Edward Conard

Top Ten New York Times Bestselling Author

  • “There are an amazing number of good ideas and interesting points made in Unintended Consequences. The thinking underlying it, and the obvious depth of understanding of the author, are very impressive.” - Steven Levitt, coauthor of Freakonomics; 2004 John Bates Clark Medal
  • “A full-throated defense of economic dynamism.” - The Wall Street Journal
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “…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
  • “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
  • “…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
  • “…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
  • “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
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “…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
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Tuesday, November 21, 2023

AI Summary. Because of population aging, growth in GDP per capita and GDP per working-age adult have diverged across advanced economies; from 1998 to 2019 Japan's accumulated growth per working-age adult was 31.9% versus 29.5% in the US. The authors find a standard neoclassical growth model calibrated to each country's working-age population tracks output per working-age adult in most economies.

Jesus Fernandez-Villaverde, Gustavo Ventura, and Wen Yao Working Paper
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Japan achieved GDP growth per working-age adult of 31.9% between 1998 and 2019, slightly faster than the US at 29.5%. @King_ofSweden

Does measuring growth per working-age adult change how aging economies look?

Core argument: From 1998 to 2019, Japan's accumulated GDP growth per working-age adult reached 31.9%, slightly faster than the U.S. figure of 29.5%, despite Japan's lackluster GDP growth per capita.

Due to population aging, GDP growth per capita and GDP growth per working-age adult have become quite different among many advanced economies over the last several decades. Countries whose GDP growth per capita performance has been lackluster, like Japan, have done surprisingly well in terms of GDP growth per working-age adult. Indeed, from 1998 to 2019, Japan has grown slightly faster than the U.S. in terms of per working-age adult: an accumulated 31.9% vs. 29.5%. Furthermore, many advanced economies appear to be on parallel balanced growth trajectories in terms of working-age adults despite important differences in levels. Motivated by this observation, we calibrate a standard neoclassical growth model in which the growth of the working-age adult population varies in line with the data for each economy. Despite the underlying demographic differences, the calibrated model tracks output per working-age adult in most economies of our sample. Our results imply that the growth behavior of mature, aging economies is not puzzling from a theoretical perspective.

Takeaways by Macro Roundup® AI

  1. From 1998 to 2019, Japan's accumulated GDP growth per working-age adult reached 31.9%, slightly faster than the U.S. figure of 29.5%, despite Japan's lackluster GDP growth per capita.
  2. Many advanced economies appear to be on parallel balanced growth trajectories in terms of output per working-age adult, despite important differences in levels.
  3. A standard neoclassical growth model calibrated so that working-age adult population growth matches the data for each economy tracks output per working-age adult in most of the sample, implying the growth of mature, aging economies is not theoretically puzzling.

Related Articles:

  • Fully Grown – European Vacation! — Europe's growth slowdown reflects a widespread drop in productivity growth rather than changes in physical capital accumulation, with human capital growth also mattering but varying by country. The productivity decline is larger than in the US: in countries such as the UK and France, productivity growth fell from about 2% to near zero or negative.
  • Population Aging and Economic Growth: From Demographic Dividend to Demographic Drag? — The authors estimate that a 1% increase in the working-age share of the population raises income per capita by about 1%, with an added 0.1–0.4% boost to growth in later periods. They project population aging will slow annual income per capita growth in advanced economies by 0.4–0.8 percentage points through 2050, while spurring growth in less developed countries.
  • Growth in Working-Age Population Ends. That’s Not All Bad — Immigration is the only factor keeping the US working-age population from shrinking, as about 4 million baby boomers turn 65 each year and more than 820,000 Americans aged 15–64 died last year. Forecasts project immigration will hold the US 15-to-64 population roughly constant through 2100, versus projected declines of 20% across high-income countries and 62% in China.

AI Summary. Analysts estimate that each 1% of GDP of Federal Reserve balance sheet reduction is associated with roughly a 2 basis point rise in 10-year Treasury yields, implying about 20bp of upward pressure in total. That is equivalent in its effect on financial conditions and growth to a little under one interest rate hike.

Manuel Abecasis and Praveen Korapaty Goldman Sachs
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A @GoldmanSachs forecast argues the FOMC will not moderate the pace of balance sheet reductions until late 2024. They write that the reduction is “likely already anticipated by financial markets” and therefore fully reflected in current rates.

How much do central bank balance sheet reductions raise long-term yields?

Core argument: A rule of thumb derived from a range of studies holds that balance sheet reduction equal to 1% of GDP is associated with a roughly 2bp rise in 10-year Treasury yields.

We continue to expect the Fed’s balance sheet runoff to have modest effects on interest rates, broader financial conditions, growth, and inflation. Our rule of thumb derived from a range of studies is that 1% of GDP of balance sheet reduction is associated with a roughly 2bp rise in 10-year Treasury yields. In total, our projections for runoff imply that balance sheet normalization will have exerted around 20bp worth of upward pressure on 10-year yields since runoff started. Together with our rule of thumb that a 25bp boost to 10-year term premia from balance sheet reduction has roughly the same impact on financial conditions and growth as a 25bp rate hike, this implies that the total runoff process should have the effect of a little under one rate hike.

Takeaways by Macro Roundup® AI

  1. A rule of thumb derived from a range of studies holds that balance sheet reduction equal to 1% of GDP is associated with a roughly 2bp rise in 10-year Treasury yields.
  2. Projections for the Fed's runoff imply balance sheet normalization will have exerted about 20bp of upward pressure on 10-year Treasury yields since runoff began.
  3. Under the rule of thumb that a 25bp boost to 10-year term premia from balance sheet reduction affects financial conditions and growth roughly as much as a 25bp rate hike, the total runoff process amounts to a little under one rate hike.

Related Articles:

  • The Grind Ahead — 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.
  • 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.
  • A Beautiful Replenishment — Money market funds buying Treasury bills lets bank reserves be replenished as cash moves from the Federal Reserve's overnight reverse repo facility into the Treasury's account and back out through government spending. The author argues reserves should stay abundant, allowing the Federal Reserve's balance sheet runoff to continue about two more years.

AI Summary. Regulatory changes are argued to be worsening the ability of the U.S. Treasury market to absorb large government debt issuance, as mandatory clearing of Treasury repurchase agreements raises leveraged investors' financing costs through higher collateral requirements. Mutual funds are meanwhile encouraged by regulation to use Treasury futures rather than buy Treasury securities outright, pointing to continued declines in liquidity.

Joseph Wang Fed Guy Blog
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.@FedGuy12 writes that a recent SEC proposal for mandatory repo clearing will likely reduce Treasury liquidity by increasing the cost of repo.

Are new regulations reducing liquidity in the Treasury market?

Core argument: Three insights from the Fed's Treasury market conference point to a continued structural decline in Treasury market liquidity, with dealer balance sheet constraints having moved beyond those solvable through central clearing.

The Fed’s recent Treasury market conference offered three notable insights that suggest Treasury market liquidity will continue its structural decline. First, dealer balance sheet constraints have moved from ones that could be solved through central clearing to those that would require other adjustments. Secondly, mandatory Treasury repo clearing may reduce market liquidity by raising the cost of financing due to higher collateral haircuts. Lastly, mutual funds may not become significant marginal investors in cash Treasuries as regulations encourage them to invest using Treasury futures. The official sector appears to be making adjustments that will make it more difficult for the market to absorb the upcoming deluge of Treasury issuance. At a high level, cash Treasuries can be held by investors using borrowed money or cash investors. The leveraged investors are more nimble participants as cash investor participation depend on asset inflows or the liquidation of other asset holdings. Going forward it looks like the costs of leveraged financing will increase due to mandatory cleared repo and a limited supply of repo financing that is constrained by regulatory costs. Major investors that could participate in the cash market remain incentivized to instead use Treasury futures. The Treasury market looks to continue its trend of becoming less liquid and more volatile.

Takeaways by Macro Roundup® AI

  1. Three insights from the Fed's Treasury market conference point to a continued structural decline in Treasury market liquidity, with dealer balance sheet constraints having moved beyond those solvable through central clearing.
  2. Mandatory Treasury repo clearing may reduce liquidity by raising financing costs through higher collateral haircuts, while regulatory costs constrain the supply of repo financing for leveraged investors.
  3. Mutual funds may not become significant marginal investors in cash Treasuries, as regulations encourage them to gain exposure through Treasury futures instead.

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.
  • How Has Treasury Market Liquidity Evolved in 2023? — Treasury market liquidity has tracked its historical relationship with interest rate volatility, indicating liquidity has not been unusually poor given the level of rate volatility, though the two-year note shows somewhat higher-than-expected price impact. The market's capacity to smoothly handle large trading flows remains a concern for policymakers and market participants.
  • Liquidity Event — U.S. Treasuries remain the world's most liquid security, but daily cash trading volumes have not kept pace with the growth in issuance, leaving the market structurally less liquid. Principal trading firms account for 20% of cash market volumes yet withdraw when volatility rises, making their liquidity provision illusory.

AI Summary. The Pew Research Center estimates the unauthorized immigrant population in the United States at 10.5m, below its peak of 12.2m and lower than every year from 2005 to 2015. That figure represents about 3% of the total U.S. population and 22% of the foreign-born population, shares among the lowest since the 1990s.

Jeffrey Passel and Jens Manuel Krogstad Pew Research Center
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10.5mm unauthorized immigrants lived in the US in 2021, under the 2007 peak of 12.2mm. This represented about 3% of the total U.S. population and 22% of the foreign-born population, among the lowest shares since the 1990s.

How large is the unauthorized immigrant population in the US?

Core argument: Pew Research Center estimates the U.S. unauthorized immigrant population reached 10.5 million in 2021, a modest increase over 2019 but nearly identical to 2017 and below the 2007 peak of 12.2 million.

The unauthorized immigrant population in the United States reached 10.5 million in 2021, according to new Pew Research Center estimates. That was a modest increase over 2019 but nearly identical to 2017. The number of unauthorized immigrants living in the U.S. in 2021 remained below its peak of 12.2 million in 2007. It was about the same size as in 2004 and lower than every year from 2005 to 2015. The U.S. foreign-born population was 14.1% of the nation’s population in 2021. That was very slightly higher than in the last five years but below the record high of 14.8% in 1890. As of 2021, the nation’s 10.5 million unauthorized immigrants represented about 3% of the total U.S. population and 22% of the foreign-born population. These shares were among the lowest since the 1990s.

Takeaways by Macro Roundup® AI

  1. Pew Research Center estimates the U.S. unauthorized immigrant population reached 10.5 million in 2021, a modest increase over 2019 but nearly identical to 2017 and below the 2007 peak of 12.2 million.
  2. The 10.5 million unauthorized immigrants in 2021 represented about 3% of the total U.S. population and 22% of the foreign-born population, shares among the lowest since the 1990s.
  3. The U.S. foreign-born population was 14.1% of the nation's population in 2021, very slightly higher than in the prior five years but below the record high of 14.8% in 1890.

Related Articles:

  • Monopsony, Efficiency, and the Regularization of Undocumented Immigrants — A study of France's amnesty program, which regularized undocumented workers making up 2.0% of workers in Paris and nearly 1% nationwide, finds positive effects on employment and wages, particularly for male, low-skill workers. The authors argue regularization reduces employers' wage-setting power in the undocumented labor market, and estimate a rise in total French GDP of around 1%.
  • Immigrants & Their Kids Were 70% of U.S. Labor Force Growth Since 1995 — U.S. labor force data show immigrants accounted for 49% of labor force growth over roughly the past three decades and their children another 21%, together about 70% of an increase of nearly 32.8m workers. Immigrants rose from about 10% to 18% of the labor force, and immigrants plus their children from 18% to 29%.
  • Immigrants’ Share of the U.S. Labor Force Grows to a New High — Foreign-born workers made up 18.1% of the U.S. labor force, up from 17.4% a year earlier and the highest share in 27 years of Labor Department records. The number of immigrants working or looking for work rose by 1.8m, or 6.3%, to 29.8m.

AI Summary. China's surplus in manufactured goods net of commodity imports has kept growing relative to trade partners' output and relative to China's own economic output, alongside weak consumer spending and falling homebuilding. U.S. federal spending financed largely by borrowing has supported private balance sheets and demand, muting attention to that surplus.

Matt Klein The Overshoot
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China’s surplus is growing relative to GDP. @M_C_Klein notes the negative employment consequences of this has been offset by US government spending which has sustained domestic American demand and shored up private sector balance sheets.

Is China's manufacturing surplus growing while US borrowing masks its effects?

Core argument: China's surplus in manufactured goods net of commodity imports has kept growing relative to the economic output of its trade partners, driven in large part by China's growth relative to the rest of the world.

China’s surplus in manufactured goods net of commodity imports has continued to grow relative to the economic output of China’s trade partners, thanks in large part to China’s growth relative to the rest of the world. Even though the value of Chinese exports fell in 2023, this has had no impact on China’s overall balance because the amount of money spent on imports is down as well. The past few years have even seen a renewed surge in China’s surplus (properly measured) relative to China’s own GDP thanks to exceptionally weak growth in consumer spending and the sustained plunge in homebuilding. Federal spending—financed in large part by borrowing—has helped shore up private sector balance sheets and sustain demand, even as some spending elements have contained provisions that should put a floor on sales for American producers. This policy mix helps explain why China’s growing surplus has not attracted much ire, or even notice, in the U.S.

Takeaways by Macro Roundup® AI

  1. China's surplus in manufactured goods net of commodity imports has kept growing relative to the economic output of its trade partners, driven in large part by China's growth relative to the rest of the world.
  2. Chinese export values fell in 2023 without changing China's overall balance, because spending on imports declined as well, and the surplus measured against China's own GDP has surged again amid exceptionally weak consumer spending and a sustained plunge in homebuilding.
  3. U.S. federal spending, financed largely by borrowing, has shored up private sector balance sheets and sustained demand, and some spending elements contain provisions that should put a floor under sales for American producers, which helps explain why China's growing surplus has drawn little U.S. notice.

Related Articles:

  • Danish Weight Loss Drugs vs. Chinese Cars: Two Models of Export Booms — Denmark's weight-loss drug exports illustrate a positive-sum export boom in which new products create both supply and demand, while Chinese car exports reflect firms with persistent overcapacity fighting for market share. The US preempted Chinese electric vehicles through legislation that boosts demand while reserving a share for local producers; Europe remains more exposed.
  • Can China Reduce Its Internal Balances Without Renewed External Imbalances? — China's headline goods trade surplus is about 5% of its GDP, with the underlying surplus in manufactured goods close to 10% of GDP. The author argues that if China relies on interest rate cuts, exchange rate liberalization, and a weak yuan to offset its property downturn, its trade surplus could reach record levels relative to trading partners' output.
  • As Long As The US Is Outlet For China’s Surplus Rumors Of Decoupling Are Overstated — With Europe's current account near balance and Japan back in surplus, the question of which economy absorbs China's current account surplus remains open, and the US external deficit exceeds what G-7 countries can finance. The global economy stays relatively integrated despite frictions, even as global politics is more fractured.

AI Summary. More than three-quarters of the foreign money that flowed into China's stock market has since left, with global investors selling over $25bn of shares despite Beijing's efforts to restore confidence. Net purchases by offshore investors are on course for their smallest annual total since 2015.

Hudson Lockett Financial Times
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Three-quarters of the foreign money invested in China’s stock market in 2023 has left the country so far this year. Net investment inflows in terms of equities are at an 8-year low.

Are foreign investors pulling their money out of Chinese stocks?

Core argument: More than 75% of the foreign money that flowed into China's stock market in the first seven months of the year has left, with global investors selling over $25bn worth of shares despite Beijing's efforts to restore confidence.

More than three-quarters of the foreign money that flowed into China’s stock market in the first seven months of the year has left, with global investors dumping more than $25bn worth of shares despite Beijing’s efforts to restore confidence in the world’s second-largest economy. The sharp selling in recent months puts net purchases by offshore investors on course for the smallest annual total since 2015, the first full year of the Stock Connect programme that links up markets in Hong Kong and mainland China.

Takeaways by Macro Roundup® AI

  1. More than 75% of the foreign money that flowed into China's stock market in the first seven months of the year has left, with global investors selling over $25bn worth of shares despite Beijing's efforts to restore confidence.
  2. Net purchases of Chinese stocks by offshore investors are on course for the smallest annual total since 2015, the first full year of the Stock Connect programme linking Hong Kong and mainland markets.

Related Articles:

  • The Threat from China’s Capital Flight — Oddities in China's official balance of payments statistics suggest its actual current account surplus may be nearly 3x the reported figure, which would make it about as large relative to world output as it has ever been. The likeliest explanation for simultaneous downward pressure on the yuan is capital flight of roughly $500bn a year.
  • Net Outflow of Funds from China Hits 7-Year High in September — China's State Administration of Foreign Exchange reported a net outflow of $53.9bn in monthly international financial transactions handled by domestic banks for businesses and households, the largest since a $55.8bn outflow tied to a sudden yuan devaluation. Outflows linked to direct investment, such as building manufacturing plants, were notable.
  • The Rise & Fall of Foreign Direct Investment in China — Net foreign direct investment into China has been negative for four consecutive quarters, as foreign investors shifted from reinvesting earnings from their Chinese operations to repatriating them. Whether this reflects cash management or signals a future slowdown in foreign direct investment is unclear, but the repatriation of profits is negative for China's currency.

AI Summary. Interest on Argentina's central bank securities exceeds 100% annualized, at 133%, putting its interest bill at nearly 20% of GDP. The central bank must create more local currency to cover that bill, which in turn requires still more borrowing to absorb the new money.

Chris Marsh Money: Inside and Out
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Dollarization might be helpful for Argentina but it doesn’t solve the Central Bank of Argentina’s (BCRA) balance sheet problem; currently, it is monetizing its interest bill, driving inflation. @GeneralTheorist argues for another debt writedown.

Can a central bank escape a self-feeding money creation cycle?

Core argument: Interest on Argentina's central bank (BCRA) securities exceeds 100% annualised—133%—meaning the local-currency value of outstanding LELIQs will more than double over the next 12 months.

All that matters for understanding the BCRA balance sheet is the fact that the interest on BCRA securities now exceeds 100% annualised—in fact, 133%. In other words, the value of LELIQs outstanding, measured in local currency, will more than double over the next 12 months. In fact, these are rolled every one or two weeks, so properly compounding the story is even worse. But let’s say it increases by 1.3 times over the next 12 months. Then the BCRA interest bill is nearly 20% of GDP. BCRA has no choice but to monetise their interest bill—creating yet more units of local currency, requiring even more money to be sterilised, acting like a dog chasing her tail. If Milei had not been elected, with his determination to fix the central bank balance sheet, it is possible that hyperinflation would have been the next phase of monetary madness.

Takeaways by Macro Roundup® AI

  1. Interest on Argentina's central bank (BCRA) securities exceeds 100% annualised—133%—meaning the local-currency value of outstanding LELIQs will more than double over the next 12 months.
  2. Assuming LELIQs outstanding rise 1.3 times over 12 months, the BCRA interest bill is nearly 20% of GDP, and because the securities are rolled every one or two weeks, compounding makes the arithmetic worse.
  3. The BCRA has no choice but to monetise its interest bill, creating more local currency that in turn requires more sterilisation; without Milei's election and his determination to fix the central bank balance sheet, hyperinflation was a possible next phase.

Related Articles:

  • A Brief History of Dollar Hatred — The US dollar shows no long-term downward trend and sits above its long-term average in both nominal and real terms, though the reading depends on which dollar index is used.

Monday, November 27, 2023

AI Summary. U.S. H-1B visa denial rates rose from about 6% to 16%, and the authors estimate a 10 percentage point rise in denials increases Canadian applications by 30%, roughly one Canadian application per four forgone visas. More exposed Canadian firms increased sales and hired about 0.5 native workers per immigrant.

Agostina Brinatti and Xing Guo University of Michigan
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Immigration restrictions on skilled immigration during Trump’s first term drove an uptick in skilled immigration to Canada. This inflow was associated with Canadian firms expanding in both domestic and foreign markets. @AgosBrinatti

Do tighter U.S. skilled visa rules send workers and gains abroad?

Core argument: H-1B denial rates rose from about 6% in 2016 to 16% in 2018, alongside a decrease of 140,000 H-1B approvals relative to trend by the end of 2018.

By the end of 2018, there was a decrease of 140,000 H-1B approvals (relative to trend) and an unprecedented spike in H-1B denial rates. Denial rates increased from about 6% in 2016 to 16% in 2018. Our event-study estimates imply that a 10 percentage point increase in H-1B denial rates increases Canadian applications by 30%. A back-of-the-envelope calculation suggests that for every four forgone H-1B visas, there is an associated increase of one Canadian application. We find that firms that were relatively more exposed to the immigrant inflow increased sales. Consistent with the increase in production, we find that a firm hired approximately 0.5 additional native workers per new immigrant. We also find that the earnings per native worker at relatively more exposed firms dropped. This result together with the fact that more exposed firms are intensive in occupations that were more impacted by U.S. restrictions, is consistent with earnings per native worker in more affected occupations declining compared to less affected ones.

Takeaways by Macro Roundup® AI

  1. H-1B denial rates rose from about 6% in 2016 to 16% in 2018, alongside a decrease of 140,000 H-1B approvals relative to trend by the end of 2018.
  2. Event-study estimates imply that a 10 percentage point increase in H-1B denial rates raises Canadian applications by 30%, with a back-of-the-envelope calculation suggesting one additional Canadian application for every four forgone H-1B visas.
  3. Firms more exposed to the immigrant inflow increased sales and hired approximately 0.5 additional native workers per new immigrant, while earnings per native worker at those firms dropped.

Related Articles:

AI Summary. The seven largest US mega-cap technology stocks are projected to outperform the rest of the S&P 500, supported by faster expected sales growth, higher margins, greater reinvestment, and stronger balance sheets. Analysts expect these companies to grow sales at an 11% annual rate versus 3% for the other 493 companies, with net margins twice as high.

David Kostin, Ben Snider, Ryan Hammond, Cormac Conners, Lily Calcagnini, Jenny Ma and Daniel Chavez Goldman Sachs
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.@GoldmanSachs forecasts a 6% total return for the S&P 500 in 2024, with the Magnificent 7 growing sales at a CAGR of 11% vs. 3% for the rest of the S&P 500.

Will mega-cap tech stocks keep outperforming the rest of the index?

Core argument: Analyst estimates show the "Magnificent 7" mega-cap tech stocks growing sales at an 11% CAGR through 2025, versus 3% for the rest of the S&P 500.

The massive outperformance of the “Magnificent 7” mega-cap tech stocks has been a defining feature of the equity market in 2023. The stocks should collectively outperform the remainder of the index in 2024. The 7 stocks have faster expected sales growth, higher margins, a greater re-investment ratio, and stronger balance sheets than the other 493 stocks and trade at a relative valuation in line with recent averages after accounting for expected growth. However, the risk/reward profile of this trade is not especially attractive given elevated expectations. Analyst estimates show the mega-cap tech companies growing sales at a CAGR of 11% through 2025 compared with just 3% for the rest of the S&P 500. The net margins of the Magnificent 7 are twice the margins of the rest of the index, and consensus expects this gap will persist through 2025.

Takeaways by Macro Roundup® AI

  1. Analyst estimates show the "Magnificent 7" mega-cap tech stocks growing sales at an 11% CAGR through 2025, versus 3% for the rest of the S&P 500.
  2. The Magnificent 7's net margins are twice those of the other 493 S&P 500 stocks, and consensus expects that gap to persist through 2025.
  3. The Magnificent 7 should collectively outperform the rest of the index in 2024 on stronger balance sheets, a greater re-investment ratio, and relative valuations in line with recent averages after accounting for expected growth, though the risk/reward profile is not especially attractive.

Related Articles:

  • A Few Stocks Drive the Stock Market: Dot.com Vs. Today Vs. the Last 100 Years — Seven large technology stocks account for nearly 30% of the S&P 500's total value, but the rise of both hyped stocks and the broader market was more extreme during the dot-com era. Historically, only a few stocks have generated most of the stock market's value creation in the US and internationally.
  • Long-Term Shareholder Returns: Evidence From 64,000 Global Stocks — A study of about 64,000 global stocks estimates net global stock market wealth creation of $75.7tn, with returns highly concentrated: the top 159 firms (0.25%) account for half of net wealth creation and the top 1,526 (2.39%) account for all of it. Fewer than half of stocks beat one-month US Treasury bills, 42.6% of non-US and 44.8% of US stocks.
  • Birth, Death, and Wealth Creation — The median age at which US companies went public rose from 7.9 years in 1976–2000 to 9.5 years in 2001–2022, implying that more wealth creation now occurs in private markets. Research on more than 28,000 US-listed companies since 1926 finds that just under 60% destroyed $9.1tn of wealth while about 2% created $50tn.

AI Summary. The seven largest S&P 500 companies have risen 80% this year and carry an average price-to-earnings ratio above 50, diverging from the other 493 companies in the index. Their valuations are beginning to resemble those of the Nifty Fifty era and the peak of the tech bubble.

Torsten Sløk Apollo
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Torsten Sløk @apolloglobal draws parallels between the current P/E of the Magnificent 7 and similar ratios from the 2000 tech bubble and the 1972 Nifty Fifty.

Are the largest tech stocks reaching past bubble valuations?

Core argument: Investors buying the S&P 500 are buying seven companies already up 80% this year with an average P/E ratio above 50.

The divergence between the S&P7 and the S&P493 continues. Investors buying the S&P 500 today are buying seven companies that are already up 80% this year and have an average P/E ratio above 50. In fact, S&P7 valuations are beginning to look similar to the Nifty Fifty and the tech bubble in March 2000.

Takeaways by Macro Roundup® AI

  1. Investors buying the S&P 500 are buying seven companies already up 80% this year with an average P/E ratio above 50.
  2. The divergence between the S&P7 and the S&P493 continues.
  3. S&P7 valuations are beginning to look similar to those of the Nifty Fifty and the tech bubble in March 2000.

Related Articles:

  • A Few Stocks Drive the Stock Market: Dot.com Vs. Today Vs. the Last 100 Years — Seven large technology stocks account for nearly 30% of the S&P 500's total value, but the rise of both hyped stocks and the broader market was more extreme during the dot-com era. Historically, only a few stocks have generated most of the stock market's value creation in the US and internationally.
  • Long-Term Shareholder Returns: Evidence From 64,000 Global Stocks — A study of about 64,000 global stocks estimates net global stock market wealth creation of $75.7tn, with returns highly concentrated: the top 159 firms (0.25%) account for half of net wealth creation and the top 1,526 (2.39%) account for all of it. Fewer than half of stocks beat one-month US Treasury bills, 42.6% of non-US and 44.8% of US stocks.
  • 2024 US Equity Outlook: “All You Had To Do Was Stay” — The seven largest US mega-cap technology stocks are projected to outperform the rest of the S&P 500, supported by faster expected sales growth, higher margins, greater reinvestment, and stronger balance sheets. Analysts expect these companies to grow sales at an 11% annual rate versus 3% for the other 493 companies, with net margins twice as high.

AI Summary. The strongest argument for adopting the dollar is precommitment: a country that dollarizes cannot print money to fund spending beyond tax revenue, must borrow in dollars, and must accept costly default rather than inflation if it does not repay. A government credibly committed to avoiding inflation and devaluation can borrow far more on better terms.

John Cochrane The Grumpy Economist
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.@JohnHCochrane argues dollarization is the closest Argentina can likely get to an independent central bank. He notes that Argentina will need a way to access dollars.

.@JohnHCochrane argues dollarization is the closest Argentina can likely get to an independent central bank. He notes that...

Does adopting the dollar help a country borrow on better terms?

Core argument: Precommitment is the most powerful argument for dollarization because a country that dollarizes cannot print money to spend more than it receives in taxes.

Precommitment is, I think, the most powerful argument for dollarization (as for eurorization of, say, Greece): A country that dollarizes cannot print money to spend more than it receives in taxes. A country that dollarizes must also borrow entirely in dollars and must endure costly default rather than relatively less costly inflation if it doesn't want to repay debts. Ex post inflation and devaluation is always tempting, to pay deficits, to avoid paying debt, to transfer money from savers to borrowers, to advantage exporters, or to goose the economy ahead of elections. If a government can precommit itself to eschew inflation and devaluation, then it can borrow a lot more money on better terms, and its economy will be far better off in the long run. An independent central bank is often advocated for precommitment value. Well, locating the central bank 5,000 miles away in a country that doesn't care about your economy is as independent as you can get!

Takeaways by Macro Roundup® AI

  1. Precommitment is the most powerful argument for dollarization because a country that dollarizes cannot print money to spend more than it receives in taxes.
  2. A dollarizing country must borrow entirely in dollars and endure costly default rather than relatively less costly inflation if it does not want to repay its debts.
  3. A government that precommits to eschew inflation and devaluation can borrow far more on better terms, and locating the central bank 5,000 miles away in a country indifferent to your economy is as independent as you can get.

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AI Summary. China's officially reported current account surplus understates the true figure, with both the balance-of-payments goods surplus falling well short of customs data and investment income remaining in deficit despite higher U.S. interest rates. Adjusting for these discrepancies, the author estimates the surplus would be roughly $300bn larger, around $800bn or over 4% of China's GDP.

Brad Setser Council on Foreign Relations
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.@Brad_Setser finds “With reasonable adjustments, China’s ‘true’ current account surplus might be $300B larger than China officially reports,” or around $800B.

Is China's true current account surplus far larger than reported?

Core argument: With reasonable adjustments, China's "true" current account surplus might be $300 billion larger than officially reported, putting it near $800 billion, over 4 percent of GDP.

[In the official reports] both the goods surplus, which is much smaller in the balance of payments than in the customs data, and balance on investment income, which remains in deficit even with the rise in U.S. interest rates, are suspicious. With reasonable adjustments, China's “true” current account surplus might be $300 billion larger than China officially reports. That's real money, even for China. The model implies China's overall income balance should now be back in a surplus of around $70 billion thanks to the rise in U.S. short-term interest rates. So without the unexplained deficit in investment income and the discrepancy between customs goods and balance of payments goods, and China’s current account surplus would now be around $800 billion, over 4 percent of its GDP.

Takeaways by Macro Roundup® AI

  1. With reasonable adjustments, China's "true" current account surplus might be $300 billion larger than officially reported, putting it near $800 billion, over 4 percent of GDP.
  2. China's balance-of-payments goods surplus is much smaller than its customs data show, and its investment income balance remains in deficit despite the rise in U.S. interest rates.
  3. The model implies China's overall income balance should now be in surplus of around $70 billion thanks to the rise in U.S. short-term interest rates.

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  • Managing Economic and Financial Entanglements With China — China's surplus in manufactured goods net of commodity imports has kept growing relative to trade partners' output and relative to China's own economic output, alongside weak consumer spending and falling homebuilding. U.S. federal spending financed largely by borrowing has supported private balance sheets and demand, muting attention to that surplus.
  • Can China Reduce Its Internal Balances Without Renewed External Imbalances? — China's headline goods trade surplus is about 5% of its GDP, with the underlying surplus in manufactured goods close to 10% of GDP. The author argues that if China relies on interest rate cuts, exchange rate liberalization, and a weak yuan to offset its property downturn, its trade surplus could reach record levels relative to trading partners' output.
  • Can China Reduce Its Internal Balances Without Renewed External Imbalances? — China's headline goods trade surplus is about 5% of its GDP, with the underlying surplus in manufactured goods close to 10% of GDP. The author argues that if China relies on interest rate cuts, exchange rate liberalization, and a weak yuan to offset its property downturn, its trade surplus could reach record levels relative to trading partners' output.

AI Summary. China's annual college graduates rose from about 1m at the turn of the century, roughly 6% of the age cohort, to 11.6m, about 63% of the cohort, with over 40% studying science, technology, engineering, or math, compared with 18% in the US, 35% in Germany, and 26% across the OECD.

Han Feizi Asia Times
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Han Feizi argues China’s deepening pool of human capital will offset demographic drag. 40% of China’s college graduates are STEM majors. Given current graduation rates, by 2043 China will have more STEM-educated workers than the rest of the world.

Has China's college graduate share of its age cohort risen sharply?

Core argument: China's college graduates rose from 1 million at the turn of the century, or 6% of the age cohort measured against births 24 years earlier, to 11.6 million for the class of 2023, equal to 63% of the cohort.

At the turn of the century, China produced one million college graduates. This represented 6% of the age cohort which we calculate by dividing graduates by births 24 years prior (the average age at college graduation is 23.7 in China). This has increased dramatically to 11.6 million graduates for the class of 2023, 63% of the age cohort. Over 40% of China’s college graduates are STEM majors. This compares to 18% in the US, 35% in Germany, and 26% in the OECD. While we await graduation statistics for 2024 and beyond, we believe recent university expansions have enrolled an additional 3 million students per year since 2017, taking them out of both the job and family formation market until graduation. This just so happens to coincide with both the sudden decline in births and the increase in youth unemployment.

Takeaways by Macro Roundup® AI

  1. China's college graduates rose from 1 million at the turn of the century, or 6% of the age cohort measured against births 24 years earlier, to 11.6 million for the class of 2023, equal to 63% of the cohort.
  2. Over 40% of China's college graduates are STEM majors, compared with 18% in the US, 35% in Germany, and 26% across the OECD.
  3. University expansions are estimated to have enrolled an additional 3 million students per year since 2017, taking them out of the job and family formation markets until graduation, coinciding with declining births and rising youth unemployment.

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  • A Revolution Is Coming for China’s Families — Prolonged below-replacement fertility in China is projected to produce a "kin crash" in which rising generations have fewer living relatives than ever before in Chinese history. The authors argue this shrinking of extended family networks will erode the Chinese family's role in protecting people from adversity and helping them seize opportunity.