Edward Conard

Top Ten New York Times Bestselling Author

  • “A full-throated defense of economic dynamism.” - The Wall Street Journal
  • “…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 comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “Unintended Consequences is full of substance, it is one of the must-read books of the year, and once I finish it I will be giving it a second read through right away.” - Tyler Cowen, Professor, George Mason University
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard 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
  • “…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 should be read by anyone who takes for granted the superiority of progressive taxation and has not thought carefully about the trade-offs involved.” - The New Republic
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Friday, March 8, 2024

AI Summary. Estimates of the natural rate of interest across core advanced economies suggest it may have increased, though the estimates are widely dispersed and statistically uncertain. Low expected potential growth and rising longevity may weigh on the natural rate, while large fiscal deficits, age-related spending, and public investment needs for infrastructure, defense, and the green transition may push it up.

Gianluca Benigno, Boris Hofmann, Galo Nuño Barrau and Damiano Sandri Bank for International Settlements
Date Posted:

A @BIS_org analysis of the natural rate of interest suggests the rate has risen in the post-pandemic period however there is considerable uncertainty about its current level.

Has the natural rate of interest risen after the pandemic?

Core argument: A review of established measures of the natural rate of interest across core advanced economies suggests r* may have increased, though estimates show considerable dispersion and high statistical uncertainty around individual estimates.

We assess the post-pandemic natural rate from different perspectives. A review of various established measures of r* in core advanced economies suggests that it may indeed have increased. That said, there is considerable dispersion across estimates and high statistical uncertainty around individual estimates. The recent behaviour of the structural drivers of r* does not paint a clear-cut picture either. Low expected potential growth and rising longevity may continue to weigh on r*. Several other factors may exert upward pressure though, including persistently large fiscal deficits due to rising age-related spending as well as higher public investment needs for infrastructure, defence, and the green transition. Moreover, and less often appreciated, monetary policy itself could have a non-negligible effect on natural rates and perceptions thereof, through debt accumulation and beliefs about r*. As such, the recent reemergence of upside inflation risks inducing a tighter monetary policy stance going forward may have pushed at least perceptions of r* higher.

Takeaways by Macro Roundup® AI

  1. A review of established measures of the natural rate of interest across core advanced economies suggests r* may have increased, though estimates show considerable dispersion and high statistical uncertainty around individual estimates.
  2. The recent behaviour of r*'s structural drivers paints no clear-cut picture: low expected potential growth and rising longevity may continue to weigh on r*, while large fiscal deficits from age-related spending and investment needs for infrastructure, defence, and the green transition may push it up.
  3. Monetary policy itself could have a non-negligible effect on natural rates and perceptions of them through debt accumulation and beliefs about r*, so reemerging upside inflation risks inducing a tighter stance may have pushed perceptions of r* higher.

Related Articles:

  • 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.
  • The Price of Money Is Going Up, and It’s Not Only Because of the Fed — A model projects the inflation-adjusted natural interest rate rising about a percentage point from a 1.7% trough to 2.7% by 2050, implying 10-year US Treasury yields of 4.5%–5%. The authors estimate wide fiscal deficits, climate investment, and faster growth could lift the natural rate to 4%, implying roughly 6% yields.
  • Global Natural Rates in the Long Run: Postwar Macro Trends and the Market-Implied r* in 10 Advanced Economies — Estimates for 10 advanced economies show natural interest rates have declined over the long run, though not steadily: as recently as the 1990s they ranged from 100 to 600 basis points, while by the end of the sample 4 of 10 countries had a negative natural rate and most others fell between 0 and 50 basis points.

AI Summary. Market-based measures of expected inflation over the next one and two years, derived from the gap between yields on inflation-protected and traditional US Treasury bonds, have moved higher this year. The argument is that this uptrend pushes the Federal Reserve toward a more hawkish stance.

Torsten Sløk Apollo
Date Posted:

Citing the 1 and 2-year breakeven inflation rates (the yield difference between TIPS and traditional Treasuries) Torsten Sløk notes inflation expectations have moved higher this year.

Are rising inflation expectations pushing the Fed toward a more hawkish stance?

Core argument: Torsten Sløk notes that 1-year and 2-year breakeven inflation rates, the yield difference between TIPS and traditional Treasuries, have moved higher this year, indicating rising inflation expectations.

The strong uptrend in inflation expectations is forcing the Fed to be more hawkish.

Takeaways by Macro Roundup® AI

  1. Torsten Sløk notes that 1-year and 2-year breakeven inflation rates, the yield difference between TIPS and traditional Treasuries, have moved higher this year, indicating rising inflation expectations.
  2. Sløk argues the strong uptrend in inflation expectations is forcing the Federal Reserve to be more hawkish.

Related Articles:

  • Inflation Is Still Hot, But Could Incomes Be Slowing? — A measure of underlying US inflation—personal consumption services excluding energy, housing, and imputed items—is running about 1.5 percentage points faster than before the pandemic, unchanged over the past year. A 1% monthly jump in pre-tax personal income was driven more by dividends than by wages and salaries, which matter most for consumer spending.
  • How Fast Can the Fed Ease? The Private Sector Response to Easier Conditions Will Be a Key Factor — US households have reduced debt over the past 20 years, leaving room to borrow more if incentives improve, while companies that issued debt at low rates hold large liquidity and healthy balance sheets. That gives businesses capacity to raise investment, and business surveys indicate capital-spending sentiment is already improving.
  • A January Bounce — Inflation in "super core" services — services excluding housing — posted its strongest monthly reading since mid-2022, and its three-month average has ticked higher, reviving concern that late-year disinflation progress was a head fake. Disinflation has been uneven since core goods prices peaked, with the three-month average accelerating roughly every 8 months.

AI Summary. Foreign demand for long-term US Treasuries, at just over $450bn, exceeded the Treasury's net long-term issuance of just over $400bn, with that demand not coming from China. Net long-term issuance lagged the fiscal deficit—roughly 1.5% of GDP versus 6%—leaving the increase in the stock of long-term "safe" US assets modest.

Brad Setser @Brad_Setser
Date Posted:

According to @Brad_Setser in 2023 the $450B of foreign demand for long-term US Treasuries exceeded the $400B of Treasury’s net issuance of long term Treasuries.

Did foreign demand for long-term Treasuries exceed net issuance?

Core argument: Foreign demand for long-term US Treasuries reached just over $450bn in 2023, exceeding the Treasury's net long-term issuance of just over $400bn, an outcome not seen for a long time and not expected for 2023.

A rather surprising fact from the Fed's flow of funds: foreign demand for long-term US Treasuries (just over $450b) exceeded the Treasury's net issuance of long term Treasuries (just over $400b). That hasn't been the case for a long-time and it wasn't the expectation for 2023. Of course, with the Fed's Quantitative Tightening, the net supply of notes and bonds that the market had to absorb was larger than the Treasury's issuance (and note the foreign demand did not come from China either). What explains this sort of surprising outcome? Well, foreign demand for Treasuries isn't just China. Private investors presumably liked the yields on offer. And Treasury long-term issuance lagged the fiscal deficit bigly (1.5% of GDP v 6% of GDP). Net long-term issuance hasn't been this low since, well, 2007. So the increase in the stock of "safe" long-term US assets (counting Agencies) actually was fairly modest in 2023.

Takeaways by Macro Roundup® AI

  1. Foreign demand for long-term US Treasuries reached just over $450bn in 2023, exceeding the Treasury's net long-term issuance of just over $400bn, an outcome not seen for a long time and not expected for 2023.
  2. Treasury net long-term issuance ran at about 1.5% of GDP against a fiscal deficit of about 6% of GDP, the lowest net long-term issuance since 2007.
  3. The Fed's quantitative tightening meant the net supply of notes and bonds the market had to absorb exceeded the Treasury's issuance, and the foreign demand did not come from China.

Related Articles:

  • Preferred Habitats and Timing in the World’s Safe Asset — As the Federal Reserve shrinks its bond portfolio, the authors argue private investors, U.S. and foreign, are the more likely buyers of Treasury securities, since their purchases respond to yields and their holdings tilt toward longer-maturity bonds. Foreign governments have not materially added to their Treasury holdings in almost a decade and tend to hold shorter-maturity bonds.
  • Foreign Official and Foreign Private Investors in Treasuries Have Different Goals — Foreign central banks and sovereign wealth funds historically bought US Treasuries to hold down their own currencies and support exports rather than for yield, and these yield-insensitive official holders have been selling Treasuries to limit their currencies' weakening. Foreign private investors, by contrast, find US yields attractive despite high hedging costs.
  • US Treasury To Slow Pace Of Longer-Dated Debt Issuance — The US Treasury said it will keep raising two- and five-year note auction sizes by $3bn per month while slowing increases in longer-dated debt, lifting 10-year note auctions by $2bn and 30-year bond auctions by $1bn. Its quarterly refunding will total $112bn, down from $114bn.

AI Summary. A model-extracted trend in wage growth nearly doubled over 2021, appears to have peaked in early 2022, then declined before flattening out and remaining stagnant. The estimates carry considerable uncertainty, and it cannot be ruled out that wage growth stays markedly higher in the near term than before the pandemic.

Martin Almuzara, Richard Audoly, Augustin Belin, and Davide Melcangi Federal Reserve Bank of New York
Date Posted:

“Trend Wage Inflation,” a @NewYorkFed measure of the persistence of nominal wage growth, has stabilized at around 5%, vs. the pre-pandemic level of around 4%.

Will wage growth remain higher than before the pandemic?

Core argument: The trend wage growth extracted by the model nearly doubled over the course of 2021 after remaining stable between 2019 and 2020, suggesting a large chunk of that year's wage growth was persistent.

After remaining stable between 2019 and 2020, the trend increased markedly at the beginning of 2021, nearly doubling over the course of the year. As such, a large chunk of the wage growth we saw over the course of 2021 appears to have been persistent. It is worth stressing once more that the trend extracted by the model is expressed in terms of annualized monthly wage growth, which explains why it leads the actual year-over-year wage growth series in the chart. The model suggests that the trend may have peaked in the early months of 2022, and then started declining. The moderation in TWIn flattened out mid-2023 and has remained stagnant since. However, the shaded areas still illustrate considerable uncertainty. The recent slowdown estimated by our model indicates it cannot be ruled out that wage growth will continue to be markedly higher in the near-term than it was before the pandemic.

Takeaways by Macro Roundup® AI

  1. The trend wage growth extracted by the model nearly doubled over the course of 2021 after remaining stable between 2019 and 2020, suggesting a large chunk of that year's wage growth was persistent.
  2. The model suggests the wage growth trend may have peaked in the early months of 2022 and then declined, with the moderation in TWIn flattening out mid-2023 and remaining stagnant since.
  3. Considerable uncertainty surrounds the model's estimates, and it cannot be ruled out that wage growth will remain markedly higher in the near term than it was before the pandemic.

Related Articles:

  • Wages Are Rising Faster than We Thought — Core wage growth is running slightly faster than in the late 1990s and 2005-2007, about 2-3 percentage points faster than before the pandemic. The author argues a steady state near 5% annual wage growth need not be inflationary if workers save more or productivity gains let businesses expand output to meet demand.
  • The Unexpected Compression: Competition at Work in the Low Wage Labor Market — Labor market tightness produced an unexpected compression in the US wage distribution, with disproportionate wage growth at the bottom reducing the college wage premium and reversing nearly 40% of the rise in 90-10 wage inequality since 1980. The authors attribute this in part to increased competition for low-wage workers.
  • Credit Bidenomics for Rising US Wages — Inflation-adjusted wages for US workers in the middle pay range, between the 40th and 60th percentiles, were 6.6% higher than before the pandemic, slightly above what 2015-19 trends would predict. The US is the only G7 country with substantial real wage gains, ranging elsewhere from a 0.2% rise in Canada to a 9% decline in Italy.

AI Summary. Artificial intelligence in investing is still statistics — data goes in and a forecast comes out — and is not as revolutionary as many claim, the author argues. Questions such as the premium for high- versus low-quality stocks or value versus growth involve a small-data problem, not a big-data one, so more computation cannot answer them.

Robert Armstrong and Ethan Wu Financial Times
Date Posted:

Noting AI is “still just statistics” @CliffordAsness suspects that AI’s impact in investing will be more limited than many people’s revolutionary expectations.

Noting AI is “still just statistics” @CliffordAsness suspects that AI’s impact in investing will be more...

Is artificial intelligence as revolutionary for investing as many claim?

Core argument: Cliff Asness argues that AI in his field is not as revolutionary as others claim, describing it as "still just statistics" — data going in and a forecast coming out.

We don’t think AI, at least in our field, is as revolutionary as others do. It’s still just statistics. It’s still a whole bunch of data going in and a forecast coming out. Some of the key things we’ve talked about here I don’t think AI will help with at all: what is the premium for high-quality versus low-quality stocks? Value versus growth? We don’t have a big data problem there; we have a small data problem. If we had 8bn years of stationary comparable markets, we could answer these questions with any kind of statistics.

Takeaways by Macro Roundup® AI

  1. Cliff Asness argues that AI in his field is not as revolutionary as others claim, describing it as "still just statistics" — data going in and a forecast coming out.
  2. Asness says questions such as the premium for high-quality versus low-quality stocks and value versus growth pose a small data problem rather than a big data problem, so AI will not help with them at all.
  3. Asness contends that answering such questions with any kind of statistics would require 8bn years of stationary comparable markets.

Related Articles:

  • Erik Brynjolfsson: ‘This Could Be The Best Decade in History — Or The Worst’ — Studies of large language models across tasks including software coding, consulting, and writing find double-digit productivity gains appearing within months, with less-skilled workers typically benefiting most. Given the large share of modern work these tools can augment, the author projects US productivity growth near 3% annually in the 2020s, roughly double the Congressional Budget Office's 1.4% projection.
  • Assessing the Implications of a Productivity Miracle — If artificial intelligence can perform economically valuable cognitive tasks at very low marginal cost, consumers would buy far more of the cheapened goods and spend the savings in other categories, expanding activity and employment in sectors facing new demand. Where supply is inherently limited, such as real estate, those savings could bid up prices and produce inflation.
  • Integrating the Goldman AI Report Into Our Views — Goldman Sachs estimates generative AI productivity gains based on how easily the technology applies to each occupation rather than where the largest untapped economic opportunities lie. The author argues gains in producing documents and emails are overstated, while gains in software production are far larger than Goldman anticipates.

AI Summary. Global gross domestic product growth is routinely revised higher long after a period ends, which makes the most recent growth performance look weak by comparison. Current estimates put global growth at 2.7% year-over-year, but if the historical pattern of revisions holds, that figure is likely to be revised up to 3.2%.

Kevin Daly and Johan Allen Goldman Sachs
Date Posted:

Noting that early GDP estimates are routinely revised higher, Kevin Daly suggests 2023 was an “unusually strong” year and the global economy likely grew 3.2%.

Do upward GDP revisions make recent global growth look weak?

Core argument: Global GDP growth for 2023 is currently estimated at +2.7% yoy, an average year, but if the historical pattern of upward revisions holds, that figure is likely to be revised to +3.2% yoy, an unusually strong year.

The fact that GDP growth is routinely revised higher, long after the period has ended, has the effect of making the latest growth performance appear poor by comparison. We currently estimate that the global economy grew by +2.7%yoy in 2023, making it an average year for global growth. However, if the historical pattern of GDP revisions persists, that growth rate is likely to be revised to +3.2%yoy over time, making 2023 an unusually strong year for the world. Last year was pretty good – we just don’t know it yet.

Takeaways by Macro Roundup® AI

  1. Global GDP growth for 2023 is currently estimated at +2.7% yoy, an average year, but if the historical pattern of upward revisions holds, that figure is likely to be revised to +3.2% yoy, an unusually strong year.
  2. GDP growth is routinely revised higher long after the period has ended, making the latest measured growth performance appear poor by comparison.

Related Articles:

  • Macro Outlook 2024: The Hard Part Is Over — Goldman Sachs projects limited recession risk, holding a 15% US recession probability, and expects tailwinds to global growth including strong real household income growth, a smaller drag from monetary and fiscal tightening, recovering manufacturing, and central banks more willing to cut rates if growth slows. It projects core inflation falling to 2–2½%.
  • How Fast Can the Fed Ease? The Private Sector Response to Easier Conditions Will Be a Key Factor — US households have reduced debt over the past 20 years, leaving room to borrow more if incentives improve, while companies that issued debt at low rates hold large liquidity and healthy balance sheets. That gives businesses capacity to raise investment, and business surveys indicate capital-spending sentiment is already improving.
  • The Big Picture: Back to the Future — The secular backdrop has shifted from disinflationary to more inflationary, with interest rates no longer near zero and real rates no longer negative. Household balance sheets are as healthy as they have been in 20 years, leaving room to borrow, while the public sector is as indebted as it has ever been.

AI Summary. National election surveys and Gallup polling show the Democratic Party's advantage among Black, Latino, and Asian voters at its lowest level since 1960. The article argues this shift reflects fading civil rights-era ties, a weakening link between income and party choice, and non-white voters with long-held conservative views aligning their votes with those views.

John Burn-Murdoch Financial Times
Date Posted:

Democrats’ advantage with minorities is the lowest since 1960, as conservative minorities increasingly vote their policy preferences. In 2012 3/4 of blacks who identified as conservatives voted for Democrats, vs. less than half in 2022. @jburnmurdoch

Why is the Democratic advantage among non-white voters shrinking?

Core argument: America's national election surveys show Democrats' advantage among Black, Latino, and Asian voters at its lowest level since 1960, with Gallup figures showing the same steepening decline.

Data from America’s gold-standard national election surveys show Democrats’ advantage among Black, Latino, and Asian voters at its lowest since 1960. Figures from Gallup show the same steepening decline. Part of this is due to fading memories and weakening ties. Black Americans who lived through the civil rights era still support the party at very high levels, but younger generations are wavering. There’s also the weakening correlation between income and voter choice in US politics. The image of the GOP as the party of wealthy country club elites is dimming, opening the door to working- and middle-class voters of all ethnicities. More ominous for the Democrats is a less widely understood dynamic: many of America’s non-white voters have long held much more conservative views than their voting patterns would suggest. The migration we’re seeing today is not so much natural Democrats becoming disillusioned but natural Republicans realising they’ve been voting for the wrong party.

Takeaways by Macro Roundup® AI

  1. America's national election surveys show Democrats' advantage among Black, Latino, and Asian voters at its lowest level since 1960, with Gallup figures showing the same steepening decline.
  2. Black Americans who lived through the civil rights era still back the Democratic Party at very high levels, while younger generations are wavering as memories fade and party ties weaken.
  3. Many non-white American voters have long held more conservative views than their voting patterns suggested, so the migration reflects natural Republicans realising they had been voting for the wrong party rather than disillusioned Democrats.

Related Articles:

  • Consistent Signs of Erosion in Black and Hispanic Support for Biden — Polling shows the Democratic presidential candidate's support among nonwhite voters running well below his prior election standing across racial groups, with leads of 72-11 among Black voters, 47-35 among Hispanic registrants, and 40-39 among other nonwhite voters. About 5% of his former nonwhite voters now back the Republican candidate, including 8% of Hispanic voters.
  • Can Democrats Survive the Looming Crisis in New York City’s Outer Boroughs? — Just over a third of the decline in the Democratic margin of victory came from the suburbs, with New York City voters—through a mix of defection and abstention—accounting for most of the rest. Precincts that are at least three-quarters Hispanic or Asian swung 58 and 52 points toward Republicans, versus 32 points in white and 8 points in black precincts.
  • How Worried Should the Democrats be About the Polls? — The Democratic share of the Black vote fell from 97% to 91% between 2012 and 2020, according to Catalist data on demographic voting patterns, with the decline in the latter half as large as in the first. Polls put the Democratic presidential share at 80%, and 70% among young Black men.

Monday, March 11, 2024

AI Summary. The authors find that the estimated decline in labor market returns to pre-labor-market cognitive skills for white men across two U.S. youth cohorts depends critically on the widening and increased left-skewness of the test-score distribution, with declines appearing only at the lower end of that distribution.

Judith Hellerstein, Sai Luo and Sergio Urzúa National Bureau of Economic Research
Date Posted:
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Wage returns to cognitive skill have declined for white men who took the Armed Forces Qualifying Test (AFQT) in 1997 relative to 1979, driven primarily by a decline in scores at the bottom of the skill distribution.

Have labor market returns to cognitive skills declined across cohorts?

Core argument: The estimated decline in returns to pre-labor market cognitive skills for white men between the NLSY-1979 and NLSY-1997 cohorts depends critically on changes in the distribution of adjusted Armed Forces Qualifying Test (AAFQT) scores across the two cohorts.

It is well known that the wage structure widened in the U.S. labor market over the decades encompassing the early adulthood of the 1979 and 1997 National Longitudinal Survey of Youth (NLSY) cohorts. Although often overlooked, changing pre-labor market skill distributions may play a crucial role in capturing the evolution of labor market returns to cognitive skills. We show that for white men in the NLSY, the estimated decline over this period in the return to adjusted Armed Forces Qualifying Test (AAFQT) scores, which measure pre-labor market cognitive skills, critically depends on changes in the distribution of these scores between the two cohorts and particularly on the widening (and increased left-skewness) of the AAFQT distribution in the NLSY–97. To the extent that returns to cognitive skills did decline for the white men in our sample, they did so only at the lower part of the AAFQT distribution. This may prove especially important in the future given continuing changes in skill development in recent youth cohorts.

Takeaways by Macro Roundup® AI

  1. The estimated decline in returns to pre-labor market cognitive skills for white men between the NLSY-1979 and NLSY-1997 cohorts depends critically on changes in the distribution of adjusted Armed Forces Qualifying Test (AAFQT) scores across the two cohorts.
  2. To the extent that returns to cognitive skills declined for the white men in the NLSY sample, the decline occurred only at the lower part of the AAFQT distribution.
  3. Changes in the measured return to AAFQT scores depend particularly on the widening and increased left-skewness of the AAFQT distribution in the NLSY-1997, which may prove important given continuing changes in skill development in recent youth cohorts.

Related Articles:

  • Why Do Wages Grow Faster for Educated Workers? — College graduates sort into professional, non-routine occupations where wages rise much more with job tenure, and the author estimates this occupational sorting explains at least half of the life-cycle growth in the college wage premium. That premium is estimated at 22% at age 26, 49% at age 40, and 56% at age 60.
  • Multidimensional Human Capital and the Wage Structure — The wage return to cognitive skills has declined, from about 10% higher hourly wages per standard deviation of test score in the 1980s and early 1990s to 4.5% in the 2000s and early 2010s, while returns to a bachelor's degree rose. Social skill-intensive occupations grew as a share of US jobs, with faster real wage growth.
  • The Plateauing of Cognitive Ability Among Top Earners — Measured cognitive ability plateaus at higher wage levels, flattening around an annual wage of about €60,000 ($64,200) at under one standard deviation above average. The authors find no significant ability differences across the top three income percentiles, even though top-percentile earners make more than double those in the 98th percentile.

AI Summary. The largest US stocks make up a bigger share of the equity market than during the 2000 technology bubble, yet their valuations are lower than in earlier bubble episodes including the Nifty 50 of the early 1970s and Japan's late-1980s bubble. Today's dominant companies are also more profitable with stronger balance sheets.

Peter Oppenheimer, Guillaume Jaisson, Sharon Bell, Marcus von Scheele and Lilia Peytavin Goldman Sachs
Date Posted:
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A @GoldmanSachs analysis notes while market concentration is high, valuations are lower than in recent bubble periods and US superstar firms are much more profitable and have stronger balance sheets than they did during the tech bubble.

Does record market concentration mean stocks are in a bubble?

Core argument: The largest US stocks account for a much bigger share of the equity market today than during the 2000 stock market bubble.

While the biggest stocks in the US equity market are much bigger today as a share of the market compared with the stock market bubble of 2000, current valuations are much lower than have been typical in other recent bubble periods, stretching back to the Nifty 50 era of the early 1970s, the Japanese bubble in the late 1980s, and indeed the technology bubble in 2000. Perhaps more importantly, however, the current dominant companies are much more profitable and have stronger balance sheets than those that dominated during the tech bubble.

Takeaways by Macro Roundup® AI

  1. The largest US stocks account for a much bigger share of the equity market today than during the 2000 stock market bubble.
  2. Valuations of today's dominant US stocks are much lower than those typical of prior bubble periods, including the Nifty 50 of the early 1970s, Japan's late-1980s bubble, and the 2000 technology bubble.
  3. Today's dominant companies are much more profitable and carry stronger balance sheets than the companies that dominated during the technology bubble.

Related Articles:

  • Five Easy Pieces — The rally in the seven largest US technology stocks has been driven by earnings rather than valuation: of the group's 28% return, 21 percentage points came from sales growth, 6 from margin expansion, and 1 from multiple expansion. Market concentration has reached its highest level since 1972, and large spikes in concentration have frequently coincided with or preceded prior recessions.
  • 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.
  • 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. Falling interest rates reduced interest payments as a share of corporate profits, raising profits and stock market valuations. Measured against GDP, the US stock market is historically expensive, and since rates cannot fall as sharply as they have over the past four decades, expected future returns are low.

Jesper Rangvid Rangvid's Blog
Date Posted:
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Jesper Rangvid shows that high stock market returns over the last 40 years have been driven by falling interest rates. With rates now rising, he expects real returns of only around 2% annually over the next decade.

Have falling interest rates made stocks expensive and future returns low?

Core argument: The total value of US stocks scaled by GDP, the author's preferred valuation measure, shows the market as historically expensive, apart from the brief and unusual 2020 coronavirus episode.

Lower interest rates have lowered the share of interest payments in corporate profits, thereby increasing profits and the valuation of the stock market, which in turn has caused the stock market to rise so remarkably. Today’s valuation of the US stock market is high. By my favorite measure, scaling the total value of stocks by GDP, the stock market is historically expensive, apart from the strange and short-lived corona experience in 2020. From here, interest rates can no longer fall as sharply as they could over the past four decades. Looking ahead, expected returns from the US stock market are low.

Takeaways by Macro Roundup® AI

  1. The total value of US stocks scaled by GDP, the author's preferred valuation measure, shows the market as historically expensive, apart from the brief and unusual 2020 coronavirus episode.
  2. Lower interest rates reduced the share of interest payments in corporate profits, raising profits and stock market valuations, which the author identifies as the driver of the market's remarkable rise.
  3. The author expects low returns from the US stock market going forward, since interest rates can no longer fall as sharply as they did over the past four decades.

Related Articles:

  • End of an Era: The Coming Long-Run Slowdown in Corporate Profit Growth and Stock Returns — The authors estimate that declining interest and corporate tax rates accounted for over 40% of real corporate profit growth from 1989 to 2019, while falling risk-free rates explain the entire expansion in price-to-earnings multiples. Real earnings before interest and taxes grew slightly more slowly than in 1962–1989, at 2.2% versus 2.4% per year.
  • The Curious Incident of the Elevated Profit Margins — The US fiscal deficit averaged just under 3% of gross national product from 1950 to 2011 but 6.6% from 2012 to 2022, driven mainly by health and social security spending, a pattern that holds excluding pandemic years. Even assuming permanently elevated profit margins, US equity valuations imply low long-run returns.
  • 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 Summary. Across industries, larger increases in markups are not associated with larger declines in business dynamism—measured by new business entry rates and gross job or worker flows—and the correlation may even be positive. The authors conclude that rising markups as commonly measured are not a major explanatory factor behind declining dynamism.

Brian Albrecht and Ryan Decker Federal Reserve Board
Date Posted:
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Industries with the largest increase in markups between 1980 and 2016 saw smaller declines in dynamism. Larger increases in markups are not associated with larger declines in dynamism at the industry level.

Do rising markups explain declining business dynamism across industries?

Core argument: Across industries over 1980–2016, the authors find no negative correlation between changes in markups and changes in business dynamism, measured by new business entry rates and gross job or worker flows.

Looking across industries we do not find a negative correlation between changes in dynamism [new business entry rates and gross job or worker flows] and changes in markups over the 1980-2016 period; and the correlation may even be positive. In other words: larger increases in markups are not associated with larger declines in dynamism at the industry level. Our evidence strongly suggests that rising markups—as commonly measured in the literature on broadly rising market power—are not a major explanatory factor behind declining dynamism.

Takeaways by Macro Roundup® AI

  1. Across industries over 1980–2016, the authors find no negative correlation between changes in markups and changes in business dynamism, measured by new business entry rates and gross job or worker flows.
  2. The industry-level correlation between markup increases and dynamism may even be positive, so larger increases in markups are not associated with larger declines in dynamism.
  3. The authors conclude their evidence strongly suggests that rising markups, as commonly measured in the literature on broadly rising market power, are not a major explanatory factor behind declining dynamism.

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  • America’s New Business Boom — The share of US workers employed by young firms is rising for the first time in decades, with 11.3% of jobs at firms less than 5 years old and 8.6% at firms 6–10 years old. Gains in the share of jobs at firms under 5 years old were larger in transportation and warehousing, management and information, and manufacturing.
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AI Summary. China's manufacturing trade surplus has reached about 2% of world GDP, exceeding the peak surpluses of export powerhouses like Japan and Germany, and shows no signs of shrinking as policy continues to emphasize advanced manufacturing capacity. The main offsetting manufactured-goods deficit is in the United States rather than commodity exporters.

Brad Setser, Volkmar Baur and Michael Weilandt Council on Foreign Relations
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China’s post-pandemic manufacturing goods surplus is now 2% of global GDP and shows no sign of shrinking, driving countries to seek protection from Chinese overcapacity. @Brad_Setser @Mike_Weilandt @BaurVolk

Has China’s manufacturing surplus surpassed that of past export powerhouses?

Core argument: China's post-pandemic manufacturing surplus has reached about 2% of world GDP, far exceeding the peak surpluses run by export powerhouses such as Japan and Germany.

China’s post pandemic surplus in manufacturing – which has now reached about two percent of world GDP – far exceeds the peak surpluses run by export powerhouses like Japan and Germany. More importantly, China’s surplus shows no signs of shrinking. While there was a pause in the expansion of the surplus in 2023, that only came after a huge jump between 2018 and 2022. Chinese policy continues to emphasize upgrading China capacity in advanced manufacturing as a major driver of future growth. It should go without saying that a large manufacturing surplus requires an offsetting deficit in manufactured elsewhere in the global economy. That deficit could just be with commodity exporters – there is a natural trade between oil exporters like Russia and the Gulf and manufacturing exporters like Europe and East Asia. But right now the main counterpart to the Chinese surplus is not in the commodity exporters but in the United States. The U.S. deficit has continued to increase in the past few years as a share of world GDP, in part because global dollar GDP has shrunk with the dollar’s rise.

Takeaways by Macro Roundup® AI

  1. China's post-pandemic manufacturing surplus has reached about 2% of world GDP, far exceeding the peak surpluses run by export powerhouses such as Japan and Germany.
  2. China's manufacturing surplus shows no signs of shrinking, with a pause in its expansion in 2023 following a large jump between 2018 and 2022, while Chinese policy continues to emphasize upgrading advanced manufacturing capacity as a driver of future growth.
  3. The main counterpart to China's manufacturing surplus is the United States rather than commodity exporters, and the U.S. deficit has continued to increase as a share of world GDP, in part because global dollar GDP has shrunk with the dollar's rise.

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  • China’s Excess Savings Are A Danger — China's current account surplus of 4% of GDP is larger in global terms than its 2007 peak of 10%, because its share of the world economy at market prices rose from 6% to 17%. Sustaining that surplus would require China to fund deficits in smaller developing countries.
  • A Second Dose of Trump On Trade Would Differ From The First — A second Trump administration would pair a 10 percentage point tariff increase on all US trading partners with a tariff of at least 60% on Chinese imports, with advisers arguing a broad import tax addresses America's persistent pattern of trade deficits rather than bilateral imbalances. Researchers estimate China's manufacturing goods surplus reached a record of almost 2% of world GDP.
  • EU to Press China On Industrial Overcapacity at Beijing Summit — European Union leaders are pressing China over its expansion of industrial capacity, particularly in renewable energy products, at a time of weak Chinese domestic demand and tightening access to markets such as the US, leaving Europe a target for excess exports. EU officials say the bloc's trade deficit with China is just below $400bn and has doubled within two years.

AI Summary. The commonly cited figure that women earn 84% of men's pay compares average annual earnings of full-time, year-round workers, a category defined broadly enough to obscure differences in hours, experience, and occupation. Women over 40 average three fewer years of experience than men the same age, which the author says explains about a third of the gap.

Phil Gramm and John Early Wall Street Journal
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Phil Gramm and John Early note that the “Gender Pay Gap” is largely driven by female preference for fewer hours worked and lower-paying professions.

Phil Gramm and John Early note that the “Gender Pay Gap” is largely driven by female preference for fewer hours...

Does the widely cited gender pay gap reflect differing work choices?

Core argument: The 84% figure comes from dividing the average annual pay of women working full-time year-round by that of men, a comparison the author argues is misleading because "full-time, year-round" work is defined so broadly.

The pay gap is the natural economic result of choices men and women make, including how much or how little to work and which occupations to enter. The 84% figure, which is correct, is arrived at by dividing the average annual pay for women who work full-time all year by the average annual pay of men working full-time all year. But that comparison is misleading because full-time, year-round work is defined so broadly. Workers’ earning power increases as they gain more experience. On average, women over 40 have three less years of experience than men of the same age. The reason for this should be obvious: Many women drop out of the labor force at some point to rear children. That alone explains about a third of the observed pay gap. Women and men also make different choices in terms of occupations and education. Men tend to choose higher-paying college majors and occupations. Only one of the 10 highest-earning college majors graduates more women than men, while nine of the 10 lowest-earning majors graduate more women than men.

Takeaways by Macro Roundup® AI

  1. The 84% figure comes from dividing the average annual pay of women working full-time year-round by that of men, a comparison the author argues is misleading because "full-time, year-round" work is defined so broadly.
  2. Women over 40 average three fewer years of experience than men of the same age, because many women leave the labor force to rear children, which the author says explains about a third of the observed pay gap.
  3. Only one of the 10 highest-earning college majors graduates more women than men, while nine of the 10 lowest-earning majors graduate more women than men.

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AI Summary. U.S. legislation that would ban TikTok or force its sale by Chinese parent ByteDance advanced out of the House Energy and Commerce Committee on a 50-0 vote. TikTok's campaign urging users to call their congressional representatives against the bill appeared to harden supporters' resolve.

Natalie Andrews, Georgia Wells, Kristina Peterson, Stu Woo, Keach Hagey, and Jessica Toonkel Wall Street Journal
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Legislation that would ban Tiktok in the U.S. unless its Chinese parent divests ownership is heading to a full vote in the house; Biden has indicated he would sign the bill if it passes.

Legislation that would ban Tiktok in the U.S. unless its Chinese parent divests ownership is heading to a full vote in the...

Is US legislation to ban or force the sale of TikTok advancing?

Core argument: Legislation that would ban TikTok in the U.S. or force ByteDance to sell it passed the House Energy and Commerce Committee 50-0 and is heading toward a House vote.

Legislation that would ban TikTok in the U.S. or force its sale is hurtling toward a vote in the House. Efforts had seemingly stalled until last week, when a new bill passed the House Energy and Commerce Committee 50-0. An effort by TikTok to push users to call their congressional representatives in opposition to the bill appeared to backfire by only hardening proponents’ resolve. Chuck Schumer said a ban “should be looked at” but didn’t commit to bringing the House legislation up for a vote. The first push to force ByteDance to sell TikTok started from then-president Donald Trump. Trump on Thursday appeared to reverse his position, writing on social media that banning TikTok would help Meta Platforms’s Facebook, which he described as an “enemy of the people.”

Takeaways by Macro Roundup® AI

  1. Legislation that would ban TikTok in the U.S. or force ByteDance to sell it passed the House Energy and Commerce Committee 50-0 and is heading toward a House vote.
  2. TikTok's campaign urging users to call their congressional representatives against the bill appeared to backfire by hardening proponents' resolve.
  3. Donald Trump, who launched the first push to force ByteDance to sell TikTok, appeared to reverse his position, writing on social media that a ban would help Meta Platforms's Facebook, which he described as an "enemy of the people.".

Related Articles:

  • US Bill Would Ban TikTok From App Stores Unless ByteDance Divests It — Bipartisan US legislation would bar app stores from distributing TikTok unless its Chinese owner ByteDance divests control within 165 days. The bill would also create a process letting the president act against social media applications controlled by groups headquartered or domiciled in China, Russia, Iran, or North Korea.
  • Teens, Social Media, and Technology 2023 — 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.