Edward Conard

Top Ten New York Times Bestselling Author

  • “…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
  • “…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
  • “…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
  • “Unintended Consequences is far smarter and more thought-provoking than most economics written for the general public” - Greg Mankiw, Harvard University, Former Chairman of the Council of Economic Advisors
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Monday, April 22, 2024

AI Summary. The author estimates that artificial intelligence will raise total factor productivity by less than 0.55% over the next decade, and argues that even when AI raises low-skill workers' productivity in some tasks, inequality may widen rather than narrow. The author finds no evidence AI will reduce labor income inequality and predicts a wider gap between capital and labor income.

Daron Acemoglu Massachusetts Institute of Technology
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.@DAcemogluMIT estimates that AI will have a modest 0.55% impact on total factor productivity over ten years, and may not have much effect on inequality.

Will AI deliver modest productivity gains while widening inequality?

Core argument: Total factor productivity gains from AI over the next 10 years are predicted to be modest, at less than 0.55%.

Predicted TFP gains over the next 10 years are modest and are predicted to be less than 0.55%. I also explore AI’s wage and inequality effects. I show theoretically that even when AI improves the productivity of low-skill workers in certain tasks (without creating new tasks for them), this may increase rather than reduce inequality. Empirically, I find that AI advances are unlikely to increase inequality as much as previous automation technologies because their impact is more equally distributed across demographic groups, but there is also no evidence that AI will reduce labor income inequality. AI is also predicted to widen the gap between capital and labor income. Finally, some of the new tasks created by AI may have negative social value (such as design of algorithms for online manipulation), and I discuss how to incorporate the macroeconomic effects of new tasks that may have negative social value.

Takeaways by Macro Roundup® AI

  1. Total factor productivity gains from AI over the next 10 years are predicted to be modest, at less than 0.55%.
  2. AI is predicted to widen the gap between capital and labor income, and some new tasks it creates, such as designing algorithms for online manipulation, may carry negative social value.

Related Articles:

  • 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.
  • The AI Transition One Year Later: On Track, but Macro Impact Still Several Years Off — Investment in AI hardware is projected to rise substantially as a precursor to integrating AI into business processes, with the investment cycle estimated to peak at 2–2½% of GDP and early signs visible among AI-enabling companies. The authors estimate generative AI could raise developed-market labor productivity growth by 1.5pp annually over a 10-year adoption period, roughly 15% cumulatively.
  • 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.

AI Summary. A critique argues that estimates of small productivity gains from artificial intelligence rest on a misleading method, because they omit gains from eliminating the least productive firms and from entirely new goods whose prices were previously effectively infinite. The critique also notes the analysis excludes gains from improved science on the grounds they fall outside a ten-year window.

Tyler Cowen Marginal Revolution
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.@tylercowen argues the @DAcemogluMIT estimate of AI’s productivity impact fails to account for new tasks that labor has not yet performed, gains from better science, or the departure of the least productive firms.

.@tylercowen argues the @DAcemogluMIT estimate of AI’s productivity impact fails to account for new tasks that labor has not...

Do standard estimates understate AI's productivity gains?

Core argument: Cowen argues that Acemoglu's "The Simple Macroeconomics of AI" is wrong in method rather than in its estimate, and does not establish the small-gains claim advanced in its abstract.

Mostly I think [the Acemoglu] piece is wrong, and I think it is wrong for reasons of economics. It is not that I think the estimate is off, I think the method is misleading altogether. As with international trade, a lot of the benefits of AI will come from getting rid of the least productive firms from within the distribution. This factor is never considered. And as with international trade, a lot of the benefits of AI will come from “new goods.” Since the prices of those new goods previously were infinity (do note the degree of substitutability matters), those gains can be much higher than what we get from incremental productivity improvements. Acemoglu explicitly rules out gains from doing better science, as they may not come within the ten-year time frame. In sum, I don’t think this paper at all establishes the “small gains point” it is trying to promote in the abstract. It is perfectly fair to point out that the optimists have not shown large gains, but in this paper, the deck is entirely — and unfairly — stacked in the opposite direction.

Takeaways by Macro Roundup® AI

  1. Cowen argues that Acemoglu's "The Simple Macroeconomics of AI" is wrong in method rather than in its estimate, and does not establish the small-gains claim advanced in its abstract.
  2. Cowen contends that, as with international trade, much of AI's benefit will come from eliminating the least productive firms within the distribution, a channel Acemoglu's framework never considers.
  3. Cowen notes that Acemoglu explicitly rules out gains from better science as falling outside the ten-year time frame, and omits gains from new goods whose prices were previously infinite.

Related Articles:

  • Society’s Technical Debt and Software’s Gutenberg Moment — Every wave of technological innovation has been unleashed by something costly becoming cheap enough to waste, and large language models are collapsing the cost and complexity of producing software. The authors argue that decades of underproduced software have left society with immense technical debt that is poised to contract, releasing a wave of innovation.
  • Generative AI at Work — A study of 5,179 customer support agents finds that access to a generative AI conversational assistant raised issues resolved per hour by 14% on average, with the largest gains for novice and low-skilled workers and minimal effect on experienced, highly skilled ones. The authors also find AI assistance improved customer sentiment, reduced requests for managerial intervention, and improved employee retention.
  • The Simple Macroeconomics of AI — The author estimates that artificial intelligence will raise total factor productivity by less than 0.55% over the next decade, and argues that even when AI raises low-skill workers' productivity in some tasks, inequality may widen rather than narrow. The author finds no evidence AI will reduce labor income inequality and predicts a wider gap between capital and labor income.

AI Summary. 87% of US firms with revenue above $100m are privately held rather than publicly traded.

Torsten Sløk Apollo
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Torsten Sløk @apolloglobal notes that 87% of US firms with revenue greater than $100 million are private.

Are most large US firms privately held rather than publicly traded?

Core argument: 87% of US firms with trailing-12-month revenue above $100 million are private rather than publicly listed, according to S&P Capital IQ data cited by Apollo's chief economist.

In financial markets, a lot of conversations are about public companies, but the reality is that in the US, 87% of firms with revenue greater than $100 million are private. Source: S&P Capital IQ, Apollo Chief Economist. Note: For companies with last 12-month revenue greater then $100 million by count.

Takeaways by Macro Roundup® AI

  1. 87% of US firms with trailing-12-month revenue above $100 million are private rather than publicly listed, according to S&P Capital IQ data cited by Apollo's chief economist.
  2. Financial market conversations center on public companies, though by count most US firms with revenue above $100 million are private.

Related Articles:

  • Birth, Death, and Wealth Creation — The median age at which US companies went public rose from 7.9 years in 1976–2000 to 9.5 years in 2001–2022, implying that more wealth creation now occurs in private markets. Research on more than 28,000 US-listed companies since 1926 finds that just under 60% destroyed $9.1tn of wealth while about 2% created $50tn.
  • 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.
  • The Economics of Inequality in High-Wage Economies — United States Income, Wealth, Consumption, and Inequality Diana Furchtgott-Roth

AI Summary. The relationship between interest rates and equity prices has varied across time and countries, with past bull markets occurring alongside higher rates: the late-1990s Nasdaq surge coincided with a 6.5% 10-year Treasury yield and the 1920s boom with double-digit margin rates. Early 20th-century commentators read rising rates as bullish, signaling strong money demand and growth.

Joseph Wang Fed Guy Blog
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.@FedGuy12 notes the tech bubble played out with 10-year Treasury yields at 6.5%, and argues that higher rates won’t necessarily cause a selloff in US equity markets, given strong nominal growth and chronic fiscal deficits.

Do higher interest rates prevent stock market booms?

Core argument: The late-1990s Nasdaq surge occurred with a 10-year Treasury yield of 6.5%, and the 1920s bull market occurred with double-digit margin interest rates, indicating that high rates have coincided with strong equity markets.

The relationship between interest rates and equity prices varies across time and across countries. While a 5% 10-year Treasury yield appears high after a decade of zero interest rates, even higher interest rates have in the past coincided with strong bull markets. The epic surge in the Nasdaq during the late 1990s happened with a 6.5% 10-year, and the roaring 1920s happened when margin interest rates were double digits. Higher interest rates were a hindrance, but investors expected future gains to be even higher. This speculative mindset can be seen today in the surge in the price of various crypto assets, which have no obvious utility. Also note that commentators in the early 20th century actually perceived rising interest rates to be bullish rather than bearish. Rising rates implied a strong demand for money, and thus economic growth.

Takeaways by Macro Roundup® AI

  1. The late-1990s Nasdaq surge occurred with a 10-year Treasury yield of 6.5%, and the 1920s bull market occurred with double-digit margin interest rates, indicating that high rates have coincided with strong equity markets.
  2. Higher interest rates acted as a hindrance, but investors expected future gains to be even higher, a speculative mindset visible in the surge in prices of crypto assets that have no obvious utility.
  3. Commentators in the early 20th century perceived rising interest rates as bullish rather than bearish, taking them to imply strong demand for money and thus economic growth.

Related Articles:

  • The Expensive Stock Market — 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.
  • 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.

AI Summary. Earnings per share for Japan's 500 largest stocks have risen 5.8x over the past 14 years, nearly twice the rate of US peers, after Japanese companies barely grew earnings per share in the 2000s. The authors attribute this largely to corporate deleveraging following Japan's non-performing loan crisis, which left firms well capitalized with low borrowing costs and minimal interest expense.

Nick Schmitz Verdad
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Since 2010 the largest 500 Japanese stocks have increased their EPS by 5.8x, twice the rate as their US peers. A @verdadcap analysis argues this outperformance was driven by the success of Corporate Japan’s deleveraging.

Has corporate deleveraging driven Japanese earnings growth past US peers?

Core argument: The EPS of Japan's 500 largest stocks has risen 5.8x over 14 years, almost twice the rate of their American peers, after Japanese companies barely grew EPS at all from 2000 to 2010.

Japanese companies lagged the US in revenue growth from 2000 to 2010, barely growing EPS at all. But since then, the EPS of the biggest 500 Japanese stocks has increased by 5.8x over the last 14 years, almost twice the rate of their American peers now. These results make it difficult for us to concede that Japanese companies were somehow much worse run than their S&P 500 counterparts. They seem to have improved much more and allocated capital primarily when it increased per-share earnings. But how did this happen? We believe one of the primary reasons is deleveraging balance sheets in Japan. As Japan deleveraged coming out of the non-performing loan crisis at the turn of the century, it became one of the most well capitalized corporate markets in global equities and still enjoys some of the lowest corporate borrowing rates in the world. As a result, very little of every dollar of earnings before interest and taxes (EBIT) goes to interest payments for the typical company.

Takeaways by Macro Roundup® AI

  1. The EPS of Japan's 500 largest stocks has risen 5.8x over 14 years, almost twice the rate of their American peers, after Japanese companies barely grew EPS at all from 2000 to 2010.
  2. Japan's earnings gains are attributed primarily to balance-sheet deleveraging following the non-performing loan crisis at the turn of the century, leaving Japan one of the most well capitalized corporate markets in global equities.
  3. Japanese companies borrow at some of the lowest corporate rates in the world, and very little of each dollar of EBIT goes to interest payments for the typical company.

Related Articles:

  • Japan’s Native Population Declines At Record Rate As Births Plunge — Japan's population of Japanese nationals fell by 837,000 over a year, the largest annual decline since comparable records began in 1950, while the overall population, buoyed by rising numbers of foreign residents, fell by 595,000 to 124.3mn. The number of foreign nationals living in Japan reached a record 3.2mn.
  • Japanese Workers Secure Biggest Pay Rise In Three Decades — Japanese companies including Honda, Nippon Steel, and ANA Holdings granted workers their largest pay rise in more than three decades, with economists expecting large firms to give unionised workers average increases above 4%, up from 3.6% the prior year. The increases strengthen the case for the Bank of Japan to begin raising interest rates.
  • How Japan’s Nikkei 225 Got Its Mojo Back — Japan's Nikkei 225 stock index has reclaimed the record peak it set more than 34 years ago, closing at 39,098.68, as global investors bet the country has escaped deflation and is on a path of sustainable growth. Gains in technology and chip-equipment shares drove the advance, with the index up over 16% since the start of the year.

AI Summary. South Korea made two industrial leaps—from basic goods to heavy industry, then to high-tech manufacturing—but between 2005 and 2022 only one new sector, displays, joined its top ten export products. Chinese technology firms have caught up with Korean competitors in nearly every area except the most advanced semiconductors, turning former customers and suppliers into rivals.

Christian Davies Financial Times
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The Bank of Korea is forecasting South Korean GDP growth of 2.1%/yr this decade, down from 6.4% from 1970-2022, as “Chinese companies that were once customers or suppliers have become rivals.” @FT

Has South Korea's export growth model stalled as Chinese rivals caught up?

Core argument: Between 2005 and 2022, only one new sector — displays — entered South Korea's list of top ten export products, according to Seungheon Song, managing partner of McKinsey's Seoul practice.

Seungheon Song, managing partner of McKinsey’s practice in Seoul, notes that South Korea made two great leaps — one between the 1960s and the 1980s, when the country moved from basic goods to petrochemicals and heavy industry, and the second between the 1980s and 2000s when it moved to high-tech manufacturing. Between 2005 and 2022, however, only one new sector — displays — entered the country’s list of top ten export products. Park argues that the present model reached its apogee in 2011, after a decade during which Korean tech exports were driven by the related twin demand shocks of the rise of China and the global technology boom, as well as by massive investments by Samsung and LG to seize control of the global display industry from their Japanese counterparts. Since then, however, Chinese tech companies have caught up with their Korean competitors in almost every area except the most advanced semiconductors, meaning that Chinese companies that were once customers or suppliers have become rivals.

Takeaways by Macro Roundup® AI

  1. Between 2005 and 2022, only one new sector — displays — entered South Korea's list of top ten export products, according to Seungheon Song, managing partner of McKinsey's Seoul practice.
  2. South Korea made two great leaps, from basic goods to petrochemicals and heavy industry between the 1960s and 1980s, and to high-tech manufacturing between the 1980s and 2000s.
  3. Park argues that South Korea's present model reached its apogee in 2011, after a decade in which tech exports were driven by the rise of China, the global technology boom, and Samsung and LG investments in displays.

Related Articles:

  • $75,000 for a Baby? South Korean Businesses Float Incentives As Demographic Crisis Looms — South Korea's total fertility rate fell from 0.78 to 0.72 and is projected to reach 0.68, far below the 2.1 the OECD says is needed for a stable population. Military personnel numbers have dropped below 500,000, schools and universities report shrinking enrollment, and kindergartens have been converted into nursing homes.
  • The Neoclassical Growth of China — China's per capita GDP growth path closely tracks those of Japan, South Korea, and Taiwan from similar starting income levels, indicating nothing unusual about its growth rate. The authors' model projects China's per capita GDP will level off at about 41% of the US level, reflecting a slowdown in productivity catch-up.
  • The Wealth of Working Nations — Because of population aging, growth in GDP per capita and GDP per working-age adult have diverged across advanced economies; from 1998 to 2019 Japan's accumulated growth per working-age adult was 31.9% versus 29.5% in the US. The authors find a standard neoclassical growth model calibrated to each country's working-age population tracks output per working-age adult in most economies.

Tuesday, April 23, 2024

AI Summary. The authors identify four wealth trajectory groups within a birth cohort: 21% who start and remain near the top, 42% who start and remain near the bottom, and 21% and 15% who stay in the middle while rising or falling in rank. They conclude that wealth mobility is concentrated in these middle groups rather than shared across the population.

Richard Audoly, Rory McGee, et al. Federal Reserve Bank of New York
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Norwegian tax records show that individuals born into the top 21% of the distribution or the bottom 42% tend to stay in these groups for life. Inter-generational mobility is primarily driven by movement within the middle of the distribution. @RichardAudoly

Is wealth mobility concentrated in the middle of the distribution?

Core argument: The "high-ranked" and "low-ranked" groups, 21% and 42% of the cohort, begin at the top or bottom of the wealth distribution and tend to remain within the upper or lower part of it, as small changes in the interquartile range of ranks indicate.

Two groups of individuals, which we label “high-ranked” and “low-ranked,” start their lives at the top or the bottom of the wealth distribution and tend to stay there. They make up 21 and 42% of the cohort, respectively. This does not imply that their wealth rank is fully stable but that it tends to stay within the upper or lower part of the wealth distribution, as made clear by the small changes in the interquartile range of the distribution of ranks. The other two groups, which we label “middle-rise” and “middle-fall”, correspond to the remaining 21 and 15% of the cohort, respectively. They stay in the central part of the distribution, but have, respectively, increasing and decreasing wealth rank trajectories. These trajectories lead them to overlap with the high-ranked and low-ranked groups by age 55. Crucially, the reversal of fortune experienced by these groups is the key driver behind the population intragenerational mobility trend. Mobility is not universal; rather, it is limited to segments of the population.

Takeaways by Macro Roundup® AI

  1. The "high-ranked" and "low-ranked" groups, 21% and 42% of the cohort, begin at the top or bottom of the wealth distribution and tend to remain within the upper or lower part of it, as small changes in the interquartile range of ranks indicate.
  2. The "middle-rise" and "middle-fall" groups, 21% and 15% of the cohort, stay in the central part of the wealth distribution with rising and falling rank trajectories that overlap with the high-ranked and low-ranked groups by age 55.
  3. The reversal of fortune experienced by the middle-rise and middle-fall groups is the key driver of the population intragenerational mobility trend, indicating that mobility is limited to segments of the population rather than universal.

Related Articles:

  • Intergenerational Mobility in American History: Accounting for Race and Measurement Error — Accounting for Black families, who historical studies routinely drop, and for measurement error in fathers' economic status can double estimates of intergenerational persistence in linked United States census data from 1850 to 1940. The author argues historical mobility was lower than previously estimated, implying greater equality of opportunity today than in the past.
  • The Inheritance Of Social Status: England, 1600 to 2022 — Using a genealogical database of 422,374 English people with rarer surnames, the authors find social status persists strongly even among distant relatives, with status correlations declining by a constant factor of 0.79 per step in the lineage across all status measures and eras studied. The authors argue this constancy suggests social interventions have modest effects.
  • France Has Poor Income Mobility Compared to US, Study Shows — France's statistics agency finds a 71% correlation between individuals' positions on the national income scale over a roughly 15-year span, with the richest and poorest groups least likely to change bracket. The authors say this inertia is greater than in the US, where studies have shown a higher probability of moving up or down.

AI Summary. The United States led the world in private artificial intelligence investment with $67.2bn, roughly 8.7x China's $7.8bn and 17.8x the United Kingdom's $3.8bn. Cumulative private AI investment over the prior decade shows the same ranking: $335.2bn for the United States, $103.7bn for China, and $22.3bn for the United Kingdom.

Raymond Perrault, Jack Clark, et al. Stanford University
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According to a Stanford analysis, there was $67.2B in private AI investment in the US last year, 8.7x the level in China. Since 2013 there has been a cumulative $335.2B investment in AI by the US relative to $103.7B for China.

Does the US lead the world in private AI investment?

Core argument: U.S. private AI investment reached $67.2 billion in 2023, 8.7 times China's $7.8 billion and 17.8 times the United Kingdom's $3.8 billion, leaving the United States again leading the world in total AI private investment.

The United States once again led the world in terms of total AI private investment. In 2023, the $67.2 billion invested in the United States was roughly 8.7 times greater than the amount invested in the next highest country, China ($7.8 billion), and 17.8 times the amount invested in the United Kingdom ($3.8 billion). When aggregating private AI investments since 2013, the country rankings remain the same: The United States leads with $335.2 billion invested, followed by China with $103.7 billion, and the United Kingdom at $22.3 billion.

Takeaways by Macro Roundup® AI

  1. U.S. private AI investment reached $67.2 billion in 2023, 8.7 times China's $7.8 billion and 17.8 times the United Kingdom's $3.8 billion, leaving the United States again leading the world in total AI private investment.
  2. Cumulative private AI investment since 2013 totals $335.2 billion in the United States, $103.7 billion in China, and $22.3 billion in the United Kingdom, preserving the same country rankings as the 2023 annual figures.

Related Articles:

  • The Global AI Talent Tracker 2.0 — The United States remains the leading destination for the world's most elite AI talent and hosts 60% of top AI institutions. China's share of top AI researchers working domestically rose from 29% in 2019 to 47% in 2022, and India retained one-fifth of its top AI researchers in 2022 versus nearly none in 2019.
  • Top Talent, Elite Colleges, and Migration: Evidence from the Indian Institutes of Technology — Among top scorers on India's Joint Entrance Exam for the Indian Institutes of Technology, 62% of the top 100 and 36% of the top 1,000 migrated abroad within eight years, primarily to the U.S. for graduate school. The authors argue elite schools shape migration by signaling ability and providing access to networks.
  • Chinese Companies Resort To Repurposing Nvidia Gaming Chips For AI — Chinese firms are developing artificial intelligence tools using processors stripped from Nvidia consumer gaming graphics cards and remounted on new circuit boards, after US export controls blocked sales of high-performance chips. Industry experts describe the practice as a rough workaround for China's shortage of high-end processors.

AI Summary. The authors estimate 40-50% of the emissions cuts needed for net zero can come from scaling already-mature technologies, requiring $3-5tn a year versus roughly $1.5tn deployed, with the largest shortfall in emerging markets. Technology for the remaining 50-60% is not yet available.

Daniel Hochman, Jeremy Ng, Alexis Teh, and JP Lucaci Bridgewater Associates
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Bridgewater argues that investment of $3-5T annually between 2020-50, or 4% of global GDP, would be required to deploy mature emissions-reduction technologies, but this would yield only 40-50% of reductions required to achieve net zero goals.

How much of net zero can existing technologies deliver?

Core argument: The authors estimate that 40–50% of the global emissions reductions needed for net zero can come from scaling already-mature technologies, requiring roughly $3–5 trillion a year, or about 4% of global GDP.

We estimate that about 40-50% of global emissions reductions required to achieve net zero goals can come from scaling technologies that are already mature. There are large financing gaps. Roughly $3-5 trillion a year (around 4% of global GDP) is needed to scale these technologies against the roughly $1.5 trillion a year that is currently being deployed. The financing shortfall is largest in emerging markets. The technology is not yet there to address the remaining 50-60% of emissions, though innovation is happening rapidly. Here it is harder to estimate how much capital will be necessary to successfully operationalize these technologies, but it is unlikely that the roughly $500 billion a year currently being invested to develop these earlier-stage technologies is sufficient to make the necessary progress. Unproven technologies are risky and thus require more risk-tolerant capital and project de-risking alongside in-house capex efforts of large corporate players.

Takeaways by Macro Roundup® AI

  1. The authors estimate that 40–50% of the global emissions reductions needed for net zero can come from scaling already-mature technologies, requiring roughly $3–5 trillion a year, or about 4% of global GDP.
  2. Current deployment of roughly $1.5 trillion a year falls short of the $3–5 trillion annual need for mature technologies, with the financing shortfall largest in emerging markets.
  3. Technology is not yet available to address the remaining 50–60% of emissions, and the roughly $500 billion a year invested in earlier-stage technologies is unlikely to be sufficient, making risk-tolerant capital and project de-risking necessary.

Related Articles:

  • Higher Interest Rates Are Here to Stay — Interest rates will likely stay higher over the next decade than in the decade after the 2008 financial crisis, reflecting factors including high debt levels, deglobalization, higher defense spending, the green transition, populist demands for income redistribution, and persistent inflation. Aging populations may also push developed countries to increase spending.
  • If Markets Are Right About Long Real Rates, Public Debt Ratios Will Increase For Some Time. We Must Make Sure That They Do Not Explode — Stabilizing public debt ratios would require cutting primary deficits to zero, which the author argues no government can do quickly without risking recession and boosting support for populist parties. With a US primary deficit around 4% and a dysfunctional budget process, the debt ratio is likely to keep rising for some time.
  • The 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. US petroleum output has risen from about 7mn barrels a day two decades ago to nearly 20mn, roughly matching domestic consumption, while imports from Gulf suppliers have fallen and the country became a net oil exporter. The Permian Basin of Texas and New Mexico now pumps more oil than Kuwait, Iraq or the UAE.

Myles McCormick and Jamie Smyth Financial Times
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Harold Hamm, chair of Continental Resources argues, “If you didn’t have the shale revolution now you would have $150 oil . . . You would be in a very volatile situation. It would be horrendous.” As of this writing, TWI is $82 per barrel.

Does rising domestic oil production shield the US from price shocks?

Core argument: US petroleum production has risen from about 7mn b/d two decades ago to nearly 20mn b/d, roughly on par with domestic consumption, and the US became a net oil exporter for the first time in 2019.

“Shale has redrawn the map of world oil in a way most people don’t seem to understand,” said Daniel Yergin, vice-chair of S&P Global and a Pulitzer Prize-winning energy historian. “It has changed not only the supply-demand balance but it has changed the geopolitical balance and the psychological balance.” The numbers are stark. Two decades ago the US produced about 7mn barrels a day of petroleum and consumed 21mn. Gulf countries like Saudi Arabia and Kuwait — which send oil through the Strait of Hormuz — were among the US’s most important foreign suppliers. Now the US produces almost 20mn b/d of petroleum, roughly on par with consumption. Imports from the Gulf have plummeted, and the US became a net oil exporter for the first time in 2019. The prolific Permian Basin shale of Texas and New Mexico pumps more oil than Kuwait, Iraq or the UAE, three of Opec’s powerhouses.

Takeaways by Macro Roundup® AI

  1. US petroleum production has risen from about 7mn b/d two decades ago to nearly 20mn b/d, roughly on par with domestic consumption, and the US became a net oil exporter for the first time in 2019.
  2. The Permian Basin of Texas and New Mexico pumps more oil than Kuwait, Iraq or the UAE, while US imports from Gulf suppliers shipping through the Strait of Hormuz have plummeted.
  3. Daniel Yergin, vice-chair of S&P Global, argues shale has changed not only the world oil supply-demand balance but the geopolitical and psychological balance as well.

Related Articles:

  • United States Produces More Crude Oil Than Any Country, Ever — The United States has produced more crude oil than any nation at any time for six consecutive years, averaging 12.9m barrels per day in 2023 and surpassing the prior record of 12.3m barrels per day. Output fell to 5.0m barrels per day in 2008 before rising as producers applied hydraulic fracturing and horizontal drilling.
  • 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.
  • US Oil and Gas Boom Doesn’t Feel Like One to Workers — US oil and natural gas production has been setting records, yet industry employment is 128,700 below its mid-2014 peak and 41,200 below pre-pandemic levels, with job gains stalling after rising from an early-2021 low. Productivity in the US oil and gas industry has risen dramatically.

AI Summary. The authors see limited signs of the profit or capital spending declines that often accompany recessions, noting that unlike prior yield-curve inversions the corporate sector is running a surplus with stable interest expense. They flag fading disinflationary-boom prospects as a risk to price-to-earnings multiples, particularly for technology stocks.

Michael Cembalest J.P. Morgan
Date Posted:

Michael Cembalest @jpmorgan notes that the US corporate sector is generating positive cash flow and that interest expenses are stable, but the “fading prospects of a disinflationary boom are a risk to P/E multiples, particularly for tech stocks.”

Does a corporate surplus weaken the yield curve's recession signal?

Core argument: The ratio of cash yields to S&P 500 dividend yields stands at its highest level on record apart from an August 2000 spike, which may tempt investors to hold excess cash.

We see limited signs of a large profits or capital spending decline that often coincides with recessions. While an inverted yield curve has a pattern of predicting recessions, prior inversions were also accompanied by deeply negative corporate cash flow and rising corporate interest costs. This time, the story is different: the corporate sector is in surplus and corporate interest expense is still stable. Fading prospects of a disinflationary boom are a risk to P/E multiples, particularly for tech stocks. The [12 months ending] early April showed tech P/Es back at 2020/2021 highs; since that time, almost all NASDAQ 100 and S&P 500 Tech Sector YTD gains have been erased. Investors may be tempted to hold onto excess cash now that the ratio of cash yields to S&P dividend yields is at its highest level on record other than a spike in August 2000. While US equities may experience the same kind of 10% correction we saw last summer, 2024 still looks like a year of high single-digit returns on US equities.

Takeaways by Macro Roundup® AI

  1. The ratio of cash yields to S&P 500 dividend yields stands at its highest level on record apart from an August 2000 spike, which may tempt investors to hold excess cash.
  2. Unlike prior yield-curve inversions that came with deeply negative corporate cash flow and rising interest costs, the US corporate sector is in surplus with stable interest expense, and shows limited signs of a large profits or capital spending decline.
  3. Tech price-to-earnings multiples returned to 2020/2021 highs in the 12 months ending early April, and almost all NASDAQ 100 and S&P 500 tech sector year-to-date gains have since been erased.

Related Articles:

  • 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.
  • 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.
  • Global Views: Friendly Baseline, Greater Risks — Despite upside inflation surprises, the authors argue the broader disinflation narrative remains intact, citing a labor market that continues to rebalance: a jobs-workers gap of 2.0m, a quits rate below pre-pandemic levels, and wage growth running just over 4% year-on-year. They expect wage growth to converge to 3.5%, the pace they estimate is consistent with 2% inflation.

AI Summary. Chinese households spend only 37% of national income on goods and services, the lowest share in the world, while employee compensation at Chinese nonfinancial corporations is about 44% of gross value added versus roughly 60% in the US, Europe, and Japan. Chinese manufacturers appear to be adding production capacity far faster than actual output.

Matt Klein The Overshoot
Date Posted:

.@M_C_Klein finds that Chinese industrial production is 5% under the 2014-2019 trend, and argues that a collapse in the country’s domestic consumption is driving its surging trade surplus.

Is weak household consumption, not excess capacity, China's core imbalance?

Core argument: Chinese households spend only 37% of national income on goods and services, a level lower than anywhere else in the world.

Fixed asset investment in China’s manufacturing industry has been growing relatively briskly over the past few years, especially relative to the average growth rate in 2016-2019. At the same time, Chinese estimates of capacity utilization—which only go back to 2021Q1—show that manufacturers, particularly those in green industries, seem to be increasing their capacity to produce far faster than their actual production. Only 37% of China’s national income is spent by Chinese households on goods and services. That level is lower than anywhere else in the world. For Chinese nonfinancial corporations, employee compensation is only worth about 44% of gross value added, whereas the equivalent measure of the labor share in the U.S., Europe, and Japan is ~60%. The U.S. and others might still end up needing to deploy preferential subsidies to sustain their domestic productive bases in the face of Chinese underconsumption.

Takeaways by Macro Roundup® AI

  1. Chinese households spend only 37% of national income on goods and services, a level lower than anywhere else in the world.
  2. Employee compensation at Chinese nonfinancial corporations equals about 44% of gross value added, versus roughly 60% for the equivalent labor share in the U.S., Europe, and Japan.
  3. Chinese capacity utilization estimates, which begin only in 2021Q1, suggest manufacturers—particularly in green industries—are expanding capacity far faster than actual production, alongside manufacturing fixed asset investment growth that is brisk relative to the 2016–2019 average.

Related Articles:

  • China’s Record Manufacturing Surplus — 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.
  • Can Trade Intervention Lead to Freer Trade? — China accounts for over 31% of global manufacturing but under 13% of global consumption, while the United States accounts for under 17% of manufacturing and nearly 27% of consumption. The author argues persistent surpluses reflect household subsidies to producers, and that the US could counter them with tariffs or taxes on capital inflows.
  • The World Is In For Another China Shock — Weak demand and overcapacity have pushed Chinese producer prices down for 16 months, and that disinflationary impulse is spreading abroad: US import prices from China fell 2.9% year over year while prices of imports from the European Union, Japan, and Mexico rose. Western protectionism could redirect the deflationary impact toward poorer markets.

AI Summary. The H5N1 bird flu strain now circulating globally has spread not only among farmed and wild birds but into many other animals, unlike earlier versions of the virus. Outbreaks in mink and in South American sea mammals suggest the virus most likely adapted to spread between mammals.

Apoorva Mandavilli and Emily Anthes New York Times
Date Posted:

H5N1 is killing tens of thousands of marine mammals across South America and has likely evolved to spread directly among that population.

H5N1 is killing tens of thousands of marine mammals across South America and has likely evolved to spread directly among...

Is bird flu now spreading between mammals?

Core argument: H5N1, first identified in a highly pathogenic form in Chinese domestic waterfowl in 1996, infected 18 people in Hong Kong the following year and killed six of them.

A highly pathogenic strain of H5N1 was identified in 1996 in domestic waterfowl in China. The next year, 18 people in Hong Kong became infected with the virus, and six died. The virus then went silent, but it resurfaced in Hong Kong in 2003. Since then, it has caused dozens of outbreaks in poultry and affected more than 800 people who were in close contact with the birds. All the while, it continued to evolve. The version of H5N1 currently racing across the world emerged in Europe in 2020 and spread quickly to Africa and Asia. It killed scores of farmed birds, but unlike its predecessors, it also spread widely among wild birds and into many other animals. In the mink, at least, the most likely explanation was that H5N1 had adapted to spread among the animals. The scale of the outbreaks in sea mammals in South America underscored that probability.

Takeaways by Macro Roundup® AI

  1. H5N1, first identified in a highly pathogenic form in Chinese domestic waterfowl in 1996, infected 18 people in Hong Kong the following year and killed six of them.
  2. Since H5N1 resurfaced in Hong Kong in 2003, the virus has caused dozens of poultry outbreaks and affected more than 800 people who were in close contact with birds, evolving throughout.
  3. The H5N1 version that emerged in Europe in 2020 and spread to Africa and Asia killed scores of farmed birds and, unlike its predecessors, spread widely among wild birds and many other animals, with adaptation to spread among mink the most likely explanation in that species.

Related Articles:

  • Bird Flu Outbreak in US Cows: Why Scientists Are Concerned — The H5N1 bird flu virus has been detected in cows from 16 herds across six US states, the first widespread outbreak in cattle after only sporadic prior infections with closely related flu viruses. One infected dairy worker is recovering, and the worker's viral variant carries a mutation linked to more efficient spread in mammals.
  • How the Current Bird Flu Strain Evolved to be So Deadly — A Nature study tracking bird flu genome changes and reported outbreaks found the virus spread three times faster among wild birds than farmed poultry, attributed to mutations letting it adapt to diverse species. Outbreaks, once seasonal with Northern Hemisphere bird migration, have become persistent, killing millions of birds across five continents.
  • Bird Flu Sample from Chilean Man Showed Some Signs of Adaptation to Mammals — The U.S. Centers for Disease Control and Prevention reported that an H5N1 bird flu sample from a hospitalized Chilean man carried two mutations shown in animal studies to help the virus replicate in mammalian cells. Officials said public risk remains low and the sample lacked other changes needed for efficient human-to-human spread.