Edward Conard

Top Ten New York Times Bestselling Author

  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “Unintended Consequences is full of substance, it is one of the must-read books of the year, and once I finish it I will be giving it a second read through right away.” - Tyler Cowen, Professor, George Mason University
  • “…a 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
  • “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
  • “Unintended Consequences represents the most cogent and persuasive analysis of the Financial Crisis to date.” - Andrei Shleifer, 1999 John Bates Clark Medal Winner
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “…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 full-throated defense of economic dynamism.” - The Wall Street Journal
  • “…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
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Friday, January 17, 2025

AI Summary. Gallup polling finds that while roughly 80% of Americans say they are dissatisfied with the way things are going in the country, about 80% are satisfied with the way things are going in their own lives, including 90% satisfied with family life, 88% with housing, and 87% each with education and work.

Scott Winship American Enterprise Institute
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.@swinshi argues, “Whenever you read that 80% of Americans are dissatisfied with the way things are going in the US, you should remember that 80% are satisfied with the way things are going in their own life.”

Are Americans satisfied with their own lives but dissatisfied with the country?

Core argument: Gallup found in January 2023 that 90% of Americans were satisfied with their family life, 88% with their housing, 87% with their education, and 87% with their work.

Whenever you read that 80% of Americans are dissatisfied with the way things are going in the US, you should remember that 80% are satisfied with the way things are going in their own life. Gallup found in January 2023 that 90% were satisfied with their family life, 88% with their housing, 87% with their education, 87% with their work. These are mostly down from early 2019 but up from 1995.

Takeaways by Macro Roundup® AI

  1. Gallup found in January 2023 that 90% of Americans were satisfied with their family life, 88% with their housing, 87% with their education, and 87% with their work.
  2. While 80% of Americans report dissatisfaction with the way things are going in the US, 80% report satisfaction with the way things are going in their own life.
  3. The January 2023 Gallup satisfaction readings on family life, housing, education, and work are mostly down from early 2019 but up from 1995.

Related Articles:

  • You Are Right to Worry About the Economy — The Federal Reserve describes the US as on an unsustainable fiscal path, with federal debt up from 70% of GDP after the financial crisis to nearly 100% and spending at 23% of GDP versus 19% before. Heavy tax increases on top earners are estimated to yield under 2% of GDP.
  • How Do Electoral Votes, Presidential Approval, and Consumer Sentiment Respond to Economic Indicators? — The authors estimate that unemployment, current inflation, and a set of noneconomic factors explain much of the variation in US presidential approval ratings since 1956, with the economic indicators' combined contribution almost always negative. Once noneconomic effects are included, the Michigan Consumer Sentiment Index loses its advantage over the economic variables.
  • The Cost of Money is Part of the Cost of Living: New Evidence on the Consumer Sentiment Anomaly — Variation in the University of Michigan consumer sentiment index that inflation and unemployment cannot explain is strongly correlated with growth in consumer borrowing costs, such as mortgage and car loan rates. The authors estimate that including interest payments and homeownership costs in the consumer price index would raise measured inflation from 3% to 9%.

AI Summary. Semiconductor firms in Korea and Taiwan have launched large domestic capital spending programs backed by tax credits, with wafer capital spending projected at $716bn in Taiwan and $300bn in Korea over 2024-2032. Given lower Asian costs, these firms are likely to cut US spending before home spending if sales disappoint.

Gary Clyde Hufbauer, Megan Hogan and Mingsong Chen  Peterson Institute for International Economics
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A @PIIE report argues it is “unlikely that the magnitude of Korean and Taiwanese semiconductor capex on American territory will be sufficient to meet the [CHIPS Act] target of 20% of global capacity for advanced chips made on US soil by 2030”.

Will Asian chipmakers cut US investment before home investment?

Core argument: BCG and SIA project wafer capex in Taiwan will reach $716 billion over 2024–2032, almost entirely by Taiwanese firms dominated by TSMC, and $300 billion in Korea, entirely by Korean firms dominated by Samsung and SK Hynix.

The Asian chip giants in Korea and Taiwan have launched their own massive capex programs at home, spurred by generous tax credits designed to match the US offering. According to BCG and SIA projections, wafer capex in Taiwan between 2024 and 2032 is projected to reach $716 billion, almost entirely by Taiwanese firms (dominated by TSMC), and wafer capex in Korea is projected to reach $300 billion, entirely by Korean firms (dominated by Samsung and SK Hynix). Because chip firms are bigger players in the economic landscape of Korea and Taiwan than in the United States, current Asian incentive programs (centered on tax credits) seem more certain to be extended than the US investment tax credit. Moreover, capital and operating costs in Asia are lower than in the United States. These factors suggest that, if global chip sales flag by comparison with current projections, Asian giants are likely to pull back on US capex before they reduce home capex.

Takeaways by Macro Roundup® AI

  1. BCG and SIA project wafer capex in Taiwan will reach $716 billion over 2024–2032, almost entirely by Taiwanese firms dominated by TSMC, and $300 billion in Korea, entirely by Korean firms dominated by Samsung and SK Hynix.
  2. Chip giants in Korea and Taiwan have launched large domestic capex programs spurred by tax credits designed to match the US offering, and capital and operating costs in Asia are lower than in the United States.
  3. Because chip firms loom larger in Korea's and Taiwan's economies than in the US, their tax-credit incentives appear more certain to be extended than the US investment tax credit, suggesting Asian firms would pull back on US capex before home capex if chip sales flag.

Related Articles:

  • TSMC’s Arizona Chip Production Yields Surpass Taiwan’s in Win for US Push — Taiwan Semiconductor Manufacturing Co. reports that the share of usable chips produced at its Phoenix, Arizona plant is about 4 percentage points higher than at comparable factories in Taiwan. Yield is a critical industry measure because it determines whether companies can cover the enormous costs of a chip plant.
  • The Chips Act Has Been Surprisingly Successful So Far — The US government has spent over half of its $39bn in Chips Act semiconductor incentives, and chip companies and supply chain partners have announced $327bn of investments over the next 10 years, according to Semiconductor Industry Association calculations. US data show a 15-fold increase in construction of computing and electronics manufacturing facilities.
  • With US Chips Act Money Mostly Divvied Up, the Real Test Begins — The US Chips Act is a bet that Intel, Micron, Taiwan Semiconductor Manufacturing, and Samsung can return advanced chip production to the US, with an explicit goal of making a fifth of the world's most advanced processors by 2030, up from roughly zero. Nearly 100 companies have pledged about $400bn in US facilities.

AI Summary. Citi analysts estimate reinsurers could absorb less than 3% of insured losses from the Los Angeles wildfires. Reinsurers' share of modelled catastrophe risk has fallen from about 46% over the past 25 years to 33%, following years of wildfire losses that led major reinsurers to reduce their appetite for such risks.

Lee Harris Financial Times
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Efforts by reinsurers to reduce their exposure to catastrophe risks seemingly worked in CA, with a Citi analysis finding reinsurers may absorb <3% of insured losses from the Los Angeles fires.

Have reinsurers reduced their share of wildfire catastrophe risk?

Core argument: Citi analysts estimate reinsurers could ultimately absorb less than 3% of insured losses from the Los Angeles fires.

Reinsurers, which provide insurance to frontline insurance companies, could ultimately absorb less than 3% of insured losses from the blazes, Citi analysts said. Last year, US reinsurance rates hit their highest level since at least 1990, according to a cost index published by Guy Carpenter, a reinsurance broker. Over the past 25 years, reinsurers assumed about 46% of modelled catastrophe risk, but that exposure has been cut to 33% since 2023, according to the reinsurance arm of broker Howden. Munich Re, the world’s biggest reinsurer which provides coverage to major US primary carriers, said in a 2020 investor presentation it had “reduced appetite” in reinsurance for so-called secondary perils such as wildfire. The reinsurers’ retreat followed years of painful losses. Munich Re booked €500mn of wildfire losses in 2017, the year when the Tubbs fire swept through Northern California, and €430mn of losses in 2018, following two other major fires in the state.

Takeaways by Macro Roundup® AI

  1. Citi analysts estimate reinsurers could ultimately absorb less than 3% of insured losses from the Los Angeles fires.
  2. Reinsurers assumed about 46% of modelled catastrophe risk over the past 25 years, but that exposure has been cut to 33% since 2023, according to broker Howden's reinsurance arm.
  3. Munich Re, the world's biggest reinsurer, said in a 2020 investor presentation it had "reduced appetite" in reinsurance for secondary perils such as wildfire, having booked €500mn of wildfire losses in 2017 and €430mn in 2018.

Related Articles:

  • Growing Costs of Natural Disasters are Stressing Property Insurance Markets — U.S. home insurers posted $15.2bn in net underwriting losses, their worst performance since at least 2000, and are responding by raising premiums and withdrawing coverage. State "last-resort" public insurance plans, backed by a state's policyholders or taxpayers, reached a record of just over $1.3tn in exposure, signaling growing unavailability of private coverage.
  • Catastrophe Bonds Look Set to Dodge Losses as LA Fires Rage — Catastrophe bonds, which insurers use to transfer risk to capital markets and which pay out only when cumulative losses over a year exceed a preset threshold, are unlikely to incur significant losses from wildfires in Los Angeles. The Swiss Re Global Cat Bond Index gained more than 17% in 2024, following a record near-20% return in 2023.
  • The Uninsurable World: What Climate Change Is Costing Homeowners — Global insurance losses from natural catastrophes have topped $100bn for four straight years, a level once considered the mark of an exceptionally bad year, and US insurers have repriced risk with significant premium increases. Reinsurer Swiss Re predicts a growing number of areas where buying insurance becomes uneconomical.

AI Summary. U.S. Treasury Department data covering 246m home insurance policies from 330 insurers show that homeowners in areas most exposed to climate disasters are increasingly dropping coverage by failing to pay premiums. In more than 150 ZIP codes, insurers canceled at least 10% of home insurance policies for nonpayment.

Christopher Flavelle and Mira Rojanasakul New York Times
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In 2022, the last year data was available, insurers canceled at least 10% of home insurance policies in more than 150 ZIP codes due to homeowners failing to pay their premiums.

Are homeowners in disaster-prone areas dropping insurance coverage?

Core argument: In more than 150 U.S. ZIP codes, insurers canceled at least 10% of home insurance policies in 2022 because homeowners failed to pay their premiums, according to Treasury Department data.

Homeowners in places most exposed to climate disasters are increasingly giving up on paying their insurance premiums, leaving them exposed to financial ruin, according to sweeping new government data. The rising cancellation rates are part of a broader trend captured by the Treasury Department, which analyzed information for 246 million insurance policies issued by 330 insurers nationwide from 2018 through 2022. The result is the most comprehensive look yet at the effect of climate change on the American home insurance market. In more than 150 ZIP codes around the country, insurers canceled at least 10% of home insurance policies in 2022, the most recent year for which numbers are available, because homeowners failed to pay their premiums.

Takeaways by Macro Roundup® AI

  1. In more than 150 U.S. ZIP codes, insurers canceled at least 10% of home insurance policies in 2022 because homeowners failed to pay their premiums, according to Treasury Department data.
  2. The Treasury Department analyzed 246 million insurance policies issued by 330 insurers nationwide from 2018 through 2022, the most comprehensive look yet at climate change's effect on the American home insurance market.
  3. Homeowners in areas most exposed to climate disasters are increasingly giving up on paying their insurance premiums, leaving them exposed to financial ruin.

Related Articles:

  • Growing Costs of Natural Disasters are Stressing Property Insurance Markets — U.S. home insurers posted $15.2bn in net underwriting losses, their worst performance since at least 2000, and are responding by raising premiums and withdrawing coverage. State "last-resort" public insurance plans, backed by a state's policyholders or taxpayers, reached a record of just over $1.3tn in exposure, signaling growing unavailability of private coverage.
  • Los Angeles Fires Become Existential Test for California’s Stopgap Insurer — California's largest property insurer declined to renew 72,000 home and apartment policies statewide, including 69% of policies in one Pacific Palisades ZIP code, pushing homeowners toward the state's FAIR Plan insurer of last resort, which listed $458bn in exposure against about $2.5bn in reinsurance and $200m in surplus cash.
  • The 30-Year Mortgage Wasn’t Designed For Climate Chaos — Economists warn that annual home insurance policies cannot always be reconciled with 30-year mortgages, noting that reinsurance costs rose more than 100% from 2017 to 2023 and insurers passed those costs to homeowners. The Insurance Information Institute reports insurers paid $1.11 in claims per dollar of premiums in 2023, with a fifth straight year of underwriting losses expected.

AI Summary. Blue Origin's 98-metre heavy-lift New Glenn rocket reached orbit on its maiden flight from Cape Canaveral, five years later than originally planned, positioning the company to compete with SpaceX in the satellite launch market. The attempt to land the booster on an ocean platform to demonstrate reusability failed.

Peggy Hollinger and Ian Bott Financial Times
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Jeff Bezos’s Blue Origin’s New Glenn rocket reached orbit on its maiden flight but the booster failed to return successfully. The firm seeks to challenge SpaceX’s hold on the satellite launch market.

Does a new heavy-lift rocket challenge the dominant satellite launch provider?

Core argument: Blue Origin's 98-metre heavy-lift New Glenn rocket reached orbit on its maiden flight from Florida's Cape Canaveral Space Force Station, five years later than originally planned.

Blue Origin’s New Glenn rocket has reached orbit on its maiden flight, boosting the ambitions of Jeff Bezos to challenge the hold of Elon Musk’s SpaceX on the satellite launch market. The 98-metre, heavy-lift rocket launched from Florida’s Cape Canaveral Space Force Station five years later than originally planned. New Glenn’s debut flight paves the way for a new era in space flight, pitting two of the world’s richest men against each other in a race to extend humanity’s reach to the Moon and beyond. However, the attempt to return the booster to an ocean platform to prove the rocket’s reusability failed.

Takeaways by Macro Roundup® AI

  1. Blue Origin's 98-metre heavy-lift New Glenn rocket reached orbit on its maiden flight from Florida's Cape Canaveral Space Force Station, five years later than originally planned.
  2. New Glenn's attempt to return its booster to an ocean platform, intended to prove the rocket's reusability, failed.
  3. New Glenn's debut boosts Jeff Bezos's ambitions to challenge SpaceX's hold on the satellite launch market, pitting Bezos against Elon Musk in a race to extend humanity's reach to the Moon and beyond.

Related Articles:

  • Boeing Battles Brain Drain As Engineers Chase the Allure of Space — The average tenure of a Boeing engineer has fallen from 16.4 years to 12.6 years, according to data from the union representing 12,000 Boeing engineers, with tenure shortening in almost every age bracket. Analysts, recruiters and union officials describe this "brain drain" as a drag on operations that could make launching a new plane harder.
  • It’s Not a Space Race, It’s the Space Olympics — The US operates 81% of commercial satellites in orbit and 86% of global effective launch capacity, with NATO allies second in satellites at 11% and China second in launch capacity at 9%. China is pursuing mega satellite constellations and reusable rockets, in many cases copying approaches already proven by US companies.
  • Building an Enduring Advantage in the Third Space Age — 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.

AI Summary. SpaceX's experimental Starship spacecraft separated from its booster as designed after liftoff but then exploded, with initial data pointing to a leak that built more pressure inside the vehicle than it could vent. SpaceX said a fire in the rear of the vehicle led it to break apart and fall into predefined hazard areas in the Atlantic Ocean.

Micah Maidenberg Wall Street Journal
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The 7th launch of SpaceX’s Starship rocket exploded after liftoff; however, its booster returned to the launchpad successfully.

What caused an experimental spacecraft to break apart after liftoff?

Core argument: SpaceX's Starship spacecraft exploded shortly after separating from its booster on the seventh test flight of the experimental vehicle, launched from the company's site in Texas.

SpaceX launched its Starship rocket from a company site in Texas the seventh mission of a powerful-but-still-experimental vehicle that consists of a booster that propels a spacecraft stacked on top. The spacecraft separated from the booster shortly after liftoff, as designed, but soon exploded. Initial data indicated a leak in part of the ship, which built up more pressure inside the vehicle than it could vent out. SpaceX said a fire began in the rear of the vehicle, leading it to break apart and fall into what the company said were predefined hazard areas in the Atlantic Ocean.

Takeaways by Macro Roundup® AI

  1. SpaceX's Starship spacecraft exploded shortly after separating from its booster on the seventh test flight of the experimental vehicle, launched from the company's site in Texas.
  2. Initial data indicated a leak in part of the Starship vehicle built up more internal pressure than it could vent out, and SpaceX said a fire began in the rear of the ship, leading it to break apart.
  3. SpaceX said the Starship debris fell into predefined hazard areas in the Atlantic Ocean.

Related Articles:

  • SpaceX Launches Starship Rocket as Trump and Musk Look On — SpaceX's Starship, the largest and most powerful rocket ever developed, is under contract as a lunar lander for NASA's effort to return people to the moon and is central to plans for a Mars settlement. SpaceX says the fully reusable design will be far cheaper to fly and will eventually replace its Falcon 9 and Falcon Heavy rockets.
  • It’s Not a Space Race, It’s the Space Olympics — The US operates 81% of commercial satellites in orbit and 86% of global effective launch capacity, with NATO allies second in satellites at 11% and China second in launch capacity at 9%. China is pursuing mega satellite constellations and reusable rockets, in many cases copying approaches already proven by US companies.
  • Building an Enduring Advantage in the Third Space Age — 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.

Tuesday, January 21, 2025

AI Summary. The authors estimate that U.S. asset types seeing larger reductions in the user cost of capital and marginal effective tax rates after the 2017 Tax Cuts and Jobs Act had significantly larger increases in investment rates, persisting for several years. A 1pp decline in the user cost is associated with a 1.4–2.3pp higher investment rate.

Jonathan Hartley, Kevin Hassett and Joshua Rauh Social Science Research Network
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Kevin Hassett @Jon_Hartley_ @joshrauh estimate that following the 2017 Tax Cuts and Jobs Act, a 1pp drop in the cost of capital raised the investment rate in 2022 by 2.33 pp relative to 2016, 3x the CBO’s 0.7 pp estimate.

Does a lower user cost of capital raise business investment?

Core argument: The authors estimate that a 1 percentage point decline in the user cost of capital is associated with a 2.328 percentage point increase in the investment rate over 2016–2022, and with a 1.426 percentage point increase over 2016–2018, the latter significant at the 10% level.

This paper demonstrates that U.S. firms on average increased their fixed investment in response to exogenous decreases in user cost of capital and marginal effective tax rate (METR) resulting from TCJA tax reforms. Using cross-sectional data we find that the user cost of capital is associated with higher rates of investment; BEA asset types with greater reductions in user cost of capital and METR after the 2017 Tax Cuts and Jobs Act had greater statistically significant increases in their investment rates, and that this is the case for several years after the tax reform. [Between 2016 and 2018] a 1pp decline in the cost of capital (ρ) is associated with a 1.426 percentage point increase in the investment rate), albeit at the 10% level of significance. The investment rate in 2022 minus that in 2016 also varies significantly with declines in ρ; from 2016 to 2022 a 1 percentage point decline in ρ is associated with a 2.328 percentage point increase in the investment rate. These estimates are meaningfully above the CBO’s CapTax model, [which found] that a 1% decrease in the user cost of capital is associated with a 0.7% increase in investment.

Takeaways by Macro Roundup® AI

  1. The authors estimate that a 1 percentage point decline in the user cost of capital is associated with a 2.328 percentage point increase in the investment rate over 2016–2022, and with a 1.426 percentage point increase over 2016–2018, the latter significant at the 10% level.
  2. BEA asset types with larger reductions in the user cost of capital and marginal effective tax rate after the 2017 Tax Cuts and Jobs Act had statistically significant increases in investment rates persisting for several years.
  3. The paper's estimates are meaningfully above CBO's CapTax model, which found a 1% decrease in the user cost of capital is associated with a 0.7% increase in investment.

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.
  • Lessons from the Biggest Business Tax Cut in US History — The authors find the 2017 US business tax cuts reduced corporate tax revenue by 40% while raising total tangible corporate investment by about 11%, with firms facing larger tax declines investing relatively more. They estimate long-run GDP is higher by under 1% and labor income by under $1,000 per employee.
  • Making the Tax Cuts and Jobs Act Permanent: Two Revenue-Neutral, Pro-Growth Options for Tax Reform — 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.

AI Summary. The US share of newly announced global greenfield foreign direct investment projects rose to 14.3% from 11.6%, with the estimated value of new US projects up by more than $100bn to $227bn. Over the same period China secured just under 400 new projects, close to a record low, while Germany's fell to 470, an 18-year low.

Valentina Romei and Sam Fleming Financial Times
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The US’s 14.3% share of cross-border investment hit its highest level on record in 2024 with $227B of greenfield investment and the number of projects far exceeding comparable projects in China or Germany.

Is the US share of global foreign direct investment rising?

Core argument: The US share of newly announced global greenfield FDI projects rose from 11.6% in 2023 to 14.3% in the 12 months to November 2024, according to FT analysis of fDi Markets data.

The proportion of new FDI projects announced in the US rose from 11.6% in 2023, to 14.3% in the 12 months to November 2024, according to FT analysis of data collected by fDI Markets. The estimated value of new greenfield FDI projects in the US announced in the 12 months to November 2024 rose by more than $100bn to $227bn, according to fDi. The data is based on corporate announcements, press reports and fDI estimates for the lifetime of the project, rather than annual capital spending. The US attracted more than 2,100 new FDI greenfield projects in the 12 months to last November. By contrast, China secured just under 400 projects, close to a record low and a fraction of the 1,000 plus investments received each year in the decade up to the mid-2010s. New projects in Germany plunged to 470 in the 12 months to November 2024, the lowest figure in 18 years in Europe’s largest economy and a big decline from 1,100 greenfield investments a year earlier.

Takeaways by Macro Roundup® AI

  1. The US share of newly announced global greenfield FDI projects rose from 11.6% in 2023 to 14.3% in the 12 months to November 2024, according to FT analysis of fDi Markets data.
  2. The estimated value of new greenfield FDI projects announced in the US rose by more than $100bn to $227bn in the 12 months to November 2024, spanning more than 2,100 projects, according to fDi.
  3. China secured just under 400 new greenfield FDI projects in the 12 months to November 2024, close to a record low against the 1,000-plus received annually in the decade to the mid-2010s, while Germany's fell to 470 from 1,100.

Related Articles:

  • Business Spending Is Lining Up to Reinforce Growth — Around 70% of sectors are posting positive year-over-year profit growth, with big tech showing the largest acceleration in demand and profits but strength broadening across the economy. Companies are responding with rising capital spending growth and more optimistic investment plans, as firms typically add capacity with a slight lag after real demand picks up.
  • The Industrial Renaissance: Digital Infrastructure, Energy Transition, and Power — An industrial renaissance is underway driven by industrial policies, which fall into three types: place-based policies aimed at low-income regions that may have lost manufacturing jobs, national security policies to ensure important technology and semiconductors are produced domestically, and green policies supporting the energy transition.
  • German Companies Flock To US With Record Pledges Of Capital Investment — German companies announced a record $15.7bn of capital commitments to US projects, up from $8.2bn a year earlier and well above the $5.9bn pledged in China, according to data compiled by fDi Markets. Executives at BASF and Siemens Energy attribute the shift to pragmatic US industrial policies, a strong long-term market outlook and supply-chain concerns.

AI Summary. Applying an internal-rate-of-return approach to the S&P 500 using consensus earnings and payout estimates implies an expected stock return of 8.91% and an equity risk premium of 4.33%. Assuming the premium reverts to 4.5% yields an index value about 12% below current levels, with an estimated 80% chance stocks are overvalued.

Aswath Damodaran Musing on Markets
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.@AswathDamodaran calculates an implied expected return of 8.91% for the S&P 500 in 2025 and an implied equity risk premium of 4.33% which is “close to historic norms,” though he notes “there is an 80% chance that stocks are overvalued.“

What does the implied equity risk premium say about stock valuations?

Core argument: Damodaran backs out an implied expected return of 8.91% on the S&P 500 at the start of 2025 and an implied equity risk premium of 4.33%, netting out the Jan 1, 2025 ten-year bond rate of 4.58%.

Starting 30 years ago, I began estimating an expected return on stocks, using the S&P 500, with the level of the index standing in for the price you pay for stocks, and expected earnings and cash flows, based upon consensus estimates of earnings and cash payout ratios. I solve for an internal rate of return for stocks, based upon these expected cash flows. Using this approach at the start of 2025 to the S&P 500, I back out an implied expected return of 8.91% for the index, and an implied equity risk premium of 4.33% (obtained by netting out the ten-year bond rate on Jan 1, 2025, of 4.58%). With the assumption that the equity risk premium will climb back to 4.5%, higher than the average for the 1960-2024 period, but lower than the post-2008 average, the value that I get for the index is about 5260, about 12% lower than the index at the start of the year. With the assumption that the equity risk premium will climb back to 4.5%, higher than the average for the 1960-2024 period, but lower than the post-2008 average, the value that I get for the index is about 5260, about 12% lower than the index at the start of the year. At today's price levels, there is an 80% chance that stocks are overvalued and only a 20% chance that they are undervalued.

Takeaways by Macro Roundup® AI

  1. Damodaran backs out an implied expected return of 8.91% on the S&P 500 at the start of 2025 and an implied equity risk premium of 4.33%, netting out the Jan 1, 2025 ten-year bond rate of 4.58%.
  2. Assuming the equity risk premium rises to 4.5% — above the 1960–2024 average but below the post-2008 average — Damodaran values the S&P 500 at about 5260, roughly 12% below the index level at the start of the year.
  3. Damodaran puts the probability that stocks are overvalued at current price levels at 80% and the probability they are undervalued at 20%.

Related Articles:

  • On Bubble Watch — Data from J.P. Morgan Asset Management covering monthly observations over a 27-year period show a strong relationship between the S&P 500's starting price-to-earnings ratio and its annualized return over the following ten years, with higher starting valuations consistently followed by lower returns. Purchases at a multiple near today's 22x were followed by ten-year returns between +2% and -2%.
  • Updating Our Long-Term Return Forecast For US Equities to Incorporate the Current High Level of Market Concentration — The authors estimate the S&P 500 will deliver an annualized nominal total return of 3% over the next 10 years, roughly 1% in real terms, modeling long-term returns as a function of starting valuation, market concentration, frequency of economic contractions, corporate profitability, and interest rates. The index returned 13% annualized over the past decade, above its 11% long-term average.
  • US Exceptionalism: Drivers of Equity Outperformance and What’s Needed for a Repeat — US companies need about 7% earnings-per-share growth to deliver a normal 4% equity risk premium above the risk-free rate, versus about 3% for other developed markets, with the highest expectations embedded in technology and the largest US tech firms. Chinese companies could generate a 4% risk premium over Chinese bonds with no earnings growth.

AI Summary. Global economies are converging on a reasonable equilibrium, with developed-world central banks gradually cutting rates toward what they view as neutral, China prioritizing domestic demand after a deflationary stretch, and artificial intelligence showing potential to enhance productivity. Markets are discounting that stability, with US equity indexes pricing an even more exceptional decade than the last.

Bob Prince, Greg Jensen, and Karen Karniol-Tambour Bridgewater Associates
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Bridgewater argues the global economy is coming into equilibrium with a “mercantilist consensus” in both the US and China, but “the risk of tit-for-tat escalation in mercantilist competition (and of broader conflict) threatens the path to equilibrium.”

Are global economies converging on equilibrium that markets already price in?

Core argument: After five years of severe imbalances, global economies are converging on a reasonable equilibrium, with developed-world central banks including the Fed gradually cutting rates toward what they view as a neutral posture.

After five years of severe imbalances, global economies are converging on a reasonable state of equilibrium, a condition that is generally good for assets. Developed world central banks, including the Fed, are responding to the stabilization of conditions within tolerable ranges by gradually cutting rates toward what they view as a neutral posture. Meanwhile, China, which has been a deflationary outlier over this period, has begun to recognize the problem and is prioritizing boosting domestic demand, even if the policies are not yet clearly defined. And AI technology has advanced to show real potential to enhance productivity over time. If these were the only developments in the world, you should expect an era of stability and strong profits. That’s what markets are discounting and what is therefore required to generate a strong positive return, particularly for US equity indexes, which are pricing an even more exceptional decade than the last.

Takeaways by Macro Roundup® AI

  1. After five years of severe imbalances, global economies are converging on a reasonable equilibrium, with developed-world central banks including the Fed gradually cutting rates toward what they view as a neutral posture.
  2. China, a deflationary outlier over this period, has begun to recognize the problem and is prioritizing boosting domestic demand, though its policies are not yet clearly defined.
  3. US equity indexes are pricing an even more exceptional decade than the last, requiring an era of stability and strong profits to generate a strong positive return.

Related Articles:

  • We Are All Mercantilists Now — The postwar free-trade system depended on American soft power and broad respect for its rules, and as countries defected to mercantilist policies each defection pushed others to respond in kind. China's economic size and its use of currency management, public procurement, state subsidies and protectionism to build leading industries in electric vehicles, solar power and batteries broke the existing order.
  • How German Industry Can Survive the Second China Shock — The European Union has 30mm manufacturing jobs, and China has grown from a $4tn economy producing under 15% of global manufacturing output to an $18tn economy producing over a third, with well over 50% of global capacity in many sectors. European tariffs on Chinese electric vehicles limit import competition but do not offset lost export markets.
  • US Exceptionalism: Drivers of Equity Outperformance and What’s Needed for a Repeat — US companies need about 7% earnings-per-share growth to deliver a normal 4% equity risk premium above the risk-free rate, versus about 3% for other developed markets, with the highest expectations embedded in technology and the largest US tech firms. Chinese companies could generate a 4% risk premium over Chinese bonds with no earnings growth.

AI Summary. China's stagnant imports and robust exports have increased the global supply of manufactured goods and commodities relative to demand, helping suppress costs elsewhere. Chinese producer prices have fallen about 2-3% a year for a cumulative decline of nearly 10%, and US import prices from China are down 4% versus 1% for all imported goods excluding food and fuels.

Matt Klein The Overshoot
Date Posted:
Is Database:
Database

US inflation is still running ~ 1pp above its pre-pandemic level despite a 4% reduction in prices of imports from China since April 2022. @M_C_Klein argues higher Chinese growth could reaccelerate inflation.

Is China's economic weakness holding down US inflation?

Core argument: Chinese producer prices have fallen about 2–3% a year since mid-2022, a cumulative decline of nearly 10%, which appears to have partly passed through to U.S. import prices.

The apparent stability in the pace of underlying price increases has coincided with a massive disinflationary impulse from across the Pacific. Chinese imports have stagnated, exports have been robust, and the trade surplus has ballooned. The net effect has been a large increase in the global supply of manufactured goods and commodities relative to global demand, which has helped suppress costs for everyone else relative to what they otherwise would be. Chinese producer prices have been falling about 2-3% a year since mid-2022, for a cumulative decline of almost 10%. That seems to have partly passed through to the prices of U.S. imports from China (before accounting for customs duties), which have dropped by 4% since the peak in April 2022. That is a notably larger decline than the 1% drop in the prices of all imported goods excluding food and fuels, and the difference is mostly attributable to price developments since the end of 2023.

Takeaways by Macro Roundup® AI

  1. Chinese producer prices have fallen about 2–3% a year since mid-2022, a cumulative decline of nearly 10%, which appears to have partly passed through to U.S. import prices.
  2. Prices of U.S. imports from China, before customs duties, have dropped 4% since their April 2022 peak, versus a 1% decline for all imported goods excluding food and fuels, with the gap mostly arising after end-2023.
  3. China's stagnant imports, robust exports, and ballooning trade surplus have raised the global supply of manufactured goods and commodities relative to demand, helping suppress costs elsewhere relative to what they otherwise would be.

Related Articles:

  • Prices Won’t Stop Falling in China, and Beijing Is Grasping for Solutions — Prices for goods leaving Chinese factories have fallen year-over-year for 26 consecutive months, and China's gross domestic product deflator, a broad gauge of economy-wide prices, has been negative for six straight quarters, the longest stretch since the late 1990s. As falling prices sap profitability, companies could delay investment or cut jobs, and buyers could postpone purchases expecting further declines.
  • Chinese Bond Market Grapples With ‘Japanification’ — Yields on 30-year Chinese government bonds have fallen from 4% in late 2020 to 2.21% as China cuts interest rates and investors move into safe assets, while Japan's long-term yields have risen above China's to 2.27%. Chinese core inflation, excluding fuel and food, was 0.2% annually versus 2.3% in Japan.
  • Larry Summers and Bob Rubin Join Our CIOs to Discuss the Surprising Economic Cycle — Adopting the Simpson-Bowles fiscal consolidation when interest rates were at zero would have risked excessive disinflation, since long rates had no room to fall to provide an offsetting expansionary impulse. After the large run-up in debt and rise in real interest rates, the developing fiscal situation risks inflationary pressure, Treasury market disruption, or crowding out of private investment.

AI Summary. Americans' resistance to paying to insure against risks from illness, old age, and natural and financial disasters is growing alongside those risks; JPMorgan estimated wildfires around Los Angeles caused $50bn in losses, of which only $20bn were insured. Socializing risk removes the price signal that encourages the insured to mitigate their own exposure.

Greg Ip Wall Street Journal
Date Posted:

.@greg_ip notes that since 2020, Congress funded $46B average annual disaster relief, 3X the 2009-19 rate. “Socializing risk weakens one of the main benefits of insurance: Encouraging the insured to mitigate their risk.”

Are Americans willing to pay for insurance as risks rise?

Core argument: JPMorgan estimated the fires around Los Angeles inflicted $50 billion in losses, of which only $20 billion were insured.

As risks from illness and old age to natural and financial disaster grow, so does Americans’ resistance to paying to insure against them. The latest example is California. Earlier this month, JPMorgan estimated the fires around Los Angeles had inflicted $50 billion in losses, of which only $20 billion were insured. Socializing risk weakens one of the main benefits of insurance: Encouraging the insured to mitigate their risk so as to reduce premiums. Without that price signal, it usually takes direct intervention to modify behavior. After being bailed out in 2008-09, banks have had to submit to far more stringent safety and soundness rules. The same may be true of natural disasters. If the risk is to be socialized, society has a right to demand the insured mitigate their risk, such as making homes more flood, wind and fire proof or staying out of disaster-prone areas entirely.

Takeaways by Macro Roundup® AI

  1. JPMorgan estimated the fires around Los Angeles inflicted $50 billion in losses, of which only $20 billion were insured.
  2. Socializing risk weakens a main benefit of insurance — encouraging the insured to mitigate risk in order to reduce premiums — and without that price signal, modifying behavior usually requires direct intervention.
  3. Banks had to submit to far more stringent safety and soundness rules after being bailed out in 2008-09, and the same may be true of natural disasters, with society entitled to demand that the insured make homes more flood, wind and fire proof or stay out of disaster-prone areas.

Related Articles:

  • Reinsurers Little Exposed to LA Fires After Retreat From Disaster Risks — Citi analysts estimate reinsurers could absorb less than 3% of insured losses from the Los Angeles wildfires. Reinsurers' share of modelled catastrophe risk has fallen from about 46% over the past 25 years to 33%, following years of wildfire losses that led major reinsurers to reduce their appetite for such risks.
  • Growing Costs of Natural Disasters are Stressing Property Insurance Markets — U.S. home insurers posted $15.2bn in net underwriting losses, their worst performance since at least 2000, and are responding by raising premiums and withdrawing coverage. State "last-resort" public insurance plans, backed by a state's policyholders or taxpayers, reached a record of just over $1.3tn in exposure, signaling growing unavailability of private coverage.
  • Los Angeles Fires Become Existential Test for California’s Stopgap Insurer — California's largest property insurer declined to renew 72,000 home and apartment policies statewide, including 69% of policies in one Pacific Palisades ZIP code, pushing homeowners toward the state's FAIR Plan insurer of last resort, which listed $458bn in exposure against about $2.5bn in reinsurance and $200m in surplus cash.

AI Summary. People in their teens and twenties now socialize about as much as people 10 years older did in the past, with less partying accompanied by less sex and drinking. Trends in time spent alone closely parallel rising mental distress among the young but not the middle-aged or older.

John Burn-Murdoch Financial Times
Date Posted:

.@jburnmurdoch notes in the US and UK young people are spending about 2 hours more time alone per day in 2023 than in 2010. “Time spent alone is strongly associated with lower life satisfaction and even elevated mortality.”

Is less time socializing linked to worsening mental health among young people?

Core argument: People in their teens and twenties now hang out about as much as someone 10 years older did in the past, less a case of 30 being the new 20 than 20 being the new 30.

People in their teens and twenties now hang out about as much as someone 10 years older thanthey did in the past. Not so much a case of 30 being the new 20, as 20 being the new 30. Less hanging out and less partying means less sex and less drinking. Both are developments that have been welcomed by the public health community, but they mask a darker side. Trends in time spent alone are an almost exact parallel of trends in mental health, where rates of mental distress are mounting among the young, but not the middle-aged or older. A wealth of public health research suggests the two are not merely coincidental but causally linked. Time spent alone is strongly associated with lower life satisfaction and even elevated mortality.

Takeaways by Macro Roundup® AI

  1. People in their teens and twenties now hang out about as much as someone 10 years older did in the past, less a case of 30 being the new 20 than 20 being the new 30.
  2. Less hanging out and partying among the young means less sex and less drinking, developments welcomed by the public health community that mask a darker side.
  3. Trends in time spent alone almost exactly parallel trends in mental health, with rates of mental distress mounting among the young but not the middle-aged or older, and public health research suggests the two are causally linked.

Related Articles:

  • The Anti-Social Century — Americans spend less time with other people than in any period with reliable data back to 1965, with in-person socializing down more than 20% from 2003 to 2023 according to the Bureau of Labor Statistics' American Time Use Survey. Among unmarried men and people under 25, the decline exceeded 35%.
  • The Data is Clear: People Are Having Less Sex — Survey data show every age group now reports less frequent sexual activity than counterparts in earlier decades, with roughly an 8 percentage point decline across age groups. Among people around age 25, the share reporting sex at least monthly fell from over 80% to 72%, while the peak years remain ages 30 to 40.
  • Disconnected: The Growing Class Divide in American Civic Life — 17% of Americans report having no close friends, and survey data show a wide educational gap: 24% of those with a high school education or less have no close friends versus 10% of college graduates. Three decades ago, Americans with less formal education reported social circles at least as large.