Edward Conard

Top Ten New York Times Bestselling Author

  • “Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
  • “…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
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…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
  • “…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
  • “…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
  • “…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
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Friday, December 15, 2023

AI Summary. Revised historical data that correct for survivorship bias—most notably including the Second Bank of the United States, which reached nearly 30% of US market capitalization before collapsing—show 19th-century stock returns differed from 20th-century returns, with repeated periods in which stocks underperformed bonds.

Edward McQuarrie Financial Analysts Journal
Date Posted:

An analysis of US equity and bond returns since 1792 refutes the “stocks for the long run” theory: after correcting for survivorship bias, the equity risk premium comes and goes.

Do stocks always outperform bonds over the long run?

Core argument: The Second Bank of the United States accounted for almost 30% of total US market capitalization at its pre-Panic of 1837 peak, and its shares fell from $120 to $1.50 and never recovered; its omission left the pre-1871 stock record subject to survivorship bias.

Stock returns before 1871 look different now because of the reduction in survivorship bias. The old record omitted the largest stock that traded before the Panic of 1837, the 2nd Bank of the United States. At the peak before the Panic hit, the 2nd BUS accounted for almost 30% of total US market capitalization. It failed as the Panic proceeded, with shares dropping in price from $120 to $1.50, and never recovered. Bond returns look more positive now, due to inclusion of corporate bonds, inclusion of a broader selection of federal and municipal bonds, and an adjustment for the greenback price of interest paid in gold coin between 1862 and 1879. The new data indicate that “Stocks for the Long Run” was built on a faulty premise: that the strong returns on stocks seen after World War II, combined with the poor returns on bonds through 1981, reflected a stationary process. The old historical record appeared to show that stocks had always returned 6% to 7% real and there had always been a substantial equity premium. The new data show that the 19th century, particularly the antebellum era, saw quite different returns than the 20th century, with repeated equity deficits. Unfortunately, the new data remain vulnerable to dismissal by practical investors, who may deem the results too old to be relevant.

Takeaways by Macro Roundup® AI

  1. The Second Bank of the United States accounted for almost 30% of total US market capitalization at its pre-Panic of 1837 peak, and its shares fell from $120 to $1.50 and never recovered; its omission left the pre-1871 stock record subject to survivorship bias.
  2. Revised bond returns look more positive after including corporate bonds, a broader selection of federal and municipal bonds, and an adjustment for the greenback price of interest paid in gold coin between 1862 and 1879.
  3. The new data indicate that "Stocks for the Long Run" rested on a faulty premise of a stationary process, since the 19th century, particularly the antebellum era, saw repeated equity deficits rather than the 6% to 7% real returns and substantial equity premium the old record showed.

Related Articles:

  • 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.
  • 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.
  • Market Bipolarity: Exuberance versus Exhaustion — The equity risk premium fell over the first half of the year and then held relatively steady, leaving the expected return on equities higher as risk-free rates rose. The author argues that quarterly moves in stock and corporate bond prices came largely from rising interest rates rather than a heightened fear of risk.

AI Summary. Interest-rate cuts should wait for clear evidence that inflation has been durably returned to 2%, rather than treating a brief touch of that level as success. The market view of a soft landing with 100 basis points of Federal Reserve cuts is possible but unlikely: without a recession cuts would likely be smaller, with one larger.

Robert Armstrong and Ethan Wu Financial Times
Date Posted:

.@LHSummers argues to @rbrtrmstrng that a soft landing is “a long way from assured,” “touching 2%” is not “achieving 2%” and the current market view of 100bps of cuts in 2024 is not his base case.

.@LHSummers argues to @rbrtrmstrng that a soft landing is “a long way from assured,” “touching 2%” is not...

Should rate cuts wait for durable evidence inflation has returned to target?

Core argument: Larry Summers says the market view of a soft landing with 100 basis points of Fed cuts over the next year is possible but not at the centre of his expectations.

I think I would be looking for very clear evidence that inflation was durably put down, because I would be very concerned that we would confuse touching 2% with achieving 2%, and even more concerned with touching 2.7% and regarding that as a basis for easing…I would be very much aware that if the transmission from monetary policy to inflation when there had been tightening was more direct, and involved output less than one might have expected, there was the risk of something parallel on the loosening side. So I would be in less of a hurry. The current market view that we will have a soft landing and the Fed will be able to cut rates by 100 basis points over the next year strikes me as possible, but it is not at the centre of my expectations. We may have no recession, in which case I rather doubt that the Fed will be able to cut rates by 100bp, or we may have a recession, in which case the Fed will cut rates by somewhat more than 100bp.

Takeaways by Macro Roundup® AI

  1. Larry Summers says the market view of a soft landing with 100 basis points of Fed cuts over the next year is possible but not at the centre of his expectations.
  2. Summers doubts the Fed could cut 100 basis points absent a recession, and expects somewhat more than 100 basis points of cuts if a recession occurs.
  3. Summers says he would look for very clear evidence that inflation was durably put down, warning against confusing touching 2%, or 2.7%, with achieving 2% as a basis for easing.

Related Articles:

  • US Daily: December FOMC Recap: A Faster Return to the 2% Target Means Faster Cuts — Revised estimates put core personal consumption inflation at 1.9% annualized in the second half of the year, down from 4% annualized in the first half, with some measures of the trend already at or near 2%. This pace of deceleration runs counter to the widely expected "last mile" problem in returning inflation to the 2% target.
  • 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%.

AI Summary. Consumer borrowing and bank lending showed signs of stabilizing or modest acceleration, which is not what one would expect if monetary policy were actually restrictive. Setting interest rates based on past inflation readings risks shifting policy from neutral to unnecessarily stimulative, since market-implied inflation expectations have not moved in over a year.

Matt Klein The Overshoot
Date Posted:

.@M_C_Klein argues that rate cuts could be “unnecessarily stimulative” risking above-target inflation, given the ongoing rise in asset prices, continued wage growth, and strong private sector balance sheets.

Is monetary policy actually restrictive if borrowing and lending are accelerating?

Core argument: Consumer borrowing and bank lending quantities stabilized or modestly accelerated in the second half of 2023, which the author argues is not what would be expected if Federal Reserve policy were actually restrictive.

Beyond asset prices, the quantities of consumer borrowing and bank lending have also shown signs of stabilizing (or modest acceleration) in the second half of 2023. None of this is what one would expect if policy were actually “restrictive”. The argument from Fed officials is that none of this matters. As Governor Chris Waller put it recently, “if inflation goes down, you would lower policy the rate”. But the inflation data are telling us only what has already happened, while interest rates are supposed to be forward-looking. Setting the future price of money based on last year’s price increases is nonsensical. As it happens, inflation had always been expected to slow, which is why breakevens never went above 4%. Moreover, these market-implied inflation premiums have not budged in over a year. The danger is that they may instead be shifting from “neutral” to “unnecessarily stimulative” because they are calibrating policy with a faulty backward-looking model.

Takeaways by Macro Roundup® AI

  1. Consumer borrowing and bank lending quantities stabilized or modestly accelerated in the second half of 2023, which the author argues is not what would be expected if Federal Reserve policy were actually restrictive.
  2. Market-implied inflation breakevens never rose above 4% and have not budged in over a year, which the author cites as evidence that inflation had always been expected to slow.
  3. Fed Governor Chris Waller's position that "if inflation goes down, you would lower policy the rate" rests on backward-looking inflation data, which the author argues risks shifting policy from neutral to unnecessarily stimulative.

Related Articles:

  • Reflexivity — A sharp decline in interest rates amid benign economic conditions could re-accelerate credit growth and economic activity, limiting the number of future Federal Reserve rate cuts. Despite a large rise in rates, credit quality measures show only modest deterioration to pre-2020 levels and households and corporations remain financially sound, leaving borrowers capacity to take on more debt.
  • 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%.

AI Summary. The US produces more crude oil than any other country and, counting total petroleum products, more than Saudi Arabia and Russia combined, with crude and natural gas output at record highs and gas production up 7% from its 2019 peak. Net US energy exports reached $70bn over 12 months despite falling oil and gas prices.

Joseph Politano Apricitas Economics
Date Posted:

US net energy exports were at least $70B in the last 12 months, a number that is set to grow as the US economy decarbonizes allowing more exports to more hydrocarbon-intensive emerging markets. @JosephPolitano

Is US energy production at record highs and driving net exports?

Core argument: Net US energy exports reached $70bn over the last 12 months despite falling oil and gas prices, with American crude oil output setting a record high as of September.

The US produces more crude oil than any other country by a significant margin, and when looking at total petroleum products (including hydrocarbon gas liquids like propane and biofuels like ethanol) the US makes more than Saudi Arabia and Russia combined. As of September, American crude oil production has set a new record high, US natural gas production has continued setting new record highs and is now up 7% from its 2019 peaks. In other words, the US is now producing more energy than ever before, and that growing surplus is being sent abroad—net US energy exports have reached $70B over the last 12 months despite falling oil and gas prices. In fact, US supply growth has been a large factor behind those falling prices in a year where OPEC+ producers have seen significant ongoing production cutbacks.

Takeaways by Macro Roundup® AI

  1. Net US energy exports reached $70bn over the last 12 months despite falling oil and gas prices, with American crude oil output setting a record high as of September.
  2. The US produces more crude oil than any other country by a significant margin, and its total petroleum products output—including hydrocarbon gas liquids and biofuels such as ethanol—exceeds Saudi Arabia and Russia combined.
  3. US natural gas production has continued setting record highs and stands 7% above its 2019 peak, with US supply growth a large factor behind falling prices in a year of significant OPEC+ production cutbacks.

Related Articles:

  • Oil Market Caught By Surprise As US Output Surges — US crude oil production reached an all-time high of 13.2mn barrels a day, more than any other country and about one in eight barrels of global output, outpacing official forecasts. The International Energy Agency attributes 80% of this year's growth in global oil supply to the US, complicating OPEC+ efforts to prop up prices through output cuts.
  • 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.
  • 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.

AI Summary. GLP-1 medications act on receptors in the gut, liver, muscles, and brain, and studies report they reduce heart attacks and strokes, slow kidney disease progression, and shrink liver fat deposits. Users have also reported diminished cravings for alcohol, tobacco, gambling, and other compulsive behaviors, though anecdotal reports outpace clinical studies.

Dhruv Khullar New Yorker
Date Posted:

GLP-1 drugs like Ozempic may revolutionize healthcare in the US, especially for the economically disadvantaged. They offer notable weight loss benefits and, anecdotally, reduce cravings for alcohol and tobacco. @DhruvKhullar

How far do weight-loss drugs' effects extend beyond the gut?

Core argument: GLP-1 receptors exist in the gut, liver, muscles, and brain, and studies indicate some of these medications appear to reduce the incidence of heart attacks and strokes, slow kidney disease progression, and shrink dangerous liver fat deposits.

GLP-1 produces all sorts of cascading effects; the human body has receptors for it not only in the gut but also in the liver, muscles, and brain. Studies keep turning up surprises: some of the medications appear to reduce the incidence of heart attacks and strokes, slow the progression of kidney disease, and shrink dangerous fat deposits in the liver. People who take them have reported diminished cravings for alcohol and tobacco; some have reported feeling less compelled to gamble, compulsively pick at their skin, and engage in other addictive behaviors. “It’s an unprecedented situation,” Christian Hendershot, a University of North Carolina clinical psychologist who is studying semaglutide’s effect on alcohol use, told me. “The anecdotal reports of people saying these drugs are helping them cut back on drinking or smoking have come much faster than our clinical studies can confirm.” Lizard venom helped to turn an obscure hormone into potent diabetes medications, and then into the most promising weight-loss treatments in history. We’re still discovering how much they’ll change our lives.

Takeaways by Macro Roundup® AI

  1. GLP-1 receptors exist in the gut, liver, muscles, and brain, and studies indicate some of these medications appear to reduce the incidence of heart attacks and strokes, slow kidney disease progression, and shrink dangerous liver fat deposits.
  2. People taking GLP-1 medications have reported diminished cravings for alcohol and tobacco, and some report feeling less compelled to gamble, compulsively pick at their skin, and engage in other addictive behaviors.
  3. Christian Hendershot, a University of North Carolina clinical psychologist studying semaglutide's effect on alcohol use, calls the situation unprecedented, noting anecdotal reports of people cutting back on drinking or smoking have come faster than clinical studies can confirm.

Related Articles:

  • How Disadvantage Became Deadly in America — The author calculates that the average age of death among the shortest-lived 10% of Americans is 36, versus 55 in the Netherlands and 57 in Sweden, after falling by about eight years over the past decade. Wealthy Americans live equally long regardless of local opioid use and gun violence, while poor Americans in those areas live far shorter lives.
  • How Weight Loss Drugs Stopped a Danish Recession — Strong demand for the weight-loss and diabetes drugs Ozempic and Wegovy has kept Denmark out of recession: GDP is up about 1.1% over the past year but down 0.9% excluding pharmaceuticals, meaning drugmakers added roughly 2% to growth. Booming exports let Denmark's central bank hold rates lower while maintaining its euro peg.
  • 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.

AI Summary. Commonly reported "period" life expectancy assumes current age-specific death rates persist for a newborn's entire life, while "cohort" life expectancy better measures how long a child born today will actually live. Death rates from cancer, heart disease, and stroke have fallen substantially over the past two decades, and the author argues that progress should continue.

Josh Zumbrun Wall Street Journal
Date Posted:

Recent declines in US life expectancy based on historical data don’t account for future improvements in health care. A boy born last year is expected to live 82.2 years and a girl 86.5 years, 6 and 7 years longer than purely historical estimates.

Does the standard life expectancy measure understate how long newborns will live?

Core argument: About 95% of reported life expectancy figures use the period measure, which demographer Michel Guillot of the University of Pennsylvania describes as based on a synthetic or fictitious cohort.

“When you see life expectancy reported, about 95% of the time, it’s the period life expectancy measure,” said Michel Guillot, a demographer and professor of sociology at the University of Pennsylvania. “It is based on the concept of a synthetic or fictitious cohort.” The statistic looks at how many people died at each age in a given year, and then calculates how long a hypothetical infant would live if those age-specific death rates applied for that infant’s entire life. For example, if 1.5% of people aged 65 died in 2022, this calculation assumes 1.5% of babies born this year who are still alive in 65 years will die at that age. But, of course, today’s babies won’t actually turn 65 until the late 2080s, and that would be an extraordinarily long time for us to make no progress on mortality. The more relevant way to measure how long a child born today will actually live is with “cohort life expectancy.” In the past 20 years, death rates from cancer, heart disease, and stroke have all fallen dramatically. There is reason to think that should continue.

Takeaways by Macro Roundup® AI

  1. About 95% of reported life expectancy figures use the period measure, which demographer Michel Guillot of the University of Pennsylvania describes as based on a synthetic or fictitious cohort.
  2. Period life expectancy applies a single year's age-specific death rates across an entire lifetime, assuming, for example, that babies born today who reach 65 in the late 2080s will die at 2022's rate for 65-year-olds.
  3. Death rates from cancer, heart disease, and stroke have all fallen dramatically over the past 20 years, and cohort life expectancy is the more relevant measure of how long a child born today will actually live.

Related Articles:

  • Comments On: “Accounting For the Widening Mortality Gap Between American Adults With and Without a BA” By Anne Case and Angus Deaton — Selection plausibly accounts for most or all of the widening mortality gap between US adults with and without a bachelor's degree: high school achievement measures have not risen since the early 1970s while the share earning degrees rose, and national youth survey data show non-graduates increasingly negatively selected on aptitude scores.
  • Accounting for the Widening Mortality Gap Between American Adults With and Without a BA — The mortality gap between American adults with and without a four-year college degree widened across three periods—falling mortality for both with larger gains for graduates, then diverging, then rising faster for the less educated during the pandemic—reaching an 8.5-year difference in adult life expectancy. Americans with a degree, treated as a separate country, would rank just below Japan.
  • Who Won the Cold War? Part II — Americans born around 1990 had higher death rates in their 20s than peers in affluent allied countries, and the gap widened across young adulthood. By age 29, US mortality for that cohort was about 2x New Zealand's, 2.5x France's, 3x Japan's, and 4x Italy's or Spain's.

Tuesday, January 2, 2024

AI Summary. The assumption that top wealth and capital income shares move in parallel over the long run is problematic, since falling interest rates reduce interest income relative to bond wealth and widen the gap. Fully counting passthrough business income, the authors' top 1% capital income share rose 5 percentage points.

David Splinter DavidSplinter.com
Date Posted:
Is Database:
Database
Is Important:
Important

David Splinter responds to Saez @PikettyWIL @gabriel_zucman comments: “Our headline finding of relatively flat long-run top 1% after-tax income shares is robust.”

Do top wealth and capital income shares move in parallel?

Core argument: Auten and Splinter argue that when passthrough business income is fully included, their top 1% non-housing "capital" income share rose 5 percentage points from 1989 to 2019, about two-thirds of the Federal Reserve's estimated rise in top 1% wealth shares.

PSZ suggest that top wealth and capital income shares should run parallel over the long run. This is a problematic assumption. Economic changes can push down capital income shares relative to wealth shares. Most importantly, interest rates fell dramatically between 1989 and 2019—the federal funds effective rate fell from 9 to 2%. This decreased the ratio of interest-income to bond-wealth and therefore falling interest rates likely increased the gap between top income and wealth shares. Also, much of top wealth patterns are driven by passthrough business, but this is fully or two-thirds excluded from PSZ’s definition of “capital” income here. When fully including passthrough business, the Auten–Splinter top 1% non-housing “capital” income share increased by 5 percentage points between 1989 to 2019, about two-thirds of the Federal Reserve’s estimated increase in top 1% wealth shares. Therefore, the Auten-Splinter estimates are consistent with increasing top wealth shares.

Takeaways by Macro Roundup® AI

  1. Auten and Splinter argue that when passthrough business income is fully included, their top 1% non-housing "capital" income share rose 5 percentage points from 1989 to 2019, about two-thirds of the Federal Reserve's estimated rise in top 1% wealth shares.
  2. Auten and Splinter dispute the PSZ assumption that top wealth and capital income shares run parallel over the long run, noting the federal funds effective rate fell from 9% to 2% between 1989 and 2019, lowering interest income relative to bond wealth.
  3. Auten and Splinter note that much of top wealth patterns is driven by passthrough business, which PSZ's definition of "capital" income here excludes fully or by two-thirds, and conclude their own estimates are consistent with increasing top wealth shares.

Related Articles:

AI Summary. Competing studies estimate the top 1%'s share of US after-tax-and-transfer national income rose by either 6pp or 1pp, with differing estimates of pre-tax income shares explaining part of the gap and differing estimates of tax and transfer effects explaining the rest. The preponderance of evidence suggests income inequality has increased.

William Gale, John Sabelhaus, and John Sabelhaus Brookings Institution
Date Posted:
Is Database:
Database

Weighing in on the AS/PSZ debate @WilliamGale2 John Sabelhaus @samthorpe__ argue that “the preponderance of evidence suggests that income inequality has increased” in the US and other advanced economies.

Why do estimates of rising top 1% income shares differ so widely?

Core argument: From 1960 to 2019, the after-tax-and-transfer income share of the U.S. top 1% rose by 6 percentage points according to Piketty, Saez and Zucman but only 1 point according to Auten and Splinter, a 5-point discrepancy.

From 1960 to 2019, the after-tax-and-transfer share of national income going to the top 1% rose by 6pp according to PSZ but only 1pp according to AS. Part of the difference between the two is related to their measurement of pre-tax income shares. PSZ find the top 1% share of pre-tax income rose by 6 percentage points (from 13% to 19%) and AS estimate the increase to be 4pp (from 10% to 14%). But different estimates of pre-tax income shares only explain 2 of the 5pp discrepancy. The remaining 3-point gap results from different estimates of the effects of tax and transfer policies. The preponderance of evidence suggests that income inequality has increased, both in the U.S. and in other countries. Evidence also shows U.S. inequality increasing in other measures, such as health, mortality, and wealth. It is hard to see why inequality on other dimensions would have increased, in some cases substantially, if the distribution of income had not changed.

Takeaways by Macro Roundup® AI

  1. From 1960 to 2019, the after-tax-and-transfer income share of the U.S. top 1% rose by 6 percentage points according to Piketty, Saez and Zucman but only 1 point according to Auten and Splinter, a 5-point discrepancy.
  2. Differing pre-tax income share estimates — a rise of 6 points (13% to 19%) for Piketty, Saez and Zucman versus 4 points (10% to 14%) for Auten and Splinter — explain only 2 of the 5-point gap, the remaining 3 points stemming from different estimates of tax and transfer effects.
  3. The preponderance of evidence suggests income inequality has increased in the U.S. and other countries, with U.S. inequality also rising in health, mortality and wealth, which would be hard to explain if the distribution of income had not changed.

Related Articles:

  • Income Inequality in the United States: Using Tax Data to Measure Long-Term Trends — Using administrative tax data with the Survey of Consumer Finances, the authors estimate the top 1% pre-tax income share fell from 11.1% in 1962 to 9.4% in 1979, then rose to 13.8% by 2019, a 3 percentage point rise over the full period. Their after-tax measure shows increases of only 1.4 points since 1979 and 0.2 points since 1962.
  • Comment on Auten and Splinter (2023) — A critique argues that Auten and Splinter's methodology misallocates a large share of untaxed business and capital income to the bottom of the distribution, assuming the top 1% earns only about 15% of untaxed business income while tax data show they earn about 55% of business income overall.
  • Short Reply: Comment on Auten and Splinter (2023) — The assumption that top wealth and capital income shares move in parallel over the long run is problematic, since falling interest rates reduce interest income relative to bond wealth and widen the gap. Fully counting passthrough business income, the authors' top 1% capital income share rose 5 percentage points.

AI Summary. The "magnificent 7" megacap stocks represent an all-time-high share of US market capitalization and accounted for most equity market gains, with 72% of S&P 500 stocks underperforming the index versus a 52% average since 1980. Adjusted for higher earnings growth expectations, these megacaps look less overpriced relative to the market, though the trade is very crowded.

Michael Cembalest J.P. Morgan
Date Posted:

Michael Cembalest @jpmorgan argues the valuation of the magnificent 7 “largely reflects their higher margins and free cash flow.”

Are megacap stocks overpriced once higher earnings growth expectations are considered?

Core argument: 72% of S&P 500 stocks underperformed the index in 2023, the second highest share since 1980 and above the 52% average.

The percent of market cap that the “magnificent 7” represent is at an all-time high, and they accounted for most of the equity market gains in 2023. Another sign of concentration: last year also saw the second highest percentage of S&P 500 stocks underperforming the index since 1980 (72% underperformed vs 52% average). But without judicial brakes on them, the strong are getting stronger and I see little reason, other than valuations that become too high relative to the market, that this should change. While megacap stocks look increasingly expensive relative to the market, after adjusting for their higher earnings growth expectations they don’t look nearly as overpriced. The challenge is everyone seems to agree; this is a very crowded trade.

Takeaways by Macro Roundup® AI

  1. 72% of S&P 500 stocks underperformed the index in 2023, the second highest share since 1980 and above the 52% average.
  2. The "magnificent 7" account for an all-time high share of market capitalization and delivered most of the equity market's 2023 gains.
  3. Megacap stocks look increasingly expensive relative to the market, but adjusting for their higher earnings growth expectations leaves them less overpriced, with the crowdedness of the trade the main challenge.

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.
  • 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.
  • AI Is the Latest Shiny New Toy — 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.

AI Summary. The total market value of the S&P 500's 500 companies rose $8tn, or 24.2%, but excluding seven large technology stocks — Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla — the gain was $3tn, or 11.7%. Those seven account for 52% of the index's increase in market value.

Jesper Rangvid Rangvid's Blog
Date Posted:
Is Database:
Database

The S&P 500 was up 24% in 2023, with 52% of the increase in market capitalization driven by the Magnificent 7. As of August, 70% of S&P gains had been driven by the Magnificent 7.

How much of the S&P 500's gain came from seven stocks?

Core argument: The S&P 500's total market value rose by $8 trillion, or 24.2%, during 2023, with the Magnificent Seven — Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla — accounting for 52% of that increase.

The total market value of all 500 stocks in the S&P 500 has increased by $8 trillion or 24.2% during 2023. Without the seven Mag7 stocks [Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla,] the value of the index would have risen by “only” USD 3 trillion, which corresponds to a return of 11.7%. In other words, the Mag7s are responsible for 52% of the increase in the total market value of all 500 stocks in the S&P 500. At the end of August, Mag7 had accounted for more than 70% of the value created by all the companies in the S&P 500. Today, that share has fallen to 52%. So it’s still a concentrated rally, but not as concentrated as it was right after the summer.

Takeaways by Macro Roundup® AI

  1. The S&P 500's total market value rose by $8 trillion, or 24.2%, during 2023, with the Magnificent Seven — Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla — accounting for 52% of that increase.
  2. Excluding the Magnificent Seven, the S&P 500's value would have risen by $3 trillion, a return of 11.7%, against the index's full 24.2% gain.
  3. The Magnificent Seven's share of value created by all S&P 500 companies fell from more than 70% at the end of August to 52%, leaving the rally concentrated but less so than after the summer.

Related Articles:

  • 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.
  • 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.
  • Pillow Talk — The "magnificent 7" megacap stocks represent an all-time-high share of US market capitalization and accounted for most equity market gains, with 72% of S&P 500 stocks underperforming the index versus a 52% average since 1980. Adjusted for higher earnings growth expectations, these megacaps look less overpriced relative to the market, though the trade is very crowded.

AI Summary. Roughly 50% of the most expensive quartile of US stocks remain in that quartile a year later, while about 75% of the cheapest quartile stay cheapest, with valuation multiples among the cheapest stocks tending to mean revert gradually.

Chris Satterthwaite Verdad
Date Posted:
Is Database:
Database

.@verdadcap created a value metric on a blend of price vs. cash flow, earnings, book value, and sales, and found that half of equities in the “most expensive” quartile were in the same quartile the following year, while 30% dropped to the next quartile.

How persistent are stock valuations across expensive and cheap quartiles?

Core argument: Roughly 50% of the most expensive quartile of stocks remained in the top valuation quartile one year later, while about 30% fell to the next quartile and about 10% each dropped to the second-cheapest and cheapest quartiles.

We found that roughly 50% of the most expensive stocks (those in the top quartile) remained in the top quartile one year later. Roughly 30% dropped into the next quartile, while roughly 10% fell to the second-cheapest quartile and the cheapest quartile respectively. Since these companies have the highest valuations for the current fundamentals, we can think of this most expensive quartile as a proxy for the most “growth-y” companies. The picture overall looks slightly different for the lowest quartile of value, which represents the cheapest stocks. On average, 75% of the cheapest quartile of companies in the US remain in the cheapest quartile one year later, while 17% graduate to the second quartile, and 5% and 3% move to the third and fourth quartile respectively. Within the cheapest quartile, we find evidence that valuation multiples tend to mean revert, albeit gradually.

Takeaways by Macro Roundup® AI

  1. Roughly 50% of the most expensive quartile of stocks remained in the top valuation quartile one year later, while about 30% fell to the next quartile and about 10% each dropped to the second-cheapest and cheapest quartiles.
  2. About 75% of the cheapest quartile of U.S. companies stayed in the cheapest quartile one year later, with 17% moving to the second quartile and 5% and 3% reaching the third and fourth quartiles.
  3. Within the cheapest quartile, evidence suggests valuation multiples tend to mean revert, albeit gradually, and the most expensive quartile can serve as a proxy for the most growth-oriented companies.

Related Articles:

AI Summary. The green energy transition is likely to reduce growth for some time, and with the gap between interest rates and growth rates near zero in many countries, stabilizing debt ratios requires primary budget balances to eventually reach zero or a small surplus. That end constraint cannot be altered; the only margin governments have is how quickly they reach it.

Olivier Blanchard Peterson Institute for International Economics
Date Posted:
Is Database:
Database

.@ojblanchard1 argues that reconciling higher spending needed to fight global warming and stabilizing debt levels will require fiscal consolidation yielding “some positive level of the ratio of primary balances to GDP.”

.@ojblanchard1 argues that reconciling higher spending needed to fight global warming and stabilizing debt levels will...

How can governments finance the green transition while stabilizing debt?

Core argument: With r − g close to zero in many countries, stabilizing the debt ratio implies primary balances eventually reaching zero, while accounting for uncertainty and requiring sustainability with probability above 50% implies a small positive ratio of primary balance to GDP.

The transition to green energy is likely to decrease growth, at least for some time. What, then, is the margin that can be used [to finance green energy and stabalize debt levels]? It is the speed at which the debt ratio is stabilized. Here is the simple math: Many countries have today a value of r − g close to zero. For the moment, assume that it is equal to zero and ignore uncertainty. Then the stabilization of the debt ratio simply implies that primary balances eventually go to zero. Now reintroduce uncertainty and the need for debt to be sustainable with high probability, thus with probability higher than 50%. The end goal must then be somewhat more ambitious, namely some positive level of the ratio of primary balances to GDP. The important point here is that the end constraint, be it zero or small positive primary balances, cannot be changed. But the speed at which it is reached is the margin the government has in order to achieve it. For the time being, however, governments have to finance themselves at the current rates, and it is reasonable for them to work under the assumption that r − g is and will (in expected value) remain equal to zero. A decrease would definitely help, but they cannot bet on it.

Takeaways by Macro Roundup® AI

  1. With r − g close to zero in many countries, stabilizing the debt ratio implies primary balances eventually reaching zero, while accounting for uncertainty and requiring sustainability with probability above 50% implies a small positive ratio of primary balance to GDP.
  2. The green energy transition is likely to decrease growth for some time, and a government's margin for financing it is the speed at which the debt ratio is stabilized, not the end constraint of zero or small positive primary balances.
  3. Governments must finance themselves at current rates, and it is reasonable for them to assume that r − g is and will in expected value remain zero, since a decrease would help but cannot be counted on.

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.
  • 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.
  • 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. Across advanced and emerging economies that experienced a large post-Covid price surge, core inflation is estimated to have run at a 2.2% annualized pace over three months, and 1.3% in the latest month. On that basis, the authors now expect earlier and more aggressive interest-rate cuts from several major developed-market central banks.

Jan Hatzius Goldman Sachs
Date Posted:

Jan Hatzius @GoldmanSachs notes that globally core inflation has declined to a sequential annualized pace of 2.2% over the past three months and just 1.3% in November. He expects Y/Y core inflation in the US to be < 2.5% in Q1.

Has global core inflation fallen enough to bring earlier rate cuts?

Core argument: Core inflation across the G10 excluding Japan plus the emerging-market early hikers ran at an estimated sequential annualized pace of 2.2% over the past three months.

Global inflation continues to plummet. Averaging across the broad group of economies that saw a large and unwanted post-covid price surge—the G10 excluding Japan plus the EM early hikers—we estimate that core inflation ran at a sequential annualized pace of 2.2% over the past three months and just 1.3% in November. We therefore now see earlier and more aggressive rate cuts from several major DM central banks.

Takeaways by Macro Roundup® AI

  1. Core inflation across the G10 excluding Japan plus the emerging-market early hikers ran at an estimated sequential annualized pace of 2.2% over the past three months.
  2. Core inflation in that same group of economies is estimated at just 1.3% annualized in November, following a large and unwanted post-covid price surge.
  3. The disinflation underpins an expectation of earlier and more aggressive rate cuts from several major developed-market central banks.

Related Articles:

  • Larry Summers: We Haven’t Nailed The Landing Yet — Interest-rate cuts should wait for clear evidence that inflation has been durably returned to 2%, rather than treating a brief touch of that level as success. The market view of a soft landing with 100 basis points of Federal Reserve cuts is possible but unlikely: without a recession cuts would likely be smaller, with one larger.
  • 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.
  • Fiscal Arithmetic and the Global Inflation Outlook — Across advanced economies, core inflation is significantly positively associated with growth in government debt since the start of the pandemic, and the authors expect this decade's fiscal expansions to shift price levels permanently higher. They argue this differs from permanently higher inflation, projecting inflation to diminish as temporary deficits normalize, with medium-term inflation expectations still anchored near central bank targets.

AI Summary. Because monetary policy affects inflation with long and variable lags, much recent tightening has yet to have its full effect, and the collapse in global credit creation points to weak money growth ahead. The author argues central banks over-tightened by reacting to incoming inflation rather than looking through a one-off pandemic price-level adjustment, shifting the risk toward undershooting inflation targets.

Chris Marsh Money: Inside and Out
Date Posted:

Given inflation has largely come down without unemployment rising but with a “collapse in global credit creation” @GeneralTheorist wonders if monetary policy overshot and 2024 might see outright deflation.

Have central banks over-tightened and risk undershooting inflation targets?

Core argument: Given the long and variable lags from policy to inflation outcomes, a substantial part of recent monetary tightening has yet to have its full effect.

Given the famous “long and variable” lags from policy to inflation outcomes, a substantial part of recent policy tightening has yet to have its full effect. The collapse in global credit creation implies the net flow of new credit is now much lower than the pre-pandemic period—suggestive of anaemic money growth ahead once the portfolio reshuffle comes to an end. The monetary overhang from the pandemic required a one-off adjustment of the price level. Since central banks target future inflation and not the price level, this ought to have been largely looked-through when setting policy in a forward-looking way. Instead, policy has been found reacting to incoming inflation and therefore over-tightening. Now that our more recent monetary overhang has now nearly worked it way through global prices, risks for monetary policymakers are now shifting from over- to under-shooting targets.

Takeaways by Macro Roundup® AI

  1. Given the long and variable lags from policy to inflation outcomes, a substantial part of recent monetary tightening has yet to have its full effect.
  2. The collapse in global credit creation implies the net flow of new credit is now much lower than in the pre-pandemic period, suggesting anaemic money growth once the portfolio reshuffle ends.
  3. The pandemic monetary overhang required a one-off price-level adjustment that forward-looking central banks targeting future inflation should largely have looked through; policy instead reacted to incoming inflation and over-tightened, shifting risks toward undershooting targets.

Related Articles:

  • The Fed Prepares for Rate Cuts. But Why? — Consumer borrowing and bank lending showed signs of stabilizing or modest acceleration, which is not what one would expect if monetary policy were actually restrictive. Setting interest rates based on past inflation readings risks shifting policy from neutral to unnecessarily stimulative, since market-implied inflation expectations have not moved in over a year.
  • 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%.

AI Summary. Excess cash balances outside the top 1% have mostly disappeared, but the author argues their liquidation did little to finance consumer spending, which has been driven mainly by wage income. Relatively low household debt leaves many Americans room to spend above their income, potentially aided by lower interest rates.

Matt Klein The Overshoot
Date Posted:
Is Database:
Database

While “excess savings” have largely been drawn down US saving and spending rates have normalized relative to income. Relative to the pre-pandemic period “Americans are richer than before and have much lower debt than would be expected.” @M_C_Klein

Has the depletion of excess cash balances driven consumer spending?

Core argument: "Excess" cash balances outside the top 1% have mostly disappeared, but the author argues their liquidation did little to finance consumer spending over the past two years, so spending is unlikely to slow suddenly.

“Excess” cash was not particularly important for many Americans. That means that the liquidation of that cash probably did not play (much) of a role in financing consumer spending over the past two years. And that in turn probably means that consumer spending will not suddenly slow down now that the “excess” cash balances outside of the top 1% have mostly disappeared. For better or worse, wage income has been the main driver of aggregate consumer spending throughout this period. Relatively low levels of debt—including among those who have relatively less cash on hand—means that many Americans have a lot of latent financial firepower to increase their spending above and beyond their income, should they wish to do so. That may not be attractive now, but lower interest rates could potentially change things. Zooming out, it is worth noting that the liquidation of household cash balances has coincided with surging investment in U.S. Treasury securities (potentially hedge fund activity, but that is a subject for another note) alongside slower borrowing and sustained purchases of other assets, both real and financial.

Takeaways by Macro Roundup® AI

  1. "Excess" cash balances outside the top 1% have mostly disappeared, but the author argues their liquidation did little to finance consumer spending over the past two years, so spending is unlikely to slow suddenly.
  2. Wage income has been the main driver of aggregate consumer spending throughout this period, according to the author, rather than drawdowns of cash balances.
  3. Relatively low household debt levels, including among Americans with less cash on hand, leave latent capacity to spend above income, which lower interest rates could make more attractive.

Related Articles:

  • Excess No More? Dwindling Pandemic Savings — Research on U.S. household savings after the pandemic recession points to rapid accumulation and then drawdown of excess savings, with cumulative drawdowns exceeding $1.9tn and less than $190bn of excess savings remaining in the aggregate economy. The authors estimate that if recent drawdown rates persist, aggregate excess savings would be depleted.
  • The Trickling Up of Excess Savings — The authors argue that excess savings created by debt-financed government transfers do not disappear as households spend them down; instead they "trickle up" to wealthier households with lower propensities to spend, so the boost to aggregate demand fades only slowly. Their benchmark estimate puts this at roughly 5 years rather than a few quarters.
  • Spending Down Pandemic Savings Is an “Only-in-the-U.S.” Phenomenon — Household saving rose in the United States and other high-income economies during the COVID-19 pandemic, but only in the U.S. and Canada did income-support measures push incomes well above pre-pandemic trajectories, while consumption fell everywhere. The divergence between U.S. and foreign saving behavior has no clear explanation.

AI Summary. Net foreign investment in China-listed shares has fallen 87% from its peak of Rmb235bn ($33bn) to Rmb30.7bn, according to Financial Times calculations using Hong Kong Stock Connect data. The exit has been absorbed by corporate share buybacks and purchases from domestic funds and state-run financial institutions under government pressure to support valuations.

Hudson Lockett and Cheng Leng Financial Times
Date Posted:
Is Database:
Database

87% of foreign money that flowed into China’s stock market in 2023 has already left.

Are foreign investors pulling out of Chinese stocks?

Core argument: Net foreign investment in China-listed shares has fallen 87% this year, from a peak of Rmb235bn ($33bn) in August to Rmb30.7bn, according to Financial Times calculations using Hong Kong Stock Connect data.

Since peaking at Rmb235bn ($33bn) in August, net foreign investment in China-listed shares this year has dropped 87 percent to just Rmb30.7bn, according to Financial Times calculations based on data from Hong Kong’s Stock Connect trading scheme. The exit by offshore investors has been facilitated by widespread share buybacks from listed companies in China and by large-scale purchases from domestic investment funds and state-run financial institutions — all of which are under pressure from Beijing to prop up sagging valuations.

Takeaways by Macro Roundup® AI

  1. Net foreign investment in China-listed shares has fallen 87% this year, from a peak of Rmb235bn ($33bn) in August to Rmb30.7bn, according to Financial Times calculations using Hong Kong Stock Connect data.
  2. The exit by offshore investors from China-listed shares has been facilitated by widespread buybacks from Chinese listed companies and large-scale purchases by domestic investment funds and state-run financial institutions.
  3. Chinese listed companies, domestic investment funds and state-run financial institutions buying shares are under pressure from Beijing to prop up sagging valuations.

Related Articles:

  • 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.
  • 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.
  • PE Firms Trapped in China After $1.5 Trillion Betting Spree — Private equity firms that built more than $1.5tn of assets in China face difficulty exiting investments, with secondary buyers demanding discounts of 30% to more than 60% versus roughly 15% in Europe and the US. Weak public markets and unattractive valuations have pushed buyout firms toward private sales.