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


Friday, December 1, 2023

AI Summary. From 1940 to 1945, the US Office of Scientific Research and Development engaged industrial and academic contractors in more than 2,200 research contracts worth over $9bn in 2022 dollars, despite no pre-war tradition of funding externally performed research. At the war's height, the US government funded the research behind nearly 1 in 8 US patents.

Daniel Gross and Bhaven Sampat American Economic Review
Date Posted:

During World War II, American defense innovation spending was responsible for 1 in 8 American patents. Areas where defense research dollars were spent produced 40% to 50% more patents annually by the 1970s relative to pre-war levels.

Did wartime government R&D funding reshape the US innovation system?

Core argument: From 1940 to 1945, the Office of Scientific Research and Development engaged industrial and academic contractors in more than 2,200 R&D contracts worth over $9 billion in 2022 dollars, despite no pre-war U.S. tradition of funding extramural R&D.

In this paper, we study the long-run effects of the largest R&D shock in U.S. history. In World War II, the newly-created Office of Scientific Research and Development (OSRD) led an expansive effort to develop technologies and medical treatments for the Allied war effort. From 1940 to 1945, OSRD engaged industrial and academic contractors in more than 2,200 R&D contracts at over $9 billion (2022 dollars), despite no pre-war tradition of funding extramural (externally-performed) R&D. At the height of the war, the U.S. government was funding the research behind nearly 1 of every 8 U.S. patents—more than five times pre-war and modern levels, and nearly twice the level at the peak of the Cold War in the 1950s and 1960s. The immediate effect of these investments was a range of technological advances which were not only instrumental to the success of the Allied campaign, but also of wide civilian value after the war ended. Its longer-run impact was to reshape the U.S. innovation system.

Takeaways by Macro Roundup® AI

  1. From 1940 to 1945, the Office of Scientific Research and Development engaged industrial and academic contractors in more than 2,200 R&D contracts worth over $9 billion in 2022 dollars, despite no pre-war U.S. tradition of funding extramural R&D.
  2. At the height of World War II, the U.S. government funded the research behind nearly 1 of every 8 U.S. patents—more than five times pre-war and modern levels and nearly twice the 1950s–1960s Cold War peak.
  3. The authors argue that OSRD's wartime investments yielded technological and medical advances instrumental to the Allied campaign and of wide civilian value afterward, and reshaped the U.S. innovation system over the longer run.

Related Articles:

  • Moonshot: Public R&D and Growth — Federal R&D investment for the mission to send a crewed mission to the Moon peaked at over 0.7% of GDP for NASA. The authors estimate that NASA research-and-development contractor spending had a local economic impact similar to that of typical government expenditures, and note there is no credible empirical estimate of the space program's contribution to economic growth.
  • Public R&D Spillovers and Productivity Growth — Using US firm-level patent and balance-sheet data spanning 1950–2020, the author estimates that a 1% decline in spillovers from publicly funded research and development causes a 0.17% decline in firm productivity growth, with public R&D spillovers about 3x as impactful as private ones and smaller firms gaining most.
  • Pentagon Plans Vast AI Fleet to Counter China Threat — The Pentagon plans to field thousands of air-, land- and sea-based artificial-intelligence systems, drones and autonomous platforms within two years to counter threats from China and other adversaries, spending hundreds of millions of dollars on systems intended to be "small, smart, cheap.

AI Summary. The authors estimate that the Federal Reserve's balance-sheet runoff makes its current policy rate of 5.375% equivalent in its effect on financial conditions to a rate of 5.763% without runoff, a gap of 39 basis points. They project that gap to widen to a full percentage point as assets continue rolling off at $95bn a month.

Benn Steil and Elisabeth Harding Barrons
Date Posted:

QT is tightening monetary policy more than the Fed realizes; under the current trajectory, @BennSteil estimates that the policy rate is 5.76%, after adjusting for the balance sheet shrinkage, relative to its headline of 5.38%.

Is monetary policy tighter than the stated policy rate suggests?

Core argument: The authors calculate that the Fed's 5.375% policy rate, combined with the current quantitative tightening roll-off schedule, affects financial conditions equivalently to a 5.763% policy rate without QT, a gap of 39bps.

The figure shows the path through time of two interest rates. The lower line shows the path of the Fed’s policy rate going back to April 2022, and its projected path forward over the coming two years. The upper line shows what we call the “QT-equivalent policy rate,” which accounts for the effect of QT. The QT-equivalent rate is the policy rate needed without QT to have an effect on financial conditions equivalent to that produced by the actual policy rate with QT. What we find is that today’s policy rate of 5.375% is, under the current QT roll-off schedule, having roughly the same impact on financial conditions as a policy rate of 5.763% without QT. That’s a gap of 39bps, or 39 hundreds of a percent. But the effect of QT rises sharply going forward, as $95 billion in assets continue to roll off the balance sheet each month, before reaching a high of 100 basis points—or one full percent—in May 2025.

Takeaways by Macro Roundup® AI

  1. The authors calculate that the Fed's 5.375% policy rate, combined with the current quantitative tightening roll-off schedule, affects financial conditions equivalently to a 5.763% policy rate without QT, a gap of 39bps.
  2. The authors project the QT-equivalent gap will widen to 100bps in May 2025 as $95 billion in assets roll off the Fed's balance sheet each month.
  3. The authors define the QT-equivalent policy rate as the policy rate needed without quantitative tightening to produce the same effect on financial conditions as the actual policy rate with QT in place.

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.
  • 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.
  • 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%.

AI Summary. The New Tenant Rent Index, which tracks rents on newly signed leases, shows disinflation that is passing through to slower growth in the shelter component of consumer prices, with data suggesting further stabilization ahead. Growth in aggregate wages and salaries continues to decline as the labor market slows, a pattern closely tied to housing inflation.

Joseph Politano Apricitas Economics
Date Posted:

The continued rise in rents is now the primary driver of CPI inflation; however, rent inflation is decelerating, with the New Tenant Rent Index now having a rate of change in line with its pre-pandemic level. @JosephPolitano

Will new lease rents keep slowing housing inflation?

Core argument: The New Tenant Rent Index showed significant rent disinflation that has begun passing through to decelerating CPI shelter prices, and NTR data through the third quarter suggests further stabilization ahead.

Earlier this year, the New Tenant Rent Index (NTR) was showing significant disinflation in rent prices that have since begun passing through to decelerations in CPI shelter prices—and recently released NTR data through the third quarter suggests that even more stabilization is yet to come. Growth in Gross Labor Income—the aggregate wages and salaries of all workers in the economy—continues to decline as the labor market slows toward normal pre-pandemic growth rates. Given how tight the relationship between cyclical growth in employment/wages and housing inflation is, a deceleration in NTR has naturally followed the slower labor market of the last year.

Takeaways by Macro Roundup® AI

  1. The New Tenant Rent Index showed significant rent disinflation that has begun passing through to decelerating CPI shelter prices, and NTR data through the third quarter suggests further stabilization ahead.
  2. Growth in Gross Labor Income, the aggregate wages and salaries of all workers in the economy, continues to decline as the labor market slows toward pre-pandemic growth rates.
  3. Given the tight relationship between cyclical employment and wage growth and housing inflation, the deceleration in the New Tenant Rent Index follows a slower labor market.

Related Articles:

  • The Most Important New Disinflation Indicator — The New Tenant Repeat Rent Index tracks price changes only for units where new tenants have signed leases, using the same underlying data as the Consumer Price Index, and tends to lead official rent measures by about a year. It currently points to significant rent disinflation over the next three quarters.
  • Where Is Shelter Inflation Headed? — A model forecast based on metro-area data projects that year-over-year shelter inflation will continue to slow and may turn negative, which would be the most severe contraction in shelter inflation since the 2007-09 financial crisis. Shelter is a major component of overall inflation, so such a turnaround would have important implications for headline inflation.
  • Striking Similarities (and Differences) Between Inflation Today and In the 1970s — US inflation over the past 5-10 years has closely tracked its behavior in the early 1970s, a pattern that would put inflation back on target by mid-2024. But unlike the early 1970s, when core inflation followed headline inflation both up and down, headline inflation has been falling while core has not, indicating more pronounced underlying inflationary pressures.

AI Summary. Inflation-adjusted US house prices are 3.0% below their peak, while housing affordability is the worst since 1982, when 30-year mortgage rates exceeded 14%. With mortgage rates at 7.20%, the principal-and-interest payment on a $500,000 house with 20% down is 16% higher than a year earlier and 88% higher than two years earlier.

Bill McBride Calculated Risk
Date Posted:

According to @calculatedrisk, real home prices are 3% under the recent peak. According to his affordability index the monthly payment for the same house is up 88% over the past two years.

How much has housing affordability deteriorated as mortgage rates rose?

Core argument: Inflation-adjusted house prices are 3.0% below their peak, and houses were the least affordable in September 2023 since 1982, when 30-year mortgage rates were over 14%.

Affordability was worse in September than in August, as house prices and mortgage rates both increased. In September 2023, houses were the least “affordable” since 1982 when 30-year mortgage rates were over 14%. We already know affordability will be even worse in October since mortgage rates have increased further. For September: a year ago, the payment on a $500,000 house, with a 20% down payment and 6.11% 30-year mortgage rates, would be around $2,427 for principal and interest. The monthly payment for the same house, with house prices up 4.0% YoY and mortgage rates at 7.20% in September 2023, would be $2,822 - an increase of 16%. However, if we compare to two years ago, there is huge difference in monthly payments. In September 2021, the payment on a $500,000 house, with a 20% down payment and 2.90% 30-year mortgage rates, would be around $1,665 for principal and interest. The monthly payment for the same house, with house prices up 15.1% over two years and mortgage rates at 7.20% in September 2023, would be $3,125 - an increase of 88%!

Takeaways by Macro Roundup® AI

  1. Inflation-adjusted house prices are 3.0% below their peak, and houses were the least affordable in September 2023 since 1982, when 30-year mortgage rates were over 14%.
  2. The principal-and-interest payment on a $500,000 house with 20% down rose 88% over two years, from about $1,665 at a 2.90% mortgage rate in September 2021 to $3,125 at 7.20% with prices up 15.1%.
  3. Affordability worsened in September as house prices and mortgage rates both increased, with the payment on a $500,000 house up 16% year over year, from about $2,427 to $2,822, and October affordability expected to be worse.

Related Articles:

  • Higher For Longer and The 2024 Housing Outlook — Sustained higher mortgage rates are expected to weigh most on housing turnover, since nearly all borrowers hold rates below market levels, discouraging moves; the authors project existing home sales of 3.8mn, the fewest annual sales since the early 1990s. Housing starts are projected to fall 4% to 1.34mn.
  • America’s Missing Empty Homes — Restoring the pre-pandemic 12% vacancy rate would require 2.7m new housing units left entirely empty, or more than 18m additional units if 75% of new units are filled on net. Construction of 1.4m units in the first half of 2023 failed to keep up with demand, pushing unoccupied housing rates lower.
  • With Housing, Millennials Have Much to Complain About — The Census Bureau's customary homeownership rate is measured by household, showing 52.7% of 25-to-34-year-old household heads own homes, but only 32.6% of all Americans in that age group do — down 20 percentage points from the late 1970s and nearly 10 points since the mid-2000s. Young-adult homeownership has seen a modest resurgence since 2016.

AI Summary. Foreign central banks and sovereign wealth funds historically bought US Treasuries to hold down their own currencies and support exports rather than for yield, and these yield-insensitive official holders have been selling Treasuries to limit their currencies' weakening. Foreign private investors, by contrast, find US yields attractive despite high hedging costs.

Torsten Sløk Apollo
Date Posted:

Torsten Sløk @apolloglobal forecasts that foreign official institutions will stop selling Treasuries given recent dollar weakening.

Do foreign official and private Treasury buyers have different motives?

Core argument: Foreign official institutions such as central banks and sovereign wealth funds bought US Treasuries for FX reasons rather than yield, intervening to limit appreciation of their domestic currencies because an overly strong currency hurts exports.

For decades, the biggest foreign holders of US Treasuries were central banks and sovereign wealth funds around the world. Foreign official institutions were buying Treasuries because many countries, in particular emerging markets, were intervening to limit the appreciation of their domestic currencies because a domestic currency that is too strong hurts exports. In other words, the foreign official sector was not buying Treasuries for yield reasons but for FX reasons to support the US dollar and thereby domestic exports. With the Fed raising rates and the dollar going up, that has now changed. Foreign central banks no longer need to buy US Treasuries and US dollars to depreciate their currencies. And foreign private buyers find US yield levels attractive despite high hedging costs. The bottom line is that with the Fed raising rates and the dollar going up, yield-insensitive central banks have been selling Treasuries to limit the weakening of their domestic currencies.

Takeaways by Macro Roundup® AI

  1. Foreign official institutions such as central banks and sovereign wealth funds bought US Treasuries for FX reasons rather than yield, intervening to limit appreciation of their domestic currencies because an overly strong currency hurts exports.
  2. With the Fed raising rates and the dollar rising, yield-insensitive foreign central banks have been selling Treasuries to limit the weakening of their own currencies, no longer needing to buy dollars to depreciate them.
  3. Foreign private investors find US yield levels attractive despite high hedging costs, unlike the FX-driven buying that long characterized the foreign official sector.

Related Articles:

  • 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.
  • 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.

AI Summary. A teardown of Huawei's Mate 60 Pro smartphone found it runs on a 7-nanometer processor made by Chinese chipmaker SMIC, suggesting China is roughly five years behind the most advanced chip technology. US export controls were aimed at keeping China at least eight years behind.

Bloomberg Staff Bloomberg
Date Posted:

Huawei is the center of China’s efforts to circumvent American export controls, benefiting from an elaborate network of shell companies.

Are export controls keeping China as far behind in chips as intended?

Core argument: A TechInsights teardown of Huawei's Mate 60 Pro conducted for Bloomberg News found the handset is powered by SMIC's advanced 7-nanometer processor, suggesting China is roughly five years behind the most advanced chip technology.

To see how deeply Huawei and the Chinese government are now entwined, look no further than the launch in August of the new Mate 60 Pro smartphone. Huawei timed the release of the phone to coincide with US Commerce Secretary Gina Raimondo’s visit to China in part because of direct encouragement from a senior official at the top of the regime, according to a person familiar with the situation who asked not to be identified discussing sensitive matters. Huawei never disclosed technical details, but a teardown of the handset conducted by TechInsights for Bloomberg News found it was powered by SMIC’s advanced 7-nanometer processor. That suggests China is roughly five years behind the current most advanced technology. Export controls imposed by the Biden administration in 2022 were aimed at keeping China at least eight years behind.

Takeaways by Macro Roundup® AI

  1. A TechInsights teardown of Huawei's Mate 60 Pro conducted for Bloomberg News found the handset is powered by SMIC's advanced 7-nanometer processor, suggesting China is roughly five years behind the most advanced chip technology.
  2. The Biden administration's 2022 export controls aimed to keep China at least eight years behind, a wider gap than the roughly five-year lag implied by the Mate 60 Pro's SMIC processor.
  3. Huawei timed the Mate 60 Pro launch to coincide with US Commerce Secretary Gina Raimondo's August visit to China, in part because of direct encouragement from a senior official at the top of the regime, according to a person familiar with the situation.

Related Articles:

  • Huawei Building Secret Network for Chips, Trade Group Warns — Huawei has entered chip production, acquiring at least two existing plants and building at least three more, part of at least 23 fabrication facilities underway in China with planned investments of more than $100bn by 2030, according to the Semiconductor Industry Association. China is on track to hold more than half of global capacity in older-generation semiconductors by around 2030.
  • China AI & Semiconductors Rise: US Sanctions Have Failed — China's Kirin 9000S is a better-designed, leading-edge chip than the West realizes, developed without access to extreme ultraviolet lithography or cutting-edge US intellectual property, indicating existing export controls have not worked. The authors argue only decisive, full-scale measures—not half measures—could prevent China from mass-manufacturing chips needed for high-end military applications.
  • China Imports Record Amount of Chipmaking Equipment — Chinese customs data show semiconductor production tool imports reached nearly $5bn over two months, up 70% from $2.9bn a year earlier, a record high. Most of the equipment came from the Netherlands and Japan, which have imposed export restrictions on chipmaking equipment alongside the US.

Monday, December 4, 2023

AI Summary. A US consumer price report showed core inflation held down by monthly declines in reopening-related items (used cars and trucks -0.8%, airfares -0.9%, hotels -2.9%), with commodities excluding used vehicles essentially flat. Services excluding housing, medical care, hotels, and airfares slowed to +0.39% monthly from +0.52%, which the author calls the report's most important signal.

Chris Marsh Money: Inside and Out
Date Posted:

The October CPI print supports an “immaculate disinflation” and likely means the policy rate has reached a local maximum. @GeneralTheorist

Is underlying services inflation slowing alongside falling reopening-related prices?

Core argument: U.S. super core services inflation excluding housing, medical care, hotels, and airfares slowed to +0.39% MoM in October from +0.52% in September, +0.57% in August, and +0.71% in July, the lowest monthly print since May.

The October CPI in the United States might be the most important in confirming the unlikely immaculate disinflation that central bankers will have dreamt of since the pandemic—certainly, the “market” took the number as a strong signal that the hiking cycle may have come to an end. The October inflation print was consequential for three reasons: First, core was once more supported by negative prints in re-opening related items (used cars and trucks, -0.8% MoM; airfares, -0.9% MoM and hotels, -2.9% MoM) though somewhat offset by a positive print in medical services (+0.3%MoM for the second month running). Second, commodities ex. used cars and trucks was essentially flat—and has averaged -0.04% MoM over the past 5 months. Third, super core services (ex. housing, medical care, hotels, and airfares) slowed meaningfully to +0.39% MoM from +0.52% MoM in Sept, +0.57% MoM in Aug. and 0.71% MoM in July. This is the lowest monthly print since May and only the fourth time this is printed below 0.4% MoM since Dec. 2021. This is the most important signal from the October reading.

Takeaways by Macro Roundup® AI

  1. U.S. super core services inflation excluding housing, medical care, hotels, and airfares slowed to +0.39% MoM in October from +0.52% in September, +0.57% in August, and +0.71% in July, the lowest monthly print since May.
  2. October core CPI was again supported by negative prints in re-opening related items—used cars and trucks -0.8% MoM, airfares -0.9% MoM, and hotels -2.9% MoM—partly offset by medical services at +0.3% MoM for a second month.
  3. U.S. commodities excluding used cars and trucks were essentially flat in October and have averaged -0.04% MoM over the past five months.

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.
  • 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.

AI Summary. Large fiscal deficits paired with expected interest rate cuts are argued to drive strong demand for equities, as newly issued Treasury debt accumulates with a concentrated group of wealthy holders who may rebalance out of bonds as yields fall. Combined with a structural decline in equity supply, this points to upward price pressure.

Joseph Wang Fed Guy Blog
Date Posted:

.@FedGuy12 thinks that equity prices currently have a favorable backdrop given his view that ongoing Treasury issuance is not much different, in effect, from straight money printing.

Do large deficits and rate cuts push stock prices higher?

Core argument: Markets have priced in 125bps of rate cuts in 2024 after Governor Waller suggested cutting rates on moderating inflation, which reduces the attractiveness of Treasuries.

Large fiscal deficits combined with future rate cuts will likely lead to significant demand for equities. The wealth distribution of the U.S. is heavily concentrated, suggesting that newly printed Treasuries ultimately end up in the hands of a small group of people. At the same time, the attractiveness of Treasuries is decreasing with the expectation of rate cuts. The market has priced in 125bps of cuts in 2024 after hearing Governor Waller suggest cutting rates due to moderating inflation. This may encourage wealthy investors to rebalancing their rapidly growing portfolio out of bonds and into other assets like equities. The intersection of a structural decline in equity supply with a structural increase in demand suggests the potential for significant upward price pressure.

Takeaways by Macro Roundup® AI

  1. Markets have priced in 125bps of rate cuts in 2024 after Governor Waller suggested cutting rates on moderating inflation, which reduces the attractiveness of Treasuries.
  2. Large fiscal deficits issue Treasuries that, given heavily concentrated U.S. wealth, likely end up held by a small group of investors who may rebalance out of bonds and into assets such as equities.
  3. The intersection of a structural decline in equity supply with a structural increase in demand suggests potential for significant upward pressure on equity prices.

Related Articles:

  • 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.
  • R versus G and the National Debt — National debt is considered sustainable when it grows more slowly than gross domestic product, so when the average interest rate on government debt (R) is below the economy's growth rate (G), debt can be sustainable even if non-interest spending exceeds revenue. R has been below G over the past 15 years.

AI Summary. Declining quality in the US small-cap universe is attributed mainly to an influx of unprofitable new listings, which account for 57% of a 2,750-stock universe and are concentrated in biotech, financials, and health care. Companies exiting the universe have tended to be higher quality than those remaining.

Chris Satterthwaite Verdad
Date Posted:
Is Database:
Database

Chris Satterthwaite @verdadcap argues the decline in US small-cap gross profit/assets has been driven by the recent IPOs of unprofitable firms during the SPAC boom of 2021.

Why has the quality of small-cap stocks declined?

Core argument: Companies that have gone public since 2013, net of de-listings, account for 57% of a US small-cap universe of 2,750 stocks, and the steep decline in quality among these new entrants has contributed to broad deterioration of quality.

At a high level, while there has been some decline in core profitability, most of the decrease in quality has come from an influx of unprofitable companies, which, after three years, enter the core cohort and contribute to deteriorating quality. In fact, the companies that have gone public since 2013, net of de-listings, currently account for 57% of our small-cap US universe of 2,750 stocks. Given the steep decline in quality since 2013 among new entrants, this significant influx has contributed to a broad deterioration of quality. To make matters worse, the exits from the small-cap universe have tended to be of higher quality than the core cohort. The new entrants to the US small-cap universe, on a market cap-weighted basis, have been heavily concentrated in biotech, financials, and health care. The SPAC boom of 2021 comprised a large portion of the financial entrants, but the biotech and health care overweights are notable.

Takeaways by Macro Roundup® AI

  1. Companies that have gone public since 2013, net of de-listings, account for 57% of a US small-cap universe of 2,750 stocks, and the steep decline in quality among these new entrants has contributed to broad deterioration of quality.
  2. Most of the decline in small-cap quality comes from an influx of unprofitable companies that enter the core cohort after three years, rather than from the decline in core profitability.
  3. New entrants to the US small-cap universe are heavily concentrated, on a market cap-weighted basis, in biotech, financials, and health care, with the 2021 SPAC boom comprising a large portion of the financial entrants, while exits have tended to be of higher quality than the core cohort.

Related Articles:

  • The Death of Small Cap Equities? — An analysis of gross profit relative to assets for US small-cap companies, defined as $400m–$4bn in market cap, finds a broad-based decline in quality from the early 2010s, with information technology, consumer discretionary, and industrials most affected. Health care was excluded because unprofitable pharmaceutical and biotech stocks rose from 5% to 16% of small stocks.
  • Mr. Toad’s Wild Ride: The Impact Of Underperforming 2020 and 2021 US IPOs — Between 40% and 60% of US initial public offerings generate negative returns even in favorable periods, so average IPO returns far exceed median returns and depend on a small set of large winners. Excluding just the top 3% of IPOs turns average net returns negative and cuts average absolute returns by more than half.
  • 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. Responses to US consumer sentiment surveys increasingly diverge along partisan lines, a pattern consistent with people giving answers that signal political affiliation rather than their actual economic views. Spending patterns offer a better read: US consumers have returned to their pre-pandemic trendline and are buying more than ever, unlike more cautious Europeans.

John Burn-Murdoch Financial Times
Date Posted:

American consumer sentiment has significantly diverged from its projected level based on economic indicators in a way that it has not for other advanced economies. @jburnmurdoch speculates political polarization is the source of the divergence.

Do consumer sentiment surveys reflect what Americans actually think about the economy?

Core argument: Democrats' responses to the Michigan survey's question on whether it is a good time to buy big household items turned favorable shortly after Joe Biden won the presidency, while Covid-19 still raged; Republicans' did not.

One question from the Michigan survey asks whether people think now is a good time to buy big household items. When the pandemic hit, Democrats and Republicans alike moved sharply towards “not a good time to buy”. But just months later, when Joe Biden won the presidential election — while Covid-19 still raged — Democrats suddenly declared conditions ripe for purchases of new fridge-freezers. Republicans did not. It seems US consumer sentiment is becoming the latest victim of expressive responding, where people give incorrect answers to questions to signal wider tribal political or social affiliations. My advice: if you want to know what Americans really think of economic conditions, look at their spending patterns. Unlike cautious Europeans, US consumers are back on the pre-pandemic trendline and buying more stuff than ever.

Takeaways by Macro Roundup® AI

  1. Democrats' responses to the Michigan survey's question on whether it is a good time to buy big household items turned favorable shortly after Joe Biden won the presidency, while Covid-19 still raged; Republicans' did not.
  2. US consumer sentiment appears to be becoming a victim of expressive responding, in which people give incorrect survey answers to signal wider tribal political or social affiliations.
  3. US consumer spending has returned to its pre-pandemic trendline, with Americans buying more than ever, unlike more cautious European consumers.

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.
  • The Economy Is Great. Why Are Americans in Such a Rotten Mood? — Consumer sentiment has been more depressed than historic correlations with the "misery index"—the sum of inflation and unemployment—would predict, even as consumer-price inflation fell from a 9.1% peak to 3.7%. The author argues much of this pessimism is "referred pain," reflecting dissatisfaction with the country as a whole rather than the economy.
  • 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.

AI Summary. Payments to the US Department of Education, mostly student loans, returned to their pre-pandemic pace of more than $75bn annualized from lows under $13bn, as required payments resumed on $1.5tn of federal student debt. Real retail spending by 25-34 year olds fell 1.5% while rising 2.5%-4.2% for all other age groups.

Joseph Politano Apricitas Economics
Date Posted:

The resumption of student loan payments has coincided with a 1.5% drop in real retail spending for 25-34-year-olds, vs. growth of 2.5-4.2% for other age groups. @JosephPolitano.

Do resumed student loan payments reduce spending by young households?

Core argument: Real retail spending by Americans aged 25–34 has fallen 1.5% since the start of September, while spending rose 2.5%–4.2% for all other age groups as student loan payments resumed.

This October, for the first time in more than 3 years, Americans were once again required to make payments on their $1.5T of outstanding Federal student debt. Starting in August, payments to the US Department of Education, most of which represent student loans, surged back to about their pre-pandemic rate of more than $75B annualized, up from the extreme lows of less than $13B annualized seen just months prior. Perhaps most importantly for the broader economy, America’s youngest households have made a substantial cutback in their consumption as student loan payments resume. Since the start of September, real retail spending by those 25-34 years old has fallen by 1.5% at the same time it has risen by between 2.5%-4.2% for all other age groups. However, this recent effect was concentrated among the young with the broader population of all former college attendees regardless of age not seeing a commensurate decrease in spending.

Takeaways by Macro Roundup® AI

  1. Real retail spending by Americans aged 25–34 has fallen 1.5% since the start of September, while spending rose 2.5%–4.2% for all other age groups as student loan payments resumed.
  2. Payments to the US Department of Education, most of which represent student loans, rebounded starting in August to roughly their pre-pandemic pace of more than $75bn annualized, up from under $13bn annualized months earlier.
  3. Americans resumed required payments on $1.5tn of outstanding federal student debt in October for the first time in more than 3 years, and the spending pullback was concentrated among the young rather than among all former college attendees.

Related Articles:

  • Debt Moratoria: Evidence from Student Loan Forbearance — The authors estimate that borrowers whose student loan payments were frozen ended with about $1,500 more in student loan balances and $1,200 (3%) more in other household debt, including mortgage, auto, and credit card borrowing, than borrowers without a payment stoppage. The findings suggest the pause raised short-term consumption and overall leverage, with effects concentrated among borrowers never previously delinquent.
  • The Economic Impact of the Student Loan Restart — 46m Americans owe student loan debt to the Department of Education, with three-quarters owing less than $40k and half owing under $20k. Borrowers with balances above $60k make up 16% of borrowers but hold the majority of outstanding student loan debt.
  • Credit Card Delinquencies Continue to Rise—Who Is Missing Payments? — Delinquency rates have risen from historic lows across most credit products, with auto loan and credit card delinquencies exceeding pre-pandemic levels while mortgage transitions into delinquency remain below them. The increase is broad-based across income groups and regions but disproportionately driven by Millennials, borrowers with auto or student loans, and those with relatively higher credit card balances.

AI Summary. Saudi Arabia and Russia are cutting oil output by 1m and 300,000 barrels a day respectively, with the rest of the OPEC+ group contributing another 3.7m b/d in cuts. Falling oil prices reflect expectations of slowing global demand tied to concerns about China's economy, reduced geopolitical risk, and higher output from the US, Brazil, and Guyana.

Economist Staff The Economist
Date Posted:

OPEC+ production cuts have yet to stabilize the price of oil which has fallen over 15% since the cuts. The market does not seem to believe that a newly expanded OPEC can credibly enforce cuts.

Are oil production cuts failing to lift prices?

Core argument: Saudi Arabia is cutting 1m barrels a day and Russia 300,000 b/d, with the rest of OPEC+ together contributing another 3.7m b/d in cuts.

Saudi Arabia and Russia are leading the way, with cuts of 1m barrels a day and 300,000 b/d respectively; the rest of OPEC+ is together contributing another 3.7m b/d in cuts. Recent oil-price drops reflect both expectations of slowing global demand, influenced by concerns over China’s economy, and the fact that geopolitical risk has fallen: few now expect the war in Gaza to turn into a broader regional conflict. At the same time, other producers, including America, Brazil, and Guyana, have increased output, making up for OPEC+ cuts.

Takeaways by Macro Roundup® AI

  1. Saudi Arabia is cutting 1m barrels a day and Russia 300,000 b/d, with the rest of OPEC+ together contributing another 3.7m b/d in cuts.
  2. Oil-price declines reflect expectations of slowing global demand tied to concerns over China's economy, alongside falling geopolitical risk as few expect the war in Gaza to widen into a regional conflict.
  3. Output increases from producers including America, Brazil, and Guyana have made up for the OPEC+ cuts.

Related Articles:

  • US Shale: The Marginal Supplier Matures — The responsiveness of US oil supply to prices has declined and is estimated to be much smaller for publicly traded producers than private ones, with a 10% price increase raising US liquids output by roughly 1%, or 200,000 barrels a day. That implies US supply would offset only about 20-25% of a geopolitical supply shock.
  • The Changing Nexus Between Commodity Prices and the Dollar: Causes and Implications — The shale boom turned the United States into a net exporter of natural gas and of oil, altering how commodity prices relate to US trade. Where higher oil prices were historically associated with a deterioration in US terms of trade, they now correspond to an improvement.
  • U.S. Oil Boom Blunts OPEC’s Pricing Power — U.S. shale drilling and fracking costs have fallen 36% since 2014 even as recovered oil volumes have risen, according to J.P. Morgan. One major producer can now earn as much from $42-a-barrel oil as it once did at $86, while Saudi Arabia's budget is estimated to require $81 a barrel.

AI Summary. As an arithmetic matter, the greying of societies is driven much more by smaller families than by longer lives, which the author attributes to a withering away of the family. Demographic simulations project that by 2040 couples in their 60s in China will likely have at least one living parent to care for, and many will have two or three.

Nicholas Eberstadt American Enterprise Institute
Date Posted:

Nicholas Eberstadt @AEIecon notes humans are social animals and global aging and population decline likely will be a threat to the family, the basic unit of human life.

Is population aging driven more by smaller families than longer lives?

Core argument: Demographic simulations suggest that by 2040 sixtysomething couples in China will likely have at least one living parent to look after, with many having two or three.

And the heart of the problem here is that global aging and population decline are mainly driven by a withering away of the family— the basic unit of human life up to this point. And therein lies the problem. As an arithmetic matter, the greying of societies is driven much more by smaller families than longer lives. But longer lives also mean that middle aged and even elderly children will increasingly be responsible for ancient living parents. Consider the outlook for China. Demographic simulations by Ashton Verdery and myself suggest the dilemmas that may face middle aged people in China in less than a generation: By 2040 it is likely that Sixtysomething couples in China will have at least one living parent to look after; many will have two or three to think about. But those prospective elders are elders with descendants. With the rise in (voluntary) childlessness around the world, growing numbers of elders will have no relatives—or no close relatives—to count on.

Takeaways by Macro Roundup® AI

  1. Demographic simulations suggest that by 2040 sixtysomething couples in China will likely have at least one living parent to look after, with many having two or three.
  2. Global aging and population decline are driven mainly by smaller families rather than longer lives, amounting to a withering away of the family as the basic unit of human life.
  3. Rising voluntary childlessness worldwide means growing numbers of elders will have no relatives, or no close relatives, to count on.

Related Articles:

  • 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.
  • Millennials Aren’t Having Kids. Here Are The Reasons Why — Childlessness rose first among women in their early 20s and then at successively older ages, tracking the millennial generation as it aged; sources consulted pointed to the broader economic climate. Much of the rise could be erased if women follow through on delayed family plans, but time for a reversal may be running out.
  • Why Americans Are Having Fewer Babies — Sociologists find that US women born in the late 1980s had, on average, about one child fewer by their early 30s than they had intended, roughly double the shortfall for women born two decades earlier. The median age at which women give birth is 30, three years older than in 1990.

AI Summary. Mexico became the United States' largest trading partner, ahead of Canada, as it won a bigger share of ground lost by China, and investors identify it as among the countries best placed to benefit from geopolitical shifts. Skeptics note that record foreign direct investment of $32.9bn over nine months mostly reflects reinvested profits rather than new projects.

Christine Murray Financial Times
Date Posted:
Is Database:
Database

Mexico has outpaced China and Canada as the US’s largest trading partner.

Is Mexico actually gaining new investment from shifting supply chains?

Core argument: Mexico's foreign direct investment rose to a record $32.9bn in the first nine months of the year, though sceptics note the total mostly reflects reinvestment of profits rather than new projects.

Mexico has been singled out by investors as one of the countries best placed to economically benefit from geopolitical changes. Referring to Mexico, JPMorgan’s chief executive Jamie Dimon told Bloomberg TV this month: “If you had to pick a country this might be the number one opportunity.” Mexico this year became the US’s largest trading partner, ahead of Canada, as it began to win a bigger share of the ground lost by China. Sceptics point out that foreign direct investment, which rose to a record $32.9 billion in the first nine months of this year, mostly reflects reinvestment of profits rather than new projects.

Takeaways by Macro Roundup® AI

  1. Mexico's foreign direct investment rose to a record $32.9bn in the first nine months of the year, though sceptics note the total mostly reflects reinvestment of profits rather than new projects.
  2. Mexico became the United States' largest trading partner, overtaking Canada, as it won a bigger share of the ground lost by China.
  3. JPMorgan chief executive Jamie Dimon told Bloomberg TV that if he had to pick a country, Mexico "might be the number one opportunity.".

Related Articles:

  • Mexico Seeks to Solidify Rank As Top U.S. Trade Partner, Push Further Past China — Mexico is the top U.S. trading partner, accounting for 15.4% of all U.S. goods trade versus 15.2% for Canada and 12.0% for China, with four-month bilateral trade of $263bn. Manufactured goods made up $234.2bn of that total, with $157bn of Mexican imports and $107bn of U.S. exports.
  • Pettis on “Friend-Shoring” — Shifting US production to countries with balanced or deficit trade, such as Mexico, is likely to raise US exports to those countries because wages and household income make up a higher share of their output. Relocating to large-surplus countries instead converts part of export revenues into savings, since workers there receive a smaller share of what they produce.
  • War, AI and Climate Change Shake Up $32 Trillion in Global Trade — US imports of tariffed goods from China are estimated to be about $150bn below where they would otherwise be, with Mexico filling much of the gap. Manufacturing accounts for 13% of India's gross domestic product, below the government's 25% goal, and Indian manufacturers' value-add is 20% versus 49% for China.