Edward Conard

Top Ten New York Times Bestselling Author

  • “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
  • “…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 offers deep and well-argued analyses on almost every issue.” - The New York Times
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…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
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…a 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
  • “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
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Tuesday, December 12, 2023

AI Summary. The factors that have pushed real interest rates down since the 1980s — demographic shifts, slower productivity growth, corporate market power, and demand for safe assets exceeding supply — do not appear likely to reverse enough to produce a large, durable rise in global real rates. The authors argue low equilibrium rates will keep complicating monetary policy and financial stability.

Maurice Obstfeld National Bureau of Economic Research
Date Posted:
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Database

Maurice Obstfeld argues that the drivers of declining interest rates since 1980, such as low productivity growth and high safe asset demand relative to supply, have not been offset enough to drive a “big and durable rise in global real interest rates.”

Will the forces that lowered real interest rates since the 1980s reverse?

Core argument: The factors that pushed real interest rates down since the 1980s and 1990s — demographic shifts, lower productivity growth, corporate market power, and safe asset demand relative to supply — do not appear poised to reverse enough to drive a large, durable rise in global real rates.

The main underlying factors that have pushed real interest rates down since the 1980s and 1990s – notably demographic shifts, lower productivity growth, corporate market power, and safe asset demand relative to supply – do not appear poised to reverse strongly enough to drive a big and durable rise in global real interest rates over the coming years. Low equilibrium interest rates may well continue periodically to bedevil monetary policy and financial stability. Figure 23 shows global rates of growth since 1980 as calculated by the IMF, with projections after 2022. It is hard to imagine real interest rates recovering substantially without a surge in global investment that would likely be associated with higher productivity and output growth. The forecasts in Figure 23 suggest that this is not in the cards in the near term. New technologies, for example, those based on artificial intelligence, could lead private investment to rise temporarily or longer term, and even increase the secular growth rate, but those predictions are contested and speculative at this point.

Takeaways by Macro Roundup® AI

  1. The factors that pushed real interest rates down since the 1980s and 1990s — demographic shifts, lower productivity growth, corporate market power, and safe asset demand relative to supply — do not appear poised to reverse enough to drive a large, durable rise in global real rates.
  2. Low equilibrium interest rates may continue periodically to bedevil monetary policy and financial stability, and a substantial recovery in real rates would likely require a surge in global investment associated with higher productivity and output growth.
  3. IMF global growth figures since 1980, with projections after 2022, suggest no such investment and growth surge in the near term, while claims that AI-based technologies will raise private investment or the secular growth rate remain contested and speculative.

Related Articles:

  • If Markets Are Right About Long Real Rates, Public Debt Ratios Will Increase For Some Time. We Must Make Sure That They Do Not Explode — Stabilizing public debt ratios would require cutting primary deficits to zero, which the author argues no government can do quickly without risking recession and boosting support for populist parties. With a US primary deficit around 4% and a dysfunctional budget process, the debt ratio is likely to keep rising for some time.
  • The Future Of r* — Long-run equilibrium interest rates are argued to stay low relative to recent decades' historical average but above pre-pandemic lows, implying rates only slightly below current levels, with a nominal neutral rate near 3.5% offered as illustration. Rising government debt, particularly in the US, is identified as the main risk to that view.
  • What Have We Learned About the Neutral Rate? — Analysts estimate that if inflation is brought down without a recession, the Federal Reserve's policy rate will stabilize nearer 3–3.25% than the 2.5% longer-run median projection of Federal Reserve officials. Projected shifts in government debt and demographics imply a roughly 0.5 percentage point net increase in the neutral rate over the next decade.

AI Summary. US government expenditures have risen 4.6 percentage points as a share of GDP since 2000 while receipts have fallen 3.8 percentage points, according to the Bureau of Economic Analysis. US tax revenue, once near the OECD average as a share of GDP in the 1960s, was 6.3 percentage points below it in 2022.

Justin Fox Bloomberg
Date Posted:

In 2000 government expenditures and receipts for all levels were roughly balanced at approximately 31% of GDP. In the first three months of 2023, expenditures were 35.3% of GDP and receipts were 27.2%. @foxjust

Is the US unusual in taxing little while spending much?

Core argument: Since 2000, when US government expenditures and receipts were roughly in balance, the Bureau of Economic Analysis estimates expenditures have risen 4.6 percentage points as a share of GDP while receipts have fallen 3.8 percentage points.

Since 2000, when the two were pretty much in balance, the US Bureau of Economic Analysis’ estimate of government expenditures is up 4.6 percentage points as a share of GDP, while receipts (which count interest, natural resources royalties, and other revenue in addition to taxes) are down 3.8 percentage points. In other words, it’s not just the spending. It’s also the taxes — which are, by international standards, low. This wasn’t always the case. In the 1960s, US tax revenue was right about at the OECD average as a share of GDP. In 2022, it was 6.3 percentage points lower.

Takeaways by Macro Roundup® AI

  1. Since 2000, when US government expenditures and receipts were roughly in balance, the Bureau of Economic Analysis estimates expenditures have risen 4.6 percentage points as a share of GDP while receipts have fallen 3.8 percentage points.
  2. US tax revenue as a share of GDP was 6.3 percentage points below the OECD average in 2022, compared with roughly matching that average in the 1960s.
  3. The US receipts measure counts interest, natural resources royalties, and other revenue in addition to taxes, and its decline indicates the fiscal gap reflects taxes as well as spending.

Related Articles:

  • 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.
  • U.S. Deficit Explodes Even As Economy Grows — The Committee for a Responsible Federal Budget projects the federal deficit will roughly double to about $2tn for the fiscal year, driven by higher interest payments and lower tax receipts despite robust economic growth. After falling from close to $3tn to roughly $1tn in its largest-ever decline, the deficit turned upward rather than returning to pre-pandemic levels.
  • Living with High Public Debt — High public debt ratios are likely to persist because large sustained primary budget surpluses are politically unrealistic, real interest rates are already very low, faster global growth is hard to engineer, inflation is not a sustainable route to reducing debt, and financial repression is less feasible amid liberalized markets.

AI Summary. Core consumer price inflation excluding food and energy ran at 4.0% over 12 months and 2.9% annualized over six months, while overall consumer prices were close to 0% for two consecutive months and 3.1% over the year. Core goods prices have been falling while core services inflation, driven substantially by shelter, remains faster than the Federal Reserve's target.

Jason Furman @jasonfurman
Date Posted:

With 12-month overall CPI at 3.1%, @jasonfurman believes “we’re basically at a soft landing with roughly symmetric risks around inflation reigniting and recession.”

Is core inflation still running above the Fed's target?

Core argument: November core CPI ran at a 3.5% annualized rate for the month and 4.0% over 12 months, a touch below expectations, while Jason Furman notes core PCE likely comes in near 2.5% annualized over the last six months.

Core CPI for the month of November came in high again (but a touch below expectations). Here are the annual rates: 1 month: 3.5% 3 months: 3.4% 6 months: 2.9% 12 months: 4.0% Note, core PCE (de facto Fed target) likely will be ~2.5% for last six months annualized. Economists look at core because it is a much better predictor of future inflation. But the inflation that matters to people is overall and that was close to 0% for the second month in a row. And 3.1% over the last year. Back to core, now breaking out core goods and core services. Goods prices have been falling (supply chains etc.) but core service price growth has still been faster than is consistent with the Fed's inflation target. Shelter inflation has been a big part of the story. It has come down a lot from its highs. But not nearly as much as some were hoping. People who follow closely think further slowdowns coming but probably not nearly as much as "new rent" indices would suggest.

Takeaways by Macro Roundup® AI

  1. November core CPI ran at a 3.5% annualized rate for the month and 4.0% over 12 months, a touch below expectations, while Jason Furman notes core PCE likely comes in near 2.5% annualized over the last six months.
  2. Overall CPI was close to 0% for the second consecutive month and 3.1% over the past year, though economists focus on core because it is a much better predictor of future inflation.
  3. Core goods prices have been falling, attributed to factors such as supply chains, while core services inflation has run faster than is consistent with the Fed's target, with shelter inflation down a lot from its highs but less than some hoped.

Related Articles:

  • Just How Bad Is the US Cost-of-Living Squeeze? We Did the Math — It now takes $119.27 to buy what $100 purchased before the pandemic, with prices rising about as much since early 2020 as in the preceding decade. Groceries and electricity are each up 25% since January 2020, used cars 35%, auto insurance 33%, and rents roughly 20%.
  • What We’ve Learned About Inflation — Fiscal theory holds that a one-time $5tn fiscal expansion produces a one-time rise in the price level sufficient to inflate away $5tn of debt value, after which inflation stops even if the Federal Reserve does nothing. Raising interest rates lowers current inflation at the cost of more-persistent inflation, a beneficial smoothing.
  • Fiscal Influences on Inflation in OECD Countries, 2020-2022 — Across 21 economies, the authors find that headline and core inflation responded positively to a measure of government spending increases scaled by pre-pandemic debt-to-GDP and average debt duration. Estimated coefficients of 0.4–0.5 suggest 40–50% of the extra spending was financed through inflation, with the rest through conventional public finance.

AI Summary. About nine-in-ten U.S. teens ages 13 to 17 say they use YouTube, making it the most widely used platform in Pew Research Center's survey, followed by TikTok (63%), Snapchat (60%), and Instagram (59%). Facebook use among teens fell from 71% in 2014-2015 to 33%, and Twitter's teen user base also shrank over the past decade.

Monica Anderson, Michelle Faverio, and Jeffrey Gottfried Pew Research Center
Date Posted:
Is Database:
Database

71% of American teenagers aged 13-17 visit Alphabet’s YouTube daily, and 58% visit ByteDance’s TikTok daily, with 17% of respondents saying they were on TikTok “Almost Constantly.”

Which social media platforms do teens use most?

Core argument: Roughly nine-in-ten teens say they use YouTube, the most widely used platform measured in the survey of teens ages 13 to 17.

YouTube continues to dominate. Roughly nine-in-ten teens say they use YouTube, making it the most widely used platform measured in our survey. TikTok, Snapchat, and Instagram remain popular among teens: Majorities of teens ages 13 to 17 say they use TikTok (63%), Snapchat (60%), and Instagram (59%). For older teens ages 15 to 17, these shares are about seven-in-ten. Teens are less likely to be using Facebook and Twitter (recently renamed X) than they were a decade ago: Facebook once dominated the social media landscape among America’s youth, but the share of teens who use the site has dropped from 71% in 2014-2015 to 33% today. Twitter, which was renamed X in July 2023, has also seen its teen user base shrink during the past decade – albeit at a less steep decline than Facebook.

Takeaways by Macro Roundup® AI

  1. Roughly nine-in-ten teens say they use YouTube, the most widely used platform measured in the survey of teens ages 13 to 17.
  2. Majorities of teens ages 13 to 17 report using TikTok (63%), Snapchat (60%) and Instagram (59%), with shares of about seven-in-ten among older teens ages 15 to 17.
  3. The share of teens who use Facebook dropped from 71% in 2014-2015 to 33%, while Twitter, renamed X in July 2023, saw a less steep decline in its teen user base over the past decade.

Related Articles:

AI Summary. France has warned that the European Union's new artificial intelligence law would impose the world's toughest regime on the foundation models underpinning generative AI products and risk hampering innovation. The rules impose transparency requirements on powerful AI models, restrict facial recognition, and prohibit "social scoring" of people based on behavior or personal characteristics.

Javier Espinoza and Leila Abboud Financial Times
Date Posted:

Macron warns that new EU AI regulations will significantly harm Europe. “We can decide to regulate much faster and much stronger than our major competitors. But we will regulate things that we will no longer produce or invent. This is never a good idea.”

Macron warns that new EU AI regulations will significantly harm Europe. “We can decide to regulate much faster and...

Does Europe's new AI law risk hampering innovation?

Core argument: Emmanuel Macron said he was concerned that the EU's AI Act means the bloc will enforce the world's toughest regime on foundational models, the technology underpinning generative AI products such as OpenAI's ChatGPT.

Macron said he was concerned that the new law means the EU will enforce the world’s toughest regime on so-called foundational models, the technology that underpins generative AI products such as OpenAI’s ChatGPT. Macron’s comments may presage a new battle over the final terms of the AI Act, which still needs to be ratified by member states over the coming weeks. “The stakes are high and the French will try to block this,” said a person with knowledge of the talks, although they thought the text would ultimately be agreed despite opposition. French negotiators had tried to water down the proposed rules in marathon talks last week, but ultimately the bloc moved towards a tough regulatory regime that imposes new transparency requirements on powerful AI models as well as strict restrictions on the use of facial-recognition technology. The new rules, which will probably come into force in early 2025, also introduce prohibitions on the use of AI for “social scoring”, the use of metrics to classify people based on their behaviour or personal characteristics.

Takeaways by Macro Roundup® AI

  1. Emmanuel Macron said he was concerned that the EU's AI Act means the bloc will enforce the world's toughest regime on foundational models, the technology underpinning generative AI products such as OpenAI's ChatGPT.
  2. The EU's AI Act imposes new transparency requirements on powerful AI models, strict restrictions on facial-recognition technology, and prohibitions on "social scoring" that classifies people by behaviour or personal characteristics.
  3. French negotiators tried to water down the proposed AI rules in marathon talks, and a person with knowledge of the negotiations said the French will try to block the text, which member states must still ratify before it probably comes into force in early 2025.

Related Articles:

  • Attenuating Innovation (AI) — AI regulation locks in incumbents, and the early AI winners promoting alarm in Washington about AI risks are engaged in regulatory capture, seeking rules that hobble future competitors while continuing their own development. Such an executive order is proscriptive rather than adaptive and presumes knowledge of an unknowable future.
  • Top Google AI Experts Pick Japan To Set Up On Their Own — Two former Google researchers have founded a Tokyo-based artificial intelligence start-up, Sakana. One is among the eight Google researchers who built the transformer, the software architecture underpinning generative AI systems including chatbots and image generators; all eight have since left Google, primarily to found their own start-ups.

AI Summary. China's Huawei is proceeding with construction of its first European factory, a mobile phone network equipment plant in France with an initial investment of €200m ($215m), even as some European governments restrict use of the company's 5G equipment.

Reuters Staff South China Morning Post
Date Posted:

Huawei is building a manufacturing facility in France. In 2020 France started to phase Huawei kit out of their telecom network; however, over the summer, the French decided to extend Huawei 5G licences in some cities. @SCMPNews

Huawei is building a manufacturing facility in France. In 2020 France started to phase Huawei kit out of their telecom...

Is a Chinese telecom giant building its first European factory despite restrictions?

Core argument: Huawei will begin construction next year on its first European factory, a mobile phone network equipment plant in Brumath near Strasbourg, with an initial investment of 200 million euros (US$215 million) outlined in 2020 and delayed by the Covid-19 pandemic, a source said.

China’s Huawei will start building its mobile phone network equipment factory in France next year, a source familiar with the matter said, pressing ahead with its first plant in Europe even as some European governments curb the use of the firm’s 5G gear. The company outlined plans for the factory with an initial investment of 200 million euros (US$215 million) in 2020, but the roll-out was delayed by the Covid-19 pandemic. The source did not give a timeline for when the factory in Brumath, near Strasbourg, will be up and running. Huawei did not respond to a request for comment. In 2020, the French government told telecoms operators planning to buy Huawei 5G equipment that they would not be able to renew licences for the gear once they expire, effectively phasing Huawei out of mobile networks. But following a meeting with French Economy Minister Bruno Le Maire in Beijing in July, China’s Vice-Premier He Lifeng said France had decided to extend Huawei 5G licences in some cities.

Takeaways by Macro Roundup® AI

  1. Huawei will begin construction next year on its first European factory, a mobile phone network equipment plant in Brumath near Strasbourg, with an initial investment of 200 million euros (US$215 million) outlined in 2020 and delayed by the Covid-19 pandemic, a source said.
  2. France told telecoms operators in 2020 that licences for Huawei 5G equipment could not be renewed once they expire, effectively phasing the company out of French mobile networks.
  3. China's Vice-Premier He Lifeng said after meeting French Economy Minister Bruno Le Maire in Beijing in July that France had decided to extend Huawei 5G licences in some cities.

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 Secretly Transforms Huawei Into Most Powerful Chip War Weapon — 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.

Wednesday, December 13, 2023

AI Summary. More than 485,000 US workers went on strike in a year across an estimated 317 work stoppages, the most in two decades, according to a Bloomberg Law analysis. The United Auto Workers is organizing at over a dozen non-unionized carmakers and urging other unions to align contract expiration dates for broader strikes.

Claire Bushey and Taylor Nicole Rogers Financial Times
Date Posted:

The @UAW is following up on their recent deal with the Big Three by launching efforts to organize workers at Tesla, Toyota, and Volkswagen and attempting to coordinate labor activity with other unions.

Are US labor unions regaining strength?

Core argument: More than 485,000 US workers went on strike in 2023 across an estimated 317 work stoppages, more than any time in the past two decades, according to an analysis by Bloomberg Law.

More than 485,000 US workers went on strike in 2023 as unions launched an estimated 317 work stoppages, more than any time in the past two decades, according to an analysis by Bloomberg Law. Labour economists at Cornell University estimate that 310,000 workers were on strike in October alone. The UAW plans to use its wins at the bargaining table to recruit more union members. It has announced a sweeping effort to organise workers at the US plants of more than a dozen non-unionised carmakers, including Tesla, Toyota, and Volkswagen. The UAW is encouraging unions across the US, in every sector, to time their contract expiration dates to the UAW’s; in the US, most union contracts contain clauses that only allow workers to strike when the contract expires. By telling other unions to line up their contract expiration dates with the UAW’s, the autoworkers’ union is trying to lay the groundwork for sweeping industrial action that could extend beyond the auto industry.

Takeaways by Macro Roundup® AI

  1. More than 485,000 US workers went on strike in 2023 across an estimated 317 work stoppages, more than any time in the past two decades, according to an analysis by Bloomberg Law.
  2. The UAW has announced an effort to organise workers at the US plants of more than a dozen non-unionised carmakers, including Tesla, Toyota, and Volkswagen, while urging other unions to align contract expiration dates with its own.

Related Articles:

  • Labor Market Conflict and the Decline of the Rust Belt — The authors argue that persistent labor market conflict in the Rust Belt's main industries lowered investment and productivity growth, shifting employment to the rest of the country, and estimate it accounts for roughly half the decline in the region's share of US manufacturing employment. Rising foreign competition plays a more modest quantitative role.
  • American Labor’s Real Problem: It Isn’t Productive Enough — U.S. manufacturing output per hour has grown about 0.2% a year since 2009, below the overall economy and peer economies in Europe and Asia except Japan, with motor vehicle manufacturing productivity falling 32% from 2012 through last year. Unlike warehouses and hospitals, manufacturers face foreign competition and cannot pass higher labor costs to customers.
  • Union Voters Could Be Decisive in 2024 — A declining union share of the electorate and weaker Democratic performance among union households have made Michigan, Pennsylvania, and Wisconsin more competitive, with white voters without college degrees making up majorities of the electorate in all three states. Unionized white non-college voters were less likely to back Trump than their non-union counterparts.

AI Summary. Strong labor unions are incompatible with a global trading system in which countries that subsidize domestic production externalize those costs through large, persistent trade surpluses, according to this argument. The US must either reform that system or unilaterally limit its economy's role in absorbing global savings and production imbalances.

Michael Pettis @michaelxpettis
Date Posted:

.@michaelxpettis notes labor unions in the tradable sector are not compatible with the current global trading system. Higher wages make American auto manufactures less competitive with their subsidized international competitors.

.@michaelxpettis notes labor unions in the tradable sector are not compatible with the current global trading system. Higher...

Can strong labor unions coexist with persistent foreign trade surpluses?

Core argument: Pettis argues that strong trade unions are incompatible with a global trading system in which countries subsidizing domestic production externalize those costs by running large, persistent trade surpluses.

If higher wages make American autos less competitive globally, the consequent reduction in auto manufacturing won't be matched by an increase in the manufacturing of some other US product. That means strong trade unions are incompatible with a global trading system in which countries that subsidize domestic production are able to externalize the cost of those subsidies by running large, persistent trade surpluses. The US (and other similar economies) gets to choose between either stronger labor unions or continued participation in a global trading system that allows and encourages mercantilist trading policies. What the US needs, instead, is either a transformation of the global trading system to the kind described by Keynes in 1944 or, if that doesn't happen, the US must unilaterally choose to implement policies that sharply limit the role of its economy in absorbing global savings and production imbalances. We can't have both labor unions and a distorted global trading system.

Takeaways by Macro Roundup® AI

  1. Pettis argues that strong trade unions are incompatible with a global trading system in which countries subsidizing domestic production externalize those costs by running large, persistent trade surpluses.
  2. If higher wages make American autos less globally competitive, Pettis contends the resulting drop in auto manufacturing would not be offset by increased US manufacturing of another product.
  3. Pettis holds that the US must either transform the global trading system along the lines Keynes described in 1944 or unilaterally adopt policies sharply limiting its economy's role in absorbing global savings and production imbalances.

Related Articles:

  • American Labor’s Real Problem: It Isn’t Productive Enough — U.S. manufacturing output per hour has grown about 0.2% a year since 2009, below the overall economy and peer economies in Europe and Asia except Japan, with motor vehicle manufacturing productivity falling 32% from 2012 through last year. Unlike warehouses and hospitals, manufacturers face foreign competition and cannot pass higher labor costs to customers.
  • Detroit Is Paying Up to End the UAW Strike. Now Carmakers Will Live With the Costs — Tentative United Auto Workers agreements with Detroit automakers include a 25% general wage increase over four years, which with cost-of-living adjustments would lift top production-worker pay to about $42 an hour and most unionized workers' annual pay into the mid-$80,000s before overtime. Ford says the contract would add $850–$900 in costs per vehicle.
  • Union Workers Score Big Pay Gains As Labour Action Sweeps US — The Bureau of Labor Statistics reports year-on-year wage growth for union members reached 4.6%, catching up with the larger pay rises non-union workers had been receiving. Analysis of 425 newly ratified union contracts by Bloomberg Law found first-year pay increases of 7% and 6.1%, against a 3% average over the preceding 10 years.

AI Summary. Agent-based models, in which simulated traders follow decision rules and trade an asset among themselves, find that asset prices rise as the diversity of trading strategies declines because similar strategies reinforce the price move. The relationship is non-linear: past a fragile point, a small further loss of diversity produces a sharp price plunge as buyers are exhausted.

Michael Mauboussin and Dan Callahan Morgan Stanley
Date Posted:

Human pattern recognition tends to fail in “domains where causality and feedback are limited” as humans tend to see patterns where they do not exist. @mjmauboussin

How does declining diversity of trading strategies affect asset prices?

Core argument: In economist Blake LeBaron's agent-based models, where in silico agents follow decision rules to trade an asset, asset prices rise as the diversity of those decision rules declines, because similar trading strategies reinforce the same price movement.

Humans are natural pattern seekers. Pattern recognition often fails in complex and evolving environments. The economist Blake LeBaron is a leader in the field of agent-based modeling. These are models that create agents in silico, provide them with decision rules, and let them trade an asset among themselves. He finds that the asset price rises even as the diversity of decision rules declines because the similar trading strategies reinforce the price movement. But at some point the market becomes fragile. At that critical juncture, a small incremental loss of diversity leads to a sharp plunge in the asset price because the buyers are exhausted. The relationship between diversity loss and asset price change is non-linear. Diversity breakdowns fit a pattern but measuring diversity is inherently difficult. Pattern recognition can also fail because of how our minds love to think in analogies. Steps include selection, mapping, evaluation, and learning. To understand a target topic we commonly start by selecting an analog, usually from memory.

Takeaways by Macro Roundup® AI

  1. In economist Blake LeBaron's agent-based models, where in silico agents follow decision rules to trade an asset, asset prices rise as the diversity of those decision rules declines, because similar trading strategies reinforce the same price movement.
  2. The relationship between diversity loss and asset price change is non-linear: at a critical juncture, a small further loss of diversity leads to a sharp price plunge because buyers are exhausted.
  3. Pattern recognition often fails in complex and evolving environments, including because minds think in analogies through selection, mapping, evaluation, and learning, usually selecting an analog from memory.

Related Articles:

  • Total Shareholder Return: Linking The Drivers of Total Returns to Fundamentals — The S&P 500 delivered an annualized total shareholder return of 16.6% over a ten-year period, composed of 14.3% price appreciation and 2.3% from dividends and dividend reinvestment. Earnings-per-share growth contributed 44% of the total, price-to-earnings multiple expansion 42%, and dividends 14%.
  • 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 economic scale of China and the US means a conflict between them would likely be protracted, lasting months, years, or decades rather than a single battle or limited campaign. Deterring war, particularly in Asia, would require a once-in-a-generation Western construction and procurement effort and strategic stockpiles of weapons and munitions far beyond current planning.

Max Hasting Bloomberg
Date Posted:

Citing @IskanderRehman research Max Hasting reports that to deter a Sino-American War the West “will need to launch a once-in-a-generation construction and procurement effort.”

Citing @IskanderRehman research Max Hasting reports that to deter a Sino-American War the West “will need to launch a...

Does deterring a protracted great-power war require a generational arms buildup?

Core argument: Iskander Rehman argues that the economic heft of China and the US would make any conflict between them protracted for months, years, or even decades, requiring the West to build strategic stocks of weapons and munitions on a scale planners have not imagined.

Iskander Rehman believes that the immense economic heft of China and the US would cause conflict between them to be protracted for many months, perhaps years and even decades. This makes it necessary for the West to build strategic stocks of weapons and munitions on a scale currently unimagined by planners. The current US mindset seems to confuse planning to win a mere battle or limited campaign with the demands of protracted conflict. Rehman’s book argues that if the West — which means principally the US — is to deter war, above all in Asia, “it will need to launch a once-in-a-generation construction and procurement effort, all the while encouraging the even more industrially atrophied allies in Europe and Asia to do the same.”

Takeaways by Macro Roundup® AI

  1. Iskander Rehman argues that the economic heft of China and the US would make any conflict between them protracted for months, years, or even decades, requiring the West to build strategic stocks of weapons and munitions on a scale planners have not imagined.
  2. Rehman contends that the current US mindset confuses planning to win a battle or limited campaign with the demands of protracted conflict.
  3. Rehman's book argues that deterring war, above all in Asia, will require the West, principally the US, to launch a once-in-a-generation construction and procurement effort while encouraging its more industrially atrophied allies in Europe and Asia to do the same.

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