholar at Yale Law School's Tsai China Center, argues the U.S. leads mainly in knowledge-intensive fields such as artificial intelligence and biotech, and that in a serious conflict halting trade he would bet on China's large, adaptive manufacturing base.

Related Articles:

  • Pentagon Plan to Buy Thousands of Drones Faces Looming Snags — The US Department of Defense aims to buy thousands of low-cost drones within as little as 18 months and up to 2,000 larger uncrewed jets, while one of its primary drone suppliers produced 38 aircraft last year. Booming commercial aerospace demand has left shortages of skilled labor, raw materials, and parts such as advanced electronics and fasteners.
  • U.S. Weapons Industry Unprepared for a China Conflict, Report Says — A Center for Strategic and International Studies report argues the U.S. defense industrial base is not prepared for the current security environment and operates in a manner better suited to peacetime. The study recommends reassessing total munitions requirements and stockpile replenishment needs, creating a strategic munitions reserve, and setting a sustainable procurement plan.
  • Breaking Down China’s Manufacturing — About 40–45% of China's manufacturing output comes from exports and 55–60% from domestic demand, making the sector mainly domestically oriented while still relying substantially on external demand. Estimates extending the data beyond the available database suggest the export share has picked up, reflecting a pandemic-era export boom.

AI Summary. China's leadership has called Taiwan the most dangerous issue in US-China relations, urging the US to stop arming the island and denying that Beijing has imminent plans for military aggression. According to a senior US official, China stated a preference for peaceful reunification while also describing conditions under which force could be used.

Jack Lau and Lawrence Chung South China Morning Post
Date Posted:

Noting Taiwan is the “most dangerous” issue in the Sino-American relationship, Xi told Biden, “China will eventually be reunified and inevitably be reunified” and highlighted the conditions under which the CCP would use force to do so. @SCMPNews

Noting Taiwan is the “most dangerous” issue in the Sino-American relationship, Xi told Biden, “China will...

Is Taiwan the most dangerous issue in US-China relations?

Core argument: In a four-hour meeting with Joe Biden in California, Xi Jinping told Biden to stop arming Taiwan, described by the two sides as the "most dangerous" issue in the bilateral relationship.

Chinese President Xi Jinping has told his US counterpart Joe Biden to stop arming Taiwan and denied Beijing has imminent plans for military aggression, in a candid exchange on the “most dangerous” issue in the bilateral relationship. During his four-hour meeting with Biden on Wednesday in California, Xi said Beijing’s preference was for peaceful reunification with Taiwan, but went on to talk about conditions in which force could be used, according to a senior US official.

Takeaways by Macro Roundup® AI

  1. In a four-hour meeting with Joe Biden in California, Xi Jinping told Biden to stop arming Taiwan, described by the two sides as the "most dangerous" issue in the bilateral relationship.
  2. Xi Jinping denied Beijing has imminent plans for military aggression against Taiwan and said China's preference is peaceful reunification, according to a senior US official.
  3. Xi Jinping went on to describe conditions in which force could be used against Taiwan, according to a senior US official.

Related Articles:

  • US To Provide Taiwan With Weapons From Its Stockpiles For First Time — The US will provide Taiwan with $345mn in weapons drawn directly from American military stockpiles, the first such transfer under an annual $1bn presidential drawdown authority approved by Congress. Previous US support for Taiwan came through approved arms sales rather than direct provision from US stocks.
  • US To Link Up With Taiwan and Japan Drone Fleets To Share Real-Time Data — The US, Taiwan and Japan plan to share real-time data from naval reconnaissance drones, with Taiwan's four MQ-9B Sea Guardian drones integrated into the same system used by US forces in the region and Japan's Self-Defense Force. The arrangement would let the US and its allies view the same drone-gathered information simultaneously.
  • Nearly 40% of US Attack Submarines Are Out of Commission for Repairs — US Navy data show 18 of its 49 attack submarines — 37% — are out of commission for repairs because of naval shipyard delays, up from 28% and well above the 20% industry best practice. The report argues this leaves the US at a disadvantage against China's numerically larger fleet.

Friday, November 17, 2023

AI Summary. Foreign holders, including private investors and central banks, own about 30% of outstanding U.S. Treasury securities, down from roughly 43% a decade ago, with China and Japan seen as unlikely net buyers going forward. Meanwhile the Treasury has issued a net $2tn in new debt and the Federal Reserve is shedding about $60bn a month.

Chelsey Dulaney and Megumi Fujikawa Wall Street Journal
Date Posted:
Is Database:
Database

The Treasury market will become increasingly stressed as the US runs record peacetime deficits at the same time the Fed is letting its portfolio run down $60B/month. @Brad_Setser notes foreign buyers are unlikely to step in at the pace supply is rising.

Is foreign ownership of U.S. Treasury debt shrinking as supply grows?

Core argument: Foreign investors, including private buyers and central banks, now hold about 30% of outstanding U.S. Treasury securities, down from roughly 43% a decade ago.

The U.S. Treasury market is in the midst of major supply and demand changes. The Federal Reserve is shedding its portfolio at a rate of about $60 billion a month. Overseas buyers who were once important sources of demand—China and Japan in particular—have become less reliable lately. Meanwhile, supply has exploded. The U.S. Treasury has issued a net $2 trillion in new debt this year, a record when excluding the pandemic borrowing spree of 2020. “U.S. issuance is way up, and foreign demand hasn’t gone up,” said Brad Setser, senior fellow at the Council on Foreign Relations. “And in some key categories—notably Japan and China—they don’t seem likely to be net buyers going forward.” In response to recent demand weakness, Treasury has shifted to issuing shorter-term bonds that are in higher demand, helping to restore market stability. Foreigners, including private investors and central banks, now own about 30% of all outstanding U.S. Treasury securities, down from roughly 43% a decade ago.

Takeaways by Macro Roundup® AI

  1. Foreign investors, including private buyers and central banks, now hold about 30% of outstanding U.S. Treasury securities, down from roughly 43% a decade ago.
  2. The U.S. Treasury has issued a net $2 trillion in new debt this year, a record excluding the 2020 pandemic borrowing, while the Federal Reserve sheds about $60 billion a month from its portfolio.
  3. Brad Setser, senior fellow at the Council on Foreign Relations, said U.S. issuance is way up while foreign demand has not risen, and that Japan and China do not seem likely to be net buyers going forward.

Related Articles:

  • Setser On Foreign Demand For Treasuries — Aggregate foreign demand for US bonds has been strong, in line with or above the post-global-financial-crisis norm, with Treasury purchases coming largely from private investors amid weak reserve growth and an absolute yield advantage. Foreign demand for long-term US agency bonds has been strong, with China a net buyer of agencies while selling Treasuries on net.
  • Preferred Habitats and Timing in the World’s Safe Asset — As the Federal Reserve shrinks its bond portfolio, the authors argue private investors, U.S. and foreign, are the more likely buyers of Treasury securities, since their purchases respond to yields and their holdings tilt toward longer-maturity bonds. Foreign governments have not materially added to their Treasury holdings in almost a decade and tend to hold shorter-maturity bonds.
  • 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.

AI Summary. The author argues that rising long-term US Treasury yields reflect a term premium driven by heavy bond supply and weaker demand, including the Federal Reserve shrinking its holdings, rather than a risk premium, since inflation-indexed yields have also risen. Risks include a failed auction or debt monetization producing high inflation.

Robert Armstrong and Ethan Wu Financial Times
Date Posted:

.@ojblanchard1 has a pessimistic outlook for the endgame for the surging American debt ratio: “My sense is it’s going to boil slowly,” he writes, “I don’t know how it ends; not smoothly, is my guess.”

.@ojblanchard1 has a pessimistic outlook for the endgame for the surging American debt ratio: “My sense is it’s going...

Do rising long-term yields reflect bond supply rather than default risk?

Core argument: Olivier Blanchard points to the term premium as the factor probably most relevant to long-term U.S. rates, citing heavy Treasury bond supply alongside weaker demand, with quantitative tightening adding to supply.

The factor which is probably most relevant, which is what finance people call the term premium. You can think of it in two ways. The first one is in terms of [Treasury bond] flow supply and flow demand. At this stage, there is a lot of supply and for various reasons there is less demand. There is QT, which is increasing supply from the Fed. It’s conceivable that that’s part of it. And the fact that long rates vary so much on news about the US Treasury changing the maturity of its issuance makes me think that it is probably relevant. The second one is to think of the term premium as a risk premium. I don’t think that’s it, because in that case we would see the nominal rates go up, but not rates on inflation-indexed bonds. But these rates have gone up as well. As hard as it is to imagine, there might be an emerging credit spread on T-bonds or a failed auction. And then Congress and the president would have to sit down and decide to do the right thing. A scary alternative scenario is that Donald Trump is elected, that he puts a lackey at the Fed, who monetises some of the debt, and we get high inflation.

Takeaways by Macro Roundup® AI

  1. Olivier Blanchard points to the term premium as the factor probably most relevant to long-term U.S. rates, citing heavy Treasury bond supply alongside weaker demand, with quantitative tightening adding to supply.
  2. Blanchard doubts the risk-premium explanation for higher long rates, noting that rates on inflation-indexed bonds have risen as well, not only nominal rates.
  3. Blanchard raises two adverse possibilities: an emerging credit spread on Treasury bonds or a failed auction that would force Congress and the president to act, or a Trump-appointed Fed lackey monetising some of the debt and producing high inflation.

Related Articles:

  • If Markets Are Right About Long Real Rates, Public Debt Ratios Will Increase For Some Time. We Must Make Sure That They Do Not Explode — Stabilizing public debt ratios would require cutting primary deficits to zero, which the author argues no government can do quickly without risking recession and boosting support for populist parties. With a US primary deficit around 4% and a dysfunctional budget process, the debt ratio is likely to keep rising for some time.
  • When Does Federal Debt Reach Unsustainable Levels? — The authors estimate that U.S. debt held by the public cannot exceed roughly 200% of GDP even under favorable market conditions, and that under current policy the ratio reaches 175–200% within about 20 years. After that point, they argue, no tax increases or spending cuts could avert default or inflationary debt monetization.
  • 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.

AI Summary. The authors project the Federal Reserve will begin cutting rates once core inflation falls below 2.5%, then cut 0.25 percentage points per quarter until rates reach 3.5–3.75%, describing the cuts as optional rather than necessary to avoid recession. They expect the equilibrium rate to exceed last cycle's, partly because larger fiscal deficits boosting demand are likely to persist.

David Mericle Goldman Sachs
Date Posted:

David Mericle @GoldmanSachs forecasts that US real GDP will grow 1.8% in 2024 on a Q4/Q4 basis, or 2.1% on a full-year basis. He expects rate cuts in Q4 of next year with a terminal rate of 3.5-3.75%.

Will the neutral interest rate settle higher than last cycle's?

Core argument: The authors expect the FOMC to deliver its first rate cut in 2024 Q4 once core PCE inflation falls below 2.5%, followed by one 25bp cut per quarter until the fed funds rate reaches 3.5–3.75% in 2026 Q2.

We expect the FOMC to deliver its first rate cut in 2024 Q4 once core PCE inflation falls below 2.5%. We then expect one 25bp cut per quarter until 2026 Q2, when the fed funds rate would reach 3.5-3.75%. While we see rate cuts next year as optional in that they are not necessary to avoid recession, we expect the FOMC to conclude that while neutral might not be as low as the 2.5% median longer run dot, it probably is not as high as 5.25-5.5%, so some amount of normalization makes sense as inflation falls. We expect the equilibrium rate to be higher than last cycle because the post-financial crisis headwinds are behind us, much larger fiscal deficits that boost aggregate demand are likely to persist, the funds rate is approaching equilibrium from above rather than below, and the r* narrative is changing.

Takeaways by Macro Roundup® AI

  1. The authors expect the FOMC to deliver its first rate cut in 2024 Q4 once core PCE inflation falls below 2.5%, followed by one 25bp cut per quarter until the fed funds rate reaches 3.5–3.75% in 2026 Q2.
  2. The authors view rate cuts as optional rather than necessary to avoid recession, expecting the FOMC to conclude that neutral is probably not as low as the 2.5% median longer-run dot nor as high as 5.25–5.5%, so some normalization makes sense as inflation falls.
  3. The authors expect the equilibrium rate to exceed last cycle's because post-financial-crisis headwinds have passed, much larger fiscal deficits that boost aggregate demand are likely to persist, the funds rate is approaching equilibrium from above rather than below, and the r* narrative is changing.

Related Articles:

  • Macro Outlook 2024: The Hard Part Is Over — Goldman Sachs projects limited recession risk, holding a 15% US recession probability, and expects tailwinds to global growth including strong real household income growth, a smaller drag from monetary and fiscal tightening, recovering manufacturing, and central banks more willing to cut rates if growth slows. It projects core inflation falling to 2–2½%.
  • Inching Toward Equilibrium — With short-term interest rates far enough above zero, they are again the central bank's main lever for steering the economy toward equilibrium, a difficult task because policy changes affect spending, output, and inflation with lags that can span years. Equity yields have changed little while bond yields rose significantly, moving equity pricing further from equilibrium.
  • 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. Higher short-term and long-term interest rates are flowing through to credit and interest costs, which the authors expect to produce "the grind" — a gradual decline in growth and in the health of corporate and household balance sheets — as a dominant driver of economies and markets over the next 12–18 months.

Greg Jensen, David Gordon, Daisuke O, Jackson Rumer Bridgewater Associates
Date Posted:

Bridgewater argues that higher rates will drive deteriorating corporate and household balance sheets, and lead to a slow-growth dynamic they call “the grind.”

Will higher interest rates gradually erode growth and balance sheet health?

Core argument: "The grind" — a gradual decline in growth and in the health of corporate and household balance sheets — is expected to be a dominant driver of economies and markets over the next 12–18 months as higher short and long rates flow through to credit and interest costs.

Higher short and now long rates continue to flow through to credit and interest costs. This is setting up a dynamic that we are calling “the grind”— a gradual decline in growth and in the health of corporate and household balance sheets —that we expect to be a dominant driver of economies and markets over the next 12-18 months. Earlier in the tightening cycle, short-term interest rates rose and dragged long-term interest rates higher. Then, beginning in October 2022 and lasting almost a year, there was a reprieve. Hikes in short-term interest rates continued, but bond yields traded sideways, reflecting market expectations for future easing combined with the Treasury circumventing the pressure on long rates by issuing T-bills. In recent months both conditions have shifted, initiating the next stage of the tightening cycle, led by long rates.

Takeaways by Macro Roundup® AI

  1. "The grind" — a gradual decline in growth and in the health of corporate and household balance sheets — is expected to be a dominant driver of economies and markets over the next 12–18 months as higher short and long rates flow through to credit and interest costs.
  2. Beginning in October 2022 and lasting almost a year, short-term rate hikes continued while bond yields traded sideways, reflecting market expectations for future easing combined with the Treasury issuing T-bills to circumvent pressure on long rates.
  3. Both conditions that had held bond yields sideways have shifted in recent months, initiating the next stage of the tightening cycle, led by long rates.

Related Articles:

  • Macro Outlook 2024: The Hard Part Is Over — Goldman Sachs projects limited recession risk, holding a 15% US recession probability, and expects tailwinds to global growth including strong real household income growth, a smaller drag from monetary and fiscal tightening, recovering manufacturing, and central banks more willing to cut rates if growth slows. It projects core inflation falling to 2–2½%.
  • Inching Toward Equilibrium — With short-term interest rates far enough above zero, they are again the central bank's main lever for steering the economy toward equilibrium, a difficult task because policy changes affect spending, output, and inflation with lags that can span years. Equity yields have changed little while bond yields rose significantly, moving equity pricing further from equilibrium.
  • Why No Recession (Yet)? — Real interest rates have risen by almost 10 percentage points, compared with 4 points during the 2004–2006 tightening, yet activity has held up because households entered the episode with large savings accumulated during the pandemic. As those surplus savings are used up and borrowers refinance at higher rates, the full impact of tightening has not yet been felt.

AI Summary. 40% of companies in the Russell 2000 index of small-cap US firms have negative earnings, a share that typically rises during recessions. If the economy enters a recession, many middle-market companies would be vulnerable to the combination of high interest rates and slowing growth.

Torsten Sløk Apollo
Date Posted:
Is Database:
Database

Citing that 40% of Russell 2000 firms have negative earnings, Torsten Sløk @apolloglobal argues that “if the economy enters a recession, a lot of middle-market companies will be vulnerable to the combination of high rates and slowing growth.”

How vulnerable are small-cap US companies to a recession?

Core argument: 40% of companies in the Russell 2000 have negative earnings, a share reached before the economy has entered a recession.

During recessions, the share of unprofitable firms rises. This is not surprising. But even before the economy has entered a recession, the share of companies in the Russell 2000 with no earnings is at 40%. The bottom line is that if the economy enters a recession, a lot of middle-market companies will be vulnerable to the combination of high rates and slowing growth.

Takeaways by Macro Roundup® AI

  1. 40% of companies in the Russell 2000 have negative earnings, a share reached before the economy has entered a recession.
  2. The share of unprofitable firms rises during recessions.
  3. If the economy enters a recession, many middle-market companies will be vulnerable to the combination of high rates and slowing growth.

Related Articles:

  • Credit Market Outlook: Default Rates Rising, But Credit Spreads Remain Tight — Higher borrowing costs are weighing on corporate earnings and interest coverage, with bankruptcy filings rising and default rates projected to keep rising, particularly among middle-market companies. Lagged effects of monetary policy are slowing consumer credit growth, with auto and credit card delinquencies rising and bank lending standards tightening.
  • Where Are All the Defaults? — One explanation for subdued high-yield bond spreads is that the lowest-quality borrowers, those most likely to default, have migrated from high-yield markets into private credit. Moody's reports the number of issuers with its lowest speculative-grade ratings has fallen, and that 62% of its rated universe is rated single-B or below.
  • Can Corporate America Cope With Its Vast Debt Pile? — Average funding costs in the $8.6tn US investment-grade corporate bond market exceed 6%, roughly 3x their lows of below 2%, while average coupons in the $1.3tn high-yield market are 9.4%, more than double their lows. Moody's projects the US default rate will peak at 5.4%, or as high as 14% if conditions worsen.

AI Summary. The Democratic share of the Black vote fell from 97% to 91% between 2012 and 2020, according to Catalist data on demographic voting patterns, with the decline in the latter half as large as in the first. Polls put the Democratic presidential share at 80%, and 70% among young Black men.

John Burn-Murdoch Financial Times
Date Posted:
Is Database:
Database

US voting behavior is becoming less racially polarized, as young black men swing from Biden to Trump. @jburnmurdoch @StackStrat

Is Democratic support among Black voters declining?

Core argument: The Democratic share of the Black vote fell from 97% in 2012 to 91% in 2020, according to Catalist data on demographic voting patterns.

Btw 2012 and 2020, the Democratic share of the black vote fell from 97 to 91%, according to the gold-standard data on demographic voting patterns from Catalist. And this is not just the unwinding of the Obama effect — the decline between 2016 and 2020 was as large as that from 2012 to 2016. Polls put Biden’s share of the black vote at just 80% today, a record low, dipping to 70% among young black men.

Takeaways by Macro Roundup® AI

  1. The Democratic share of the Black vote fell from 97% in 2012 to 91% in 2020, according to Catalist data on demographic voting patterns.
  2. The decline in the Democratic share of the Black vote between 2016 and 2020 was as large as the decline from 2012 to 2016, so the drop is not merely the unwinding of the Obama effect.
  3. Polls put Biden's share of the Black vote at 80%, a record low, dipping to 70% among young Black men.

Related Articles:

  • Why Less Engaged Voters Are Biden’s Biggest Problem — Times/Siena survey data indicate that Democrats and Biden voters were somewhat more likely than Republicans and Trump voters to skip the midterm election, implying the presidential electorate was more Democratic. Yet the same data indicate higher turnout would not help Biden now, even though it would bring more Democratic and Biden voters to the polls.
  • Consistent Signs of Erosion in Black and Hispanic Support for Biden — Polling shows the Democratic presidential candidate's support among nonwhite voters running well below his prior election standing across racial groups, with leads of 72-11 among Black voters, 47-35 among Hispanic registrants, and 40-39 among other nonwhite voters. About 5% of his former nonwhite voters now back the Republican candidate, including 8% of Hispanic voters.
  • Why Biden Is Behind, and How He Could Come Back — Polling shows a broad decline in President Biden's standing across virtually every demographic group, with the steepest losses among young, Black, and Hispanic voters. Biden holds only a narrow lead among nonwhite voters under 45, a group that reported backing him by nearly 40 points in the prior election.