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


Thursday, May 16, 2024

AI Summary. Following the 2017 US tax law, real economic output, consumption, business investment, and payrolls grew faster than pre-law forecasts and nearly matched post-law projections, and an analysis of administrative corporate tax return data estimates firms with the average tax change raised domestic investment about 20% relative to firms with no change.

Kyle Pomerleau and Donald Schneider American Enterprise Institute
Date Posted:
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Evidence from CBO projections suggests the TCJA corporate tax cut increased business investment, driving economic growth. @kpomerleau and @DonFSchneider present two revenue-neutral options to finance a permanent extension of the TCJA .

Did corporate tax cuts boost investment and economic growth?

Core argument: Gabriel Chodorow-Reich et al., using administrative US corporate tax return data, find the Tax Cuts and Jobs Act caused domestic investment of firms with the mean tax change to rise roughly 20% relative to firms with no tax change.

As Figure 1 indicates, real GDP, consumption, business investment, and payrolls grew more rapidly than expected in the 2017 forecast and in a manner consistent with CBO’s post-TCJA 2018 projections. On net, actual economic performance nearly matched CBO’s projections. These macroeconomic outcomes are also consistent with microeconomic data finding that companies benefiting from TCJA increased investment. For example, according to an analysis by Gabriel Chodorow-Reich et al. using administrative data for US corporate tax returns, “the TCJA caused domestic investment of firms with the mean tax change to increase by roughly 20% relative to firms experiencing no tax change.” The primary issue with the TCJA is that it was not stable given that much of the law was temporary: 100 percent bonus depreciation is temporary and will fully phase out by 2027.

Takeaways by Macro Roundup® AI

  1. Gabriel Chodorow-Reich et al., using administrative US corporate tax return data, find the Tax Cuts and Jobs Act caused domestic investment of firms with the mean tax change to rise roughly 20% relative to firms with no tax change.
  2. Real GDP, consumption, business investment, and payrolls grew faster than the 2017 forecast expected and in line with CBO's post-TCJA 2018 projections, with actual performance on net nearly matching those projections.
  3. The primary issue with the Tax Cuts and Jobs Act is its instability, as much of the law was temporary, including 100 percent bonus depreciation, which fully phases out by 2027.

Related Articles:

  • Tax Policy and Investment in a Global Economy — Using administrative tax data, the authors estimate that firms experiencing the mean corporate tax change under the 2017 US tax law increased investment by 20% relative to firms with no change, with long-run domestic and total capital up 7% and 13%. They find higher depreciation deductions largely offset added revenue from capital accumulation.
  • Who Gains from Corporate Tax Cuts? — The authors estimate that corporate tax cuts boost overall investment and employment, with goods-producing firms such as manufacturers raising capital expenditure and wage bills without changing dividends, and a 1% cut in the marginal tax rate lifting their capital spending by as much as 8%. Service-sector firms instead direct most of the windfall to dividends.
  • 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.

AI Summary. The Congressional Budget Office estimates that income after transfers and taxes grew faster than consumption prices for all income groups, lowering the share of income needed to buy the same goods by 2% for the lowest-income fifth and 6.3% for the highest-income fifth.

Dorian Carloni Congressional Budget Office
Date Posted:

.@USCBO analysis shows that household purchasing power has increased since 2019, as incomes have outpaced inflation across all income groups.

Has income growth outpaced inflation for all income groups?

Core argument: CBO estimates that from 2019 to 2023, adjusted income after transfers and taxes grew more than the price of consumption for all income groups, reducing the share of household income needed to buy the same bundle of goods and services.

By CBO’s estimate, adjusted income after transfers and taxes grew more than the price of consumption from 2019 to 2023 for all income groups. As a result, the portion of household income required to purchase the same bundle of goods and services declined. For households in the lowest income quintile, CBO estimates, the share of their adjusted income after transfers and taxes required to purchase their 2019 consumption bundle decreased by 2%. For households in the top income quintile, that share declined by 6.3%, the largest decline of any quintile. The difference in those percentage changes reflects two factors: Price increases were greater for the typical consumption bundle purchased by lower-income households than they were for that purchased by higher-income households, and the income of households in the highest income quintile grew more in percentage terms than the income of other households did.

Takeaways by Macro Roundup® AI

  1. CBO estimates that from 2019 to 2023, adjusted income after transfers and taxes grew more than the price of consumption for all income groups, reducing the share of household income needed to buy the same bundle of goods and services.
  2. For households in the top income quintile, CBO estimates the share of adjusted income after transfers and taxes required to purchase their 2019 consumption bundle fell 6.3%, the largest decline of any quintile, versus 2% for the lowest quintile.
  3. CBO attributes that difference to two factors: price increases were greater for the typical consumption bundle purchased by lower-income households, and income in the highest quintile grew more in percentage terms than income of other households.

Related Articles:

  • Has Pay Kept Up With Inflation? — All four measures of typical and aggregate pay have grown since 2019 when adjusted using the personal consumption expenditures price index, but show smaller increases in three measures and a decline in one when adjusted using the consumer price index. This pattern of smaller gains under consumer price index adjustment holds across time periods.
  • 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.
  • Are You Better Off Than You Were Four Years Ago? — Inflation-adjusted wages rose over the past four years, including when measured from just before the pandemic, at roughly the same pace as in the preceding years: about 3% cumulative growth adjusted by the consumer price index versus about 4% in 2015-2019, and about 5% growth adjusted by personal consumption prices.

AI Summary. Aggregate markups have stayed roughly constant during the current recovery and the recoveries following the 1991, 2001, and 2008 recessions, making their recent path unexceptional by historical standards.

Sylvain Leduc, Huiyu Li and Zheng Liu Federal Reserve Bank of San Francisco
Date Posted:

.@sffed analysis shows that “markup fluctuations have not been a main driver of the ups and downs of inflation during the post-pandemic recovery.” @huiyu_li @zliu001

Are markups driving the ups and downs of inflation?

Core argument: Aggregate markups have stayed roughly constant throughout the current recovery and the recoveries following the 1991, 2001, and 2008 recessions, making the path of the past three years not unusual by historical comparison.

The path of aggregate markups over the past three years is not unusual compared with previous recoveries. Figure 4 shows the cumulative changes in aggregate markups since the start of the current recovery (dark blue line), alongside aggregate markups following the 1991 (green line), 2001 (yellow line), and 2008 (light blue line) recessions. Aggregate markups have stayed roughly constant throughout all four recoveries.

Takeaways by Macro Roundup® AI

  1. Aggregate markups have stayed roughly constant throughout the current recovery and the recoveries following the 1991, 2001, and 2008 recessions, making the path of the past three years not unusual by historical comparison.

Related Articles:

  • How Do Firms Adjust Prices in a High Inflation Environment? — Interviews and a survey of about 700 businesses find average cost-to-price passthrough in the 60% range during a period of elevated inflation, with wide variation and some firms reporting passthrough above one. Firms report that demand strength, steady profit margins, labor and nonlabor costs, and competitors' prices shape pricing decisions.
  • “Greedflation” and the Profits Equation — The increase in nominal pretax U.S. business income since late 2019 equals about 17% of the increase in consumer spending excluding imputed rent over the same period, below the roughly 21% share of such spending that quarterly pretax business income has historically represented. On this measure, profit growth has been slightly low relative to a naive expectation.
  • Corporate Profits in the Aftermath of COVID-19 — Nonfinancial corporate profit margins—profits as a share of gross value added—rose to about 19% before easing to 15%, compared with about 13% before the pandemic. The authors attribute much of the increase to large direct government support for small and medium-sized U.S. businesses and to lower net interest expenses under accommodative monetary policy.

AI Summary. Population growth since 2020 has been concentrated in southern cities and across most of the West except its largest metros such as San Francisco, San Jose, and Portland, while the Midwest and Northeast have lost population, especially in smaller towns. Larger places continue to grow faster than smaller ones, though by a narrower margin than before 2020.

Aziz Sunderji Home Economics
Date Posted:

New 2020-23 Census data shows growth in cities is outpacing that of smaller towns. Big southern cities grew the most, while New York City showed a net loss of 500,000, depopulating faster than it did during the 1970s. @AzizSunderji

Where is population growing and shrinking across US regions and city sizes?

Core argument: Population change since 2020, ranked by place size within each Census division, shows the strongest growth in southern cities and shrinking populations across the Midwest and Northeast, especially in smaller towns.

A clear trend is that smaller towns are generally shrinking more rapidly, or growing more slowly, than large cities. That said, this trend predates the pandemic, and the differential has shrunk. In other words, big places are growing faster than small places, but by a smaller margin than before 2020. Putting all of these trends together—the growing South, New York City cratering, and the larger cities generally growing faster than smaller ones—we get the figure above. It ranks places by size, within each Census division, and measures percent population changes since 2020. Places with the strongest population growth are in green: The hottest growth is a distillation of all of these trends: southern cities are booming. The West is growing in all but the largest places, like San Francisco, San Jose, and Portland. Meanwhile, the population has been shrinking in the Midwest and Northeast, especially in smaller towns.

Takeaways by Macro Roundup® AI

  1. Population change since 2020, ranked by place size within each Census division, shows the strongest growth in southern cities and shrinking populations across the Midwest and Northeast, especially in smaller towns.
  2. Larger places continue to grow faster than smaller towns, a pattern that predates the pandemic, though the differential between big and small places has narrowed since 2020.
  3. The West is growing in all but its largest places, such as San Francisco, San Jose, and Portland, while New York City's population has cratered.

Related Articles:

  • Young Families Have Not Returned to Large Cities Post-Pandemic — The under-five population in large urban U.S. counties fell 6.1% while overall population in those counties fell 0.9%, with declines exceeding 10% in the largest counties including New York, Cook County, Illinois, and Los Angeles. Losses of young families were more severe in the Mid-Atlantic and West Coast, while the under-five population grew in Southeastern urban counties.
  • Southern Comforts — Migration into southern metropolitan areas such as Austin, San Antonio, Jacksonville, and Tampa has continued, and the South also has a higher birth rate than other census regions. Growth has been uneven: Florida's GDP rose 20% and Texas and Tennessee 15% against a US average of 11%, while Oklahoma and Louisiana contracted.
  • On the Move: Homebuyer Insights and the Housing Challenge — Bank of America internal data indicate that Gen Z and Millennials account for the net population growth in metropolitan areas where growth is accelerating, most notably Columbus and Austin. In shrinking metro areas such as New York and Washington D.C., population is declining faster among older generations than younger ones.

AI Summary. Motor vehicle insurance prices rose more than 22% over a year, the fastest pace since the 1970s, according to the Bureau of Labor Statistics. Insurers' personal auto businesses recorded losses of $4bn, $33bn, and roughly $17bn in successive years, and industry analysts say many companies still need higher prices to offset them.

Emily Flitter New York Times
Date Posted:

Motor vehicle insurance costs rose 22% in the 12 months through April 2024, the fastest pace since the 1970s, as insurers offset a $50B industry loss in 2022-23.

Are car insurance prices rising to offset insurers' losses?

Core argument: Motor vehicle insurance prices rose more than 22% in the year through April, the fastest pace since the 1970s, according to the Bureau of Labor Statistics.

The price of motor vehicle insurance rose more than 22% in the year through April, the fastest pace since the 1970s, according to the Bureau of Labor Statistics. According to calculations by the Insurance Information Institute, a trade group, the average 12-month premium for car insurance was $1,280 in 2023, the industry’s most recent figures. In 2021, insurers’ personal auto businesses started recording losses. According to David Blades, an analyst for AM Best, the industry lost $4 billion in 2021, $33 billion in 2022, and roughly $17 billion last year. According to Dale Porfilio, the chief insurance officer at the Insurance Information Institute, the trade group, many companies still need to raise prices to make up for those bad years. Last year, insurers raised auto premiums by 14%, the biggest increase in over 15 years. Mr. Porfilio’s best guess is that premiums this year will rise another 13%.

Takeaways by Macro Roundup® AI

  1. Motor vehicle insurance prices rose more than 22% in the year through April, the fastest pace since the 1970s, according to the Bureau of Labor Statistics.
  2. Insurers' personal auto businesses lost $4 billion in 2021, $33 billion in 2022, and roughly $17 billion last year, according to AM Best analyst David Blades.
  3. Insurers raised auto premiums by 14% last year, the biggest increase in over 15 years, and Dale Porfilio of the Insurance Information Institute estimates premiums will rise another 13% this year.

Related Articles:

  • April Flowers, Not Showers — Bank of America internal payments data show average household property insurance payments up 23% relative to 2019, and average per-customer payments up 25%, with a three-month average year-over-year increase of 11%. The data cannot separate auto from home insurance payments.
  • Buying Home and Auto Insurance Is Becoming Impossible — Car insurance premiums rose 19.2% over 12 months, about six times the rise in overall consumer prices, marking the 15th consecutive month of double-digit year-over-year increases and the longest such stretch since the mid-1980s. Reinsurance prices rose 30%–50%, leaving home insurers to absorb more risk themselves.
  • Just How Bad Is the US Cost-of-Living Squeeze? We Did the Math — It now takes $119.27 to buy what $100 purchased before the pandemic, with prices rising about as much since early 2020 as in the preceding decade. Groceries and electricity are each up 25% since January 2020, used cars 35%, auto insurance 33%, and rents roughly 20%.

AI Summary. U.S. overdose deaths fell about 3% to roughly 107,500, the first annual decline in five years, according to preliminary Centers for Disease Control and Prevention estimates. Deaths involving synthetic opioids, a category largely fueled by fentanyl, fell 2% to about 74,700 and accounted for 7 of every 10 overdose deaths.

Jon Kamp Wall Street Journal
Date Posted:

Preliminary @CDCgov data shows US overdose deaths in 2023 declined 3% vs. 2022 to 107,500, the first decline in five years. Deaths due to synthetic opioids, including fentanyl, declined 2% to 74,700.

Are U.S. overdose deaths starting to decline?

Core argument: U.S. overdose deaths fell about 3% to roughly 107,500 in 2023, the first decline in five years, according to preliminary CDC estimates.

The U.S. saw a slight decline in the number of new overdose deaths last year, marking a rare improvement in a still-raging national fentanyl crisis, preliminary federal data show. There were about 107,500 overdose deaths in 2023, down 3% from the year before and the first decline in five years, according to estimates from the Centers for Disease Control and Prevention. The preliminary data show deaths involving synthetic opioids—a category largely fueled by fentanyl—declined 2% to about 74,700 last year. Seven of every 10 U.S. overdose deaths involved these drugs.

Takeaways by Macro Roundup® AI

  1. U.S. overdose deaths fell about 3% to roughly 107,500 in 2023, the first decline in five years, according to preliminary CDC estimates.
  2. Deaths involving synthetic opioids, a category largely fueled by fentanyl, declined 2% to about 74,700 in 2023, according to preliminary CDC data.
  3. Synthetic opioids were involved in seven of every 10 U.S. overdose deaths.

Related Articles:

  • How Fentanyl Laid Waste to Guatemala’s Time-Worn Opium Trade — Opium prices in Guatemala's poppy-growing highlands have collapsed from $64 an ounce to about $9.60, with growers reporting a fall from roughly $2,310 to $256 per kilo. Eradication patrols now find only scattered small plots where cultivation once blanketed the land.
  • Importing the Opioid Crisis? International Trade and Fentanyl Overdoses — A study using U.S. mortality and import data finds a positive state-level association between imports per resident and drug overdose death rates, driven by fentanyl and accounting for an estimated 15,000–20,000 deaths per year. The authors estimate that 10% higher imports per resident is associated with an 8.1% higher fentanyl death rate.
  • The Global Network Behind The Fentanyl Crisis — Nearly 110,000 Americans died of drug overdoses in a year, with more than two-thirds of those deaths caused by fentanyl, a synthetic opioid 50x as potent as heroin. A kilogram of precursor chemicals bought from Chinese manufacturers for about $800 can produce 415,000 fentanyl pills, which sell wholesale for as little as 50 cents each.

AI Summary. The United States and China each logged their highest-ever annual launch rates, at 103 and 66 launches, while Russia fell to 19 and Europe recorded three. The US accounted for roughly half of global launches but 81% of effective launch capacity, since Falcon 9 and Falcon Heavy comprised 93% of US launches.

Todd Harrison American Enterprise Institute
Date Posted:

The US had 81% of global effective launch capacity in 2023, and 78% of satellite launches, largely driven by SpaceX’s Starlink constellation. @ToddHarrisonDC

Does the US lead the world in space launch capacity?

Core argument: The United States accounted for roughly half of global launches in 2023 but 81% of effective launch capacity, a theoretical measure of the equivalent mass that would reach low Earth orbit if every vehicle carried its maximum payload.

United States and China both logged their highest launch rate ever in 2023 at 103 and 66 launches, respectively, Russia fell to 19, and Europe recorded just three successful launches for the year. While the number of launches is a useful metric, another way to compare overall launch capabilities among nations is by their effective launch capacity, shown in Figure 3. This is a theoretical measure of the equivalent mass that would have been placed in orbit if each launch vehicle was used to deliver its maximum payload (measured in metric tons) to low Earth orbit (LEO). While the United States accounted for roughly half of global launches in 2023, it made up 81% of effective launch capacity. This is because the Falcon 9 and Falcon Heavy—relatively large payload capacity vehicles—comprised the vast majority (93%) of US launches.

Takeaways by Macro Roundup® AI

  1. The United States accounted for roughly half of global launches in 2023 but 81% of effective launch capacity, a theoretical measure of the equivalent mass that would reach low Earth orbit if every vehicle carried its maximum payload.
  2. The United States and China each logged their highest launch rates ever in 2023, at 103 and 66 launches respectively, while Russia fell to 19 and Europe recorded three successful launches.
  3. The Falcon 9 and Falcon Heavy, vehicles with relatively large payload capacity, comprised 93% of US launches in 2023, accounting for the US share of effective launch capacity exceeding its share of launches.

Related Articles:

  • SpaceX Starship Nears Orbit, But Is Lost Before Return to Earth — SpaceX's Starship rocket flew farther and faster than in its previous test flights, separating from its Super Heavy booster and reaching near-orbit before contact was lost during its return to Earth. SpaceX confirmed the vehicle was lost, likely destroyed, cutting the mission short.
  • Space: The Missing Element of Your Strategy — Private-sector funding of space-related companies has topped $10bn, close to a tenfold rise over the past decade, though the US government remains the largest source of space funding. If current momentum continues, commercial funding for space ventures could surpass government funding within 20 years.
  • How War in Europe Boosts the U.S. Economy — Federal Reserve data show U.S. defense and space industrial production has risen 17.5% since Russia's full-scale invasion of Ukraine. U.S. officials say 64% of the $60.7bn earmarked for Ukraine will flow back to the U.S. defense industrial base, and the State Department reported over $80bn in major arms deals, about $50bn to European allies.

Friday, May 17, 2024

AI Summary. Cultural individualism accounts for about one-third of cross-country differences in working from home, with the shift from the lowest-individualism country (Taiwan) to the highest (the US) associated with 0.7 more fully paid work-from-home days per week, and 1.1 more among college graduates. The authors find individualism explains more of this variation than industry mix, population density, or lockdown stringency.

Pablo Zarate, Mathias Dolls, Steven Davis, et al. National Bureau of Economic Research
Date Posted:
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A measure of individualism accounts for about 1/3 of the cross-country variation in work-from-home rates, with WFH most prevalent in the Anglosphere and least in Asia. @PabloZarate98 @I_Am_NickBloom @Jose_MariaRD @cevatgirayaksoy

Does culture explain why working from home varies across countries?

Core argument: Cultural factors, specifically Individualism, account for about one-third of cross-country differences in work from home, with the move from Taiwan's lowest Individualism score to the highest in the US associated with 0.7 more full paid WFH days per week.

We examine how work from home varies across countries and across US workers. Our key finding is that cultural factors – specifically Individualism – account for about one-third of the differences across countries. Figure 3 shows the bivariate relationship between individualism and WFH. Moving from the country with the lowest Individualism score (Taiwan) to the one with the highest (the US) is associated with 0.7 more full paid WFH days per week (1.1 among college graduates). Individualism explains far more of the variation than industrial composition, population-weighted density, or lockdown stringency. Across US workers, industry and population density are the two most important determinants. But cultural factors are still statistically significant. Respondents who reside in counties that voted for Joe Biden in 2020 by a larger margin WFH at higher rates even after accounting for industry, state-level wages, population density, and a battery of demographics.

Takeaways by Macro Roundup® AI

  1. Cultural factors, specifically Individualism, account for about one-third of cross-country differences in work from home, with the move from Taiwan's lowest Individualism score to the highest in the US associated with 0.7 more full paid WFH days per week.
  2. Among college graduates, the gap between the lowest- and highest-Individualism countries is associated with 1.1 more full paid WFH days per week, and Individualism explains far more variation than industrial composition, population-weighted density, or lockdown stringency.
  3. Across US workers, industry and population density are the two most important determinants of working from home, while respondents in counties that voted for Joe Biden in 2020 by larger margins work from home at higher rates even after accounting for industry, state-level wages, density, and demographics.

Related Articles:

  • Remote Work, Three Years Later — Remote work has reduced office utilization but not yet office occupancy, because most firms are locked into long-duration leases. Baseline estimates suggest remote work will exert 0.8 percentage points of upward pressure on the office vacancy rate near-term, 2.3 more over the following five years, and 1.8 thereafter.
  • Does Working from Home Boost Productivity Growth? — After controlling for each industry's pre-pandemic productivity trend, there is essentially no statistically significant relationship between how easily an industry's work can be done remotely and its excess productivity growth during the pandemic.
  • Work From Home and the Office Real Estate Apocalypse — The authors estimate New York City office values fell 45% in 2020 and 39% in the longer run, a $453bn value destruction, with lower-quality buildings hit hardest as tenants shifted to higher-quality space. They argue this has implications for local public finances and financial sector stability.

AI Summary. Credit availability in US commercial real estate has been resilient, leaving the likelihood of a credit crunch or a systemic shock from the sector low. Loan modifications and extensions will likely remain a key channel for borrowers to address refinancing needs, helping stabilize property performance outside the office sector.

Lotfi Karoui and Vinay Viswanathan Goldman Sachs
Date Posted:

A @GoldmanSachs analysis argues there is little risk of a systemic shock emerging from US commercial real estate, as banks continue to extend credit and allow modifications.

Is commercial real estate stress likely to become a systemic shock?

Core argument: Credit availability in US commercial real estate has been resilient, which the authors read as keeping the risk of a credit crunch remote and the likelihood of a systemic shock from the CRE market low.

Credit availability has been resilient, suggesting the risk of a credit crunch is still remote and leaving us comfortable with our view that the likelihood of a systemic shock from the CRE market is low. Modifications and extensions will likely remain a key channel through which borrowers address their refinancing needs. The resilience of the debt financing backdrop will likely continue to stabilize property performance, especially outside of the office sector. On the market side, we think the magnitude and speed of erosion in the risk premium provided by the new issue CMBS market has shifted the opportunity set to bond selection in older vintages in the secondary market. We continue to favor exposures to single-asset/singe-borrower bonds collateralized by retail and luxury resort properties while also seeing value up the capital structure in AAA CRE CLO AAA floaters.

Takeaways by Macro Roundup® AI

  1. Credit availability in US commercial real estate has been resilient, which the authors read as keeping the risk of a credit crunch remote and the likelihood of a systemic shock from the CRE market low.
  2. Loan modifications and extensions will likely remain a key channel for CRE borrowers addressing refinancing needs, with the resilient debt financing backdrop continuing to stabilize property performance, especially outside the office sector.
  3. The authors argue that the magnitude and speed of erosion in the new-issue CMBS risk premium has shifted the opportunity set toward bond selection in older secondary-market vintages, favoring single-asset/single-borrower bonds collateralized by retail and luxury resort properties and AAA CRE CLO floaters.

Related Articles:

  • Work From Home and the Office Real Estate Apocalypse — The authors estimate New York City office values fell 45% in 2020 and 39% in the longer run, a $453bn value destruction, with lower-quality buildings hit hardest as tenants shifted to higher-quality space. They argue this has implications for local public finances and financial sector stability.
  • Corporate Debt, Boom-Bust Cycles, and Financial Crises — Using a dataset on sectoral credit exposure for 115 economies, the authors find corporate debt accounts for two-thirds of credit expansion before financial crises and three-quarters of nonperforming loans during busts, and that corporate debt expansions predict crises similarly to household debt. Recoveries are slower after corporate debt booms.
  • Real-Estate Doom Loop Threatens America’s Banks — A Wall Street Journal analysis estimates banks' total commercial real-estate exposure at $3.6tn—about 20% of their deposits—including indirect lending, foreclosed properties, commercial mortgage-backed securities, and loans to nonbank mortgage lenders. Losses on these loans risk triggering a doom loop in which banks cut lending, pushing property prices down further and generating additional losses.

AI Summary. China sold a record $53.3bn of US Treasury and agency bonds in a single quarter, a sign of diversification away from American assets amid persistent trade tensions. Belgium, often viewed as a custodian of Chinese holdings, disposed of $22bn of Treasuries over the same period.

Masaki Kondo and Iris Ouyang Bloomberg
Date Posted:

Bloomberg reports there was an apparent $53.3B reduction in China’s US bond holdings in Q1. @Brad_Setser notes that China may have either diversified out of the dollar or diversified its custodians.

Is China diversifying away from US assets?

Core argument: China sold a combined $53.3 billion of US Treasuries and agency bonds in the first quarter, a record sum, according to calculations based on US Department of the Treasury data.

China sold a record amount of Treasury and US agency bonds in the first quarter, highlighting the Asian nation’s move to diversify away from American assets as trade tensions persist. Beijing offloaded a total of $53.3 billion of Treasuries and agency bonds combined in the first quarter, according to calculations based on the latest data from the US Department of the Treasury. Belgium, often seen as a custodian of China’s holdings, disposed of $22 billion of Treasuries during the period.

Takeaways by Macro Roundup® AI

  1. China sold a combined $53.3 billion of US Treasuries and agency bonds in the first quarter, a record sum, according to calculations based on US Department of the Treasury data.
  2. Belgium, often seen as a custodian of China's holdings, disposed of $22 billion of Treasuries during the first quarter.
  3. China's record first-quarter sales highlight Beijing's move to diversify away from American assets as trade tensions persist.

Related Articles:

  • Power and Financial Interdependence — US-China financial interdependence creates what has been called a "balance of financial terror," in which the US relies on other countries' costs of not financing its current account deficit as assurance that financing continues. Chinese policymakers worry that dollar holdings expose China to financial sanctions, while the US has feared Chinese sales of Treasuries could threaten its financial stability.
  • Shadow Reserves — How China Hides Trillions of Dollars of Hard Currency — Institutions reporting to China's central government likely hold closer to $6tn in foreign assets than the $3.12tn officially reported as reserves, with the state banking system the main vehicle for holding these uncounted foreign currency assets. China remains a massive global creditor whose foreign exchange accumulation is felt worldwide.
  • Where Have All the Foreign Buyers Gone for U.S. Treasury Debt? — Foreign holders, including private investors and central banks, own about 30% of outstanding U.S. Treasury securities, down from roughly 43% a decade ago, with China and Japan seen as unlikely net buyers going forward. Meanwhile the Treasury has issued a net $2tn in new debt and the Federal Reserve is shedding about $60bn a month.

AI Summary. The Dow Jones Industrial Average rose 45% over the portion of the Biden presidency following his election win, compared with 34% at the equivalent point of Trump's term and 70% by that term's end.

Greg Ip and Rosie Ettenheim Wall Street Journal
Date Posted:

Since Biden’s election, the DJIA has risen 45%. Despite the pandemic crash, the Dow rose 70% over Trump’s term. @greg_ip

How does stock market performance compare across presidential terms?

Core argument: The Dow is up 45% since Biden defeated Trump in 2020, compared with 34% at the equivalent point in Trump's term, which ended 70% higher.

After the election in 2016, stocks rallied on expectations that a Republican president and Congress would cut taxes and regulations. In 2020, the post-election rally reflected good news on Covid vaccines and expectations of more stimulus. The Dow is up 45% since Biden defeated Trump in 2020. At the equivalent point in Trump’s term, it was up 34%, and it finished his term 70% higher.

Takeaways by Macro Roundup® AI

  1. The Dow is up 45% since Biden defeated Trump in 2020, compared with 34% at the equivalent point in Trump's term, which ended 70% higher.
  2. The stock rally after the 2016 election reflected expectations that a Republican president and Congress would cut taxes and regulations.
  3. The rally after the 2020 election reflected good news on Covid vaccines and expectations of more stimulus.

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.
  • 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.
  • 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. Microsoft has asked roughly 700 to 800 employees in its China-based cloud-computing and artificial intelligence operations, mostly Chinese-national engineers working on machine learning, to consider transferring to countries including the U.S., Ireland, Australia, and New Zealand amid escalating U.S.-China tensions.

Raffaele Huang and Yoko Kubota Wall Street Journal
Date Posted:

Microsoft is giving hundreds of China-based employees in its cloud-computing and artificial intelligence operations the option to transfer to offices in the U.S., Ireland, Australia, and New Zealand.

Are U.S. tech firms moving AI staff out of China?

Core argument: Microsoft offered roughly 700 to 800 employees in its China-based cloud-computing and AI operations the chance to transfer abroad, to countries including the U.S., Ireland, Australia, and New Zealand, according to people familiar with the matter.

Microsoft is asking hundreds of employees in its China-based cloud-computing and artificial intelligence operations to consider transferring outside the country, as the American tech behemoth finds itself caught in the crosshairs of escalating U.S.-China tensions. Such staff, mostly engineers with Chinese nationality, were recently offered the opportunity to transfer to countries including the U.S., Ireland, Australia, and New Zealand, people familiar with the matter said. About 700 to 800 people were given the offer, the bulk of which are involved in machine learning and other cloud-computing tasks, one of the people said.

Takeaways by Macro Roundup® AI

  1. Microsoft offered roughly 700 to 800 employees in its China-based cloud-computing and AI operations the chance to transfer abroad, to countries including the U.S., Ireland, Australia, and New Zealand, according to people familiar with the matter.
  2. The Microsoft staff asked to consider relocating are mostly engineers with Chinese nationality, with the bulk involved in machine learning and other cloud-computing tasks, one of the people said.
  3. Microsoft's request that China-based AI and cloud staff consider transferring outside the country comes as the company finds itself caught in the crosshairs of escalating U.S.-China tensions.

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  • 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.
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AI Summary. The El Niño warming phase, which can temporarily raise global temperatures and drive extreme weather, is forecast to give way to a neutral stage and then the cooler La Niña pattern, which should bring temperatures down. How much El Niño lifted temperatures is not yet clear; a smaller-than-expected drop could signal a step change in the rate of global warming.

Economist Staff The Economist
Date Posted:

In June 2023 the world entered an “El Niño” phase, which is associated with higher global temperatures. Transition to the cooler “La Niña” phase between July and September will provide insights into the underlying rate of global warming.

How much did a natural warming cycle raise global temperatures?

Core argument: The world entered an El Niño phase in June 2023, a natural cycle within the El Niño Southern Oscillation that can temporarily raise temperatures and drive extreme weather anomalies.

In June 2023 the world entered an “El Niño” phase. This natural climate cycle (part of a pattern known as El Niño Southern Oscillation, or ENSO) can temporarily boost temperatures and cause extreme weather anomalies. In April the Australian Bureau of Meteorology announced that the Pacific Ocean was cooling substantially, which is generally a sign that El Niño is on its way out. Forecast models point to an imminent transition to a neutral stage, and predict that the world is likely to enter La Niña (the cooler pattern) some time between July and September. That should start bringing temperatures down towards the end of the year. El Niño has pushed temperatures up even higher, but it is not yet obvious by how much. That should become clearer in the next cycle: if temperatures do not drop by as much as expected, it could signal a step change in the rate of global warming. There is no consensus yet on what would be behind such a change.

Takeaways by Macro Roundup® AI

  1. The world entered an El Niño phase in June 2023, a natural cycle within the El Niño Southern Oscillation that can temporarily raise temperatures and drive extreme weather anomalies.
  2. The Australian Bureau of Meteorology announced in April that the Pacific Ocean was cooling substantially, generally a sign El Niño is ending, and forecast models point to a neutral stage and a likely shift to La Niña between July and September.
  3. How much El Niño pushed temperatures up is not yet obvious, and if temperatures fail to drop as much as expected in the next cycle, that could signal a step change in the rate of global warming, with no consensus yet on its cause.

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  • Oceans Set Heat Records For More Than 365 Days In A Row — Global sea surface temperatures set daily records for 365 consecutive days, peaking at an all-time high of 21.2C, according to US National Oceanic and Atmospheric Administration and Climate Reanalyzer data. Scientists are concerned that climate change could push marine ecosystems beyond a tipping point, with seas showing no sign of returning to typical seasonal temperatures.
  • Long-term Surface Impact of Hunga Tonga-Hunga Ha’apai-like Stratospheric Water Vapor Injection — A volcanic eruption that injected large amounts of water vapor — a strong greenhouse gas — into the stratosphere is estimated to have raised surface temperatures by more than 1.5°C across large regions for several years, while cooling some areas by close to 1°C. The authors suggest a possible link to tropical Pacific sea surface temperatures that warrants further investigation.
  • The Rapid Loss Of Antarctic Sea Ice Brings Grim Scenarios Into View — Unusual wind and wave patterns are a leading short-term explanation for the loss of Antarctic sea ice, which holds the continent's coastal ice shelves in place. If those shelves collapsed, continental ice could flow rapidly into the oceans; the West Antarctic ice sheet alone holds enough water to raise global sea level by 11 feet.