Edward Conard

Top Ten New York Times Bestselling Author

  • “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
  • “…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 offers deep and well-argued analyses on almost every issue.” - The New York Times
  • “…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 must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “Unintended Consequences provides a provocative interpretation of the causes of the global financial crisis and the policies needed to return to rapid growth. Whether you agree or not, this analysis is well worth reading.” - Nouriel Roubini, New York University; Chairman, Roubini Global Economics
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Monday, August 10, 2026

AI Summary. Japan's consolidated public sector has liabilities of 255% of GDP, with asset purchases having shortened their duration and bank reserves at the Bank of Japan — floating-rate liabilities — worth 75.5% of GDP, down from 90.7%. Its largely unhedged 56%-of-GDP position in foreign securities and 50%-of-GDP equity holdings would take losses if the yen appreciates and real rates climb.

Hanno Lustig The Two Cents
Date Posted:

Japan’s public sector has “acted as the world’s largest currency carry trader,” borrowing short at below-market rates to buy foreign stocks and bonds unhedged. A rise in the Yen and/or Japanese rates would cause large losses on Tokyo’s balance sheet.

Is Japan's public balance sheet exposed to yen appreciation and rising rates?

Core argument: Japan's consolidated public sector has issued total liabilities worth 255% of GDP, and large-scale asset purchases have sharply shortened the duration of those liabilities.

The consolidated Japanese public sector has issued total liabilities worth 255% of GDP. The large-scale asset purchases have dramatically shortened the duration of those liabilities. Bank reserves held at the BoJ — floating-rate liabilities — are worth 75.5% of GDP in 2025Q3, down from 90.7% in early 2024. On the asset side, the public sector has a long position of 56% of GDP in foreign securities, largely unhedged. The massive depreciation of the JPY has provided a nice fiscal tail wind. As the BoJ raises short rates and lets the long end of the yield curve snap back, the appreciation of the JPY would cause large losses on the asset side. In addition, the public sector has another 50% of GDP invested in equities, long-duration assets that will be marked down as real rates climb.

Takeaways by Macro Roundup® AI

  1. Japan's consolidated public sector has issued total liabilities worth 255% of GDP, and large-scale asset purchases have sharply shortened the duration of those liabilities.
  2. Bank reserves held at the Bank of Japan, a floating-rate liability, stand at 75.5% of GDP in 2025Q3, down from 90.7% in early 2024.
  3. Japan's public sector holds a largely unhedged long position of 56% of GDP in foreign securities plus another 50% of GDP in equities, so yen appreciation and climbing real rates would generate large asset-side losses.

Related Articles:

  • Is Japan a Debt or a Currency Crisis? — Japan's 30-year government bond yield spiked after the prime minister pledged to end "excessive" fiscal austerity, and the New York Federal Reserve followed within days with a "rate check" in currency markets to damp yen depreciation pressure. The author argues this reaction indicates markets are worried about Japan's fiscal position rather than simply trading reflation.
  • Yen Intervention = US Self-Preservation — Japan's two traditional options for supporting a weak yen — much higher Japanese interest rates or large sales of dollars and US Treasuries — would both pressure US yields, as Japan holds about $1tn of Treasuries. US willingness to back Japan via its exchange stabilization fund and the Federal Reserve's international repo facility suggests officials see that risk.
  • Japan’s Debt Puzzle: Sovereign Wealth Fund from Borrowed Money — Japan's public sector operates as a highly leveraged sovereign wealth fund, funding risky assets by borrowing from banks and depositors at below-market rates, with returns sustaining its debt-to-GDP ratio above 200% without primary surpluses. The authors argue the resulting duration and currency mismatches expose Japan to mark-to-market losses that could trigger a fiscal crisis or a run on the yen.

AI Summary. Ten-year forward yields ten years ahead have risen across major advanced economies, not just the US, a global theme the author attributes to the debt buildup during the pandemic. The author argues economies have begun shifting from a good to a bad debt equilibrium, which he sees behind the rally in precious metals prices tied to a "debasement trade.

Robin Brooks Robin Brooks Substack
Date Posted:

Citing the growing number of fiscal “accidents,” from the 2022 collapse of the Truss government in the UK to ongoing depreciation pressure on the Yen, Brooks argues a global debt crisis is underway.

Are rising long-term yields a global story driven by pandemic debt?

Core argument: 10y10y forward yields have risen across key G10 economies, with the US not standing out, a pattern attributed to the global debt binge during the pandemic.

The chart shows 10y10y forward yields across key G10 economies. The US doesn’t even stand out in this perspective. Rising longer-term yields are a global theme and stem from the global debt binge that happened during the pandemic. There are multiple equilibria when it comes to debt, and it’s one of my big convictions that - in the years since the COVID pandemic - we’ve begun to shift from a good to a bad equilibrium. This is, in my opinion, why seemingly innocuous things like Powell’s dovish keynote speech at Jackson Hole a year ago sparked the absolutely insane rally in precious metals prices we saw last year. That “debasement trade” in my mind is all about markets seeing the writing on the wall when it comes to fiscal policy.

Takeaways by Macro Roundup® AI

  1. 10y10y forward yields have risen across key G10 economies, with the US not standing out, a pattern attributed to the global debt binge during the pandemic.
  2. The author argues that debt has multiple equilibria and that a shift from a good to a bad equilibrium has begun in the years since the COVID pandemic.
  3. The author attributes the rally in precious metals prices after Powell's dovish Jackson Hole keynote to a "debasement trade" reflecting markets' view of fiscal policy.

Related Articles:

  • Are Government Bonds Safe in Times of War and Pandemic? — Government bonds severely underperform in wartime, in absolute terms and relative to equities, housing, and economic growth, unlike in financial crises when bonds tend to outperform stocks. The U.S. and U.K. reduced war-driven debt-to-GDP ratios without explicit default, using surprise inflation and financial repression that shifted fiscal burdens onto bondholders.
  • Global Debt Report 2026 — Gross central government borrowing across OECD countries rose 7% to a record $17tn, about 23% of GDP, and is projected to reach roughly $18tn, or 24% of GDP. The United States and Japan account for close to 80% of the area's refinancing requirements, with the US share rising from 57% to 70%.
  • Across The Rich World, Fiscal Crises Loom — An analysis estimates most rich countries could keep debt stable as a share of their economies with only small primary surpluses—Britain's required surplus is 0.3% of GDP—even if all debt were refinanced immediately at current rates, but the tightening needed to stabilize debt ratios exceeds 2% of GDP in Britain and America and 3% in France.

AI Summary. In a guaranteed income experiment, the gap between participant income and total household income fell by roughly $1,700 per year, which the authors attribute to lower earnings among other household members. Net transfers to extended family rose by about $135 per year, while measures of household stability, decision-making, and division of labor clustered near zero.

Elizabeth Rhodes, David Broockman, Eva Vivalt, Patrick Krause, et al. National Bureau of Economic Research
Date Posted:
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In a randomized guaranteed-income experiment, giving one adult a transfer of $1,000/month for two years cut the other household members’ income by ~$1,700/year. Partners worked less and advanced less at work, while schooling and training among others rose.

How does guaranteed income affect other household members' earnings?

Core argument: In the guaranteed income experiment, the gap between participant income and total household income fell by about $1,700 per year (s.e. $800), a decline that appears to reflect lower earnings among other household members.

Figure 4 summarizes treatment effects on the standardized family-level indices. The transfers’ effects reshaped the income and employment of other household members. The gap between participant income and total household income fell by about $1,700 per year (s.e. $800). The decline appears to reflect lower earnings among other household members. Effects on employment outcomes are consistent with this interpretation. Partner promotions and transitions to better jobs decrease significantly, but these effects are very small in magnitude. Partner hours and employment show more meaningful declines but are not significant in the unconditional analysis. Several other measures provide supporting evidence of negative effects on labor supply. Net transfers—the value given [to extended family] minus the value received—increased by roughly $135 per year. Estimates for household stability, decision-making, and the division of labor cluster near zero.

Takeaways by Macro Roundup® AI

  1. In the guaranteed income experiment, the gap between participant income and total household income fell by about $1,700 per year (s.e. $800), a decline that appears to reflect lower earnings among other household members.
  2. Partner promotions and transitions to better jobs decreased significantly but were very small in magnitude, while partner hours and employment showed more meaningful declines that were not significant in the unconditional analysis.
  3. Net transfers to extended family—value given minus value received—rose by roughly $135 per year, while estimates for household stability, decision-making, and the division of labor cluster near zero.

Related Articles:

  • The Impact of Unconditional Cash Transfers on Parenting and Children — In a randomized trial, parents receiving $1,000 per month in unconditional cash for three years spent more on their children monthly and reported better parenting behaviors, such as closer supervision, than parents receiving $50 per month. The transfer had no meaningful effect on most educational outcomes, the home environment, child food security, homelessness, or parental satisfaction.
  • The Impact of Unconditional Cash Transfers on Consumption and Household Balance Sheets: Experimental Evidence from Two US States — In a randomized experiment giving 1,000 individuals $1,000 per month, the authors estimate spending rose in most categories, most for housing, food, and car expenses, along with increased housing moves. Debt rose steadily to $1,600 higher by the study's end, and estimated net worth effects turned to roughly -$2,800.
  • The Employment Effects of a Guaranteed Income: Experimental Evidence from Two U.S. States — In a randomized experiment, 1,000 low-income individuals received $1,000/month unconditionally for three years while a control group of 2,000 received $50/month, and the transfers reduced individual income excluding transfers by about $1,500/year. The authors find no significant effects on human capital investment and conclude the transfers produced a moderate labor supply reduction not offset by other productive activities.

AI Summary. Companies in the S&P 500 outside the technology sector are spending heavily on artificial intelligence without showing gains in profit margins, with health care margins halved since 2015, consumer staples near 6%, and consumer discretionary near 8%. So far the artificial intelligence capital spending boom appears in sellers' margins rather than buyers'.

Torsten Sløk Apollo
Date Posted:

To this point the AI buildout is only showing up in sellers’ margins, not the buyers’. Sløk warns that the “longer it takes the S&P 493 to generate ROI, the bigger the downside risks to an economy and a market this concentrated in the AI trade.”

Are AI buyers outside tech seeing any margin gains?

Core argument: Health care profit margins have halved since 2015, while consumer staples remain stuck near 6% and consumer discretionary near 8%, despite heavy AI spending across the S&P 493.

The S&P 493 is spending heavily on AI, but it is not showing up in profit margins. Looking at the individual sectors of the S&P 500 outside tech shows that the picture is flat, cyclical, or worse. Health care margins have halved since 2015; consumer staples are stuck near 6%, and consumer discretionary near 8%; energy and materials have given back most of their 2022-23 gains; real estate is going sideways; and the only genuine improvements look like an ordinary cyclical recovery rather than a technology-driven step change. The bottom line is that the AI capex boom is so far only showing up in the sellers' margins, not the buyers'.

Takeaways by Macro Roundup® AI

  1. Health care profit margins have halved since 2015, while consumer staples remain stuck near 6% and consumer discretionary near 8%, despite heavy AI spending across the S&P 493.
  2. Energy and materials have given back most of their 2022–23 margin gains and real estate is moving sideways, with the only genuine improvements outside tech resembling an ordinary cyclical recovery rather than a technology-driven step change.
  3. The AI capex boom is so far showing up only in the sellers' margins, not in the margins of the companies buying AI.

Related Articles:

  • The Summer I Turned Pretty — A warning sign in a boom cycle is when companies closest to final demand weaken while capital spending beneficiaries keep thriving, as when telecom operators' shares rolled over while communications equipment stocks kept rising. Semiconductor stock prices and free cash flow are soaring while large cloud providers' shares stagnate and their free cash flow plummets.
  • A Slower AI Payoff Would Be Everyone’s Problem — If artificial intelligence profits arrive later than expected, committed capital spending and depreciation would still hit on schedule, squeezing margins, stretching balance sheets toward more debt and possible ratings downgrades, and repricing equities. Because a handful of large technology firms dominate the indices, the author argues the damage would spread to chips, power, data centers and the broader market.
  • The Market Is Asking Questions — Markets are weighing whether the trillions committed upfront to AI data centers, chips, and power will generate returns above the cost of capital before those assets depreciate. With the buildout increasingly funded by debt rather than internal cash flow and borrowing spreads widening, financing costs could rise until new data-center spending no longer clears its return hurdle.

AI Summary. China cut crude oil imports by half, or 5.5m barrels a day, without a corresponding economic slowdown, a decline experts estimate shaved $30 or more off the global Brent benchmark price. This ability to switch oil demand on and off lets the world's largest oil importer move prices much as OPEC does through output control.

Economist Staff The Economist
Date Posted:

China cut crude imports by ~5.5mm b/d btw February and June, likely reducing Brent prices by ~$30. The scale of China’s oil reserves enabled the country to reduce imports without demand destruction.

Can the world's largest oil importer move prices like OPEC?

Core argument: China cut crude imports by half, or 5.5m b/d, between February and June, a drop experts reckon shaved $30 or more off Brent, the global benchmark.

Between February and June, China slashed its crude imports by half, or 5.5m b/d—enough, experts reckon, to have shaved $30 or more off Brent, the global benchmark. That is more than half of the worldwide decline during the covid-19 lockdowns, when global demand collapsed by 9m b/d. And in contrast to the pandemic, when the world economy slid into recession, China’s GDP has chugged along just fine. It has not been buying less foreign crude because its economy is suffering. This ability to turn oil demand on and off, ostensibly at low economic cost, allows the world’s biggest oil importer to move prices just as OPEC and its allies have long done through their control of half of global output. 

Takeaways by Macro Roundup® AI

  1. China cut crude imports by half, or 5.5m b/d, between February and June, a drop experts reckon shaved $30 or more off Brent, the global benchmark.
  2. China's 5.5m b/d import cut exceeds half of the worldwide 9m b/d demand collapse during covid-19 lockdowns, yet China's GDP has kept growing rather than sliding into recession.
  3. China's ability to turn oil demand on and off at ostensibly low economic cost lets the world's biggest oil importer move prices much as OPEC and its allies do through control of half of global output.

Related Articles:

  • China’s Energy Security Doesn’t Run Through Hormuz but Through the Electrification of Everything — China's energy security rests on coal rather than imported oil and gas: the country consumes more than half the world's coal, and coal powers its industry and electricity system. Coal consumption has risen since 2022, with roughly 95GW of new coal capacity added in one year, exceeding Vietnam's entire installed electricity capacity.
  • Fighting Words: The Energy Transition in 2026 — Estimates based on primary energy overstate how much electricity is needed to replace oil in passenger cars, since electric motors convert 80%-90% of electricity into motion versus about 18% for gasoline cars. Measuring useful final energy net of waste heat avoids this "primary energy fallacy": the US consumed 45 exajoules of useful final energy versus 95 exajoules of primary energy.
  • Power Politics: Energy Self-Sufficiency in a Modern Mercantilist World — China leads in adding power to the grid, with more than 30,000 miles of ultra-high-voltage transmission lines versus zero in the US and lead times for large transformers of 48 weeks against a US average of 143 weeks. This positions China to accommodate new demand sources such as artificial intelligence.

Tuesday, August 11, 2026

AI Summary. Across countries and over time, higher public debt burdens are associated with lower relative returns on government bonds, the opposite of standard risk-premium predictions. The authors estimate financial repression—making banks captive bond buyers and loading them with low-return reserves—contributed 90.7 percentage points of GDP to Britain's postwar debt reduction, versus 20.3 from surprise inflation.

Marijn Bolhuis, Jakree Koosakul, Neil Shenai, and Jie Yang International Monetary Fund
Date Posted:

Historically, sovereign yields fell relative to private returns as debt rose, driven by liquidity and portfolio rules creating captive buyers for government liabilities. Peaking in WWII, such financial repression may return as debt rises.

How do governments reduce high public debt burdens without inflation or surpluses?

Core argument: Financial repression contributed an estimated 90.7 percentage points of GDP to Britain's debt reduction in 1945–55, versus 20.3 points from surprise inflation and 3.9 points from primary surpluses.

Across countries and over time, higher public debt burdens are associated with lower relative returns on government bonds—the opposite of what standard risk premium models would predict (Figure 1a). At postwar peaks, relative yields fell to about −4% in Britain as debt neared 250% of GDP and −3% in the US; Japan later repeated the pattern (Figures 1b–d). Fiscal repression makes banks captive bond buyers; monetary repression places low-return reserves on their balance sheets (Table 1). Both indicators peaked after WWII, fell with liberalisation, and rose after the GFC (Figure 4). Repression contributed an estimated 90.7 percentage points of GDP to British debt reduction in 1945–55, versus 20.3 from surprise inflation and 3.9 from primary surpluses (Table 3; Figure 11). Cumulative savings averaged 9.8 points of GDP across advanced economies in 2008–20 (Table 3).

Takeaways by Macro Roundup® AI

  1. Financial repression contributed an estimated 90.7 percentage points of GDP to Britain's debt reduction in 1945–55, versus 20.3 points from surprise inflation and 3.9 points from primary surpluses.
  2. Higher public debt burdens are associated with lower relative returns on government bonds across countries and over time, the opposite of standard risk premium predictions, with postwar relative yields falling to about −4% in Britain as debt neared 250% of GDP and −3% in the US.
  3. Fiscal repression makes banks captive buyers of government bonds while monetary repression places low-return reserves on bank balance sheets; both indicators peaked after WWII, fell with liberalisation, and rose after the global financial crisis, with cumulative savings averaging 9.8 points of GDP across advanced economies in 2008–20.

Related Articles:

  • The United States Capital Structure — Because Social Security and Medicare benefits are politically untouchable, retirees effectively hold the most senior claim on US government resources while Treasury bondholders hold the riskiest one. On this argument, bondholders absorb adverse fiscal shocks through surprise inflation, financial repression, or both.
  • The Global Fiscal Train Wreck — Ten-year forward yields ten years ahead have risen across major advanced economies, not just the US, a global theme the author attributes to the debt buildup during the pandemic. The author argues economies have begun shifting from a good to a bad debt equilibrium, which he sees behind the rally in precious metals prices tied to a "debasement trade.
  • Fiscal Dominance and the Return of Zero-Interest Bank Reserve Requirements — Fiscal dominance requires governments to fund deficits at the margin with non-interest-bearing debt, and the revenue from inflation taxation—both expected and unexpected—is limited. The authors argue a US fiscal dominance episode could end the payment of interest on bank reserves and restore requirements that banks hold large zero-interest reserves against deposits.

AI Summary. The yen resumed its slide past 159 per dollar, erasing half the gain from the first coordinated US-Japan currency intervention since 1998. The move highlights the limits of intervention while the forces behind the yen's decline remain intact, including wide Japan-US interest-rate differentials, concerns over Japan's fiscal outlook, and geopolitical uncertainty.

Daniel Flatley and Anya Andrianova Bloomberg
Date Posted:

As the impact of the recent intervention recedes, Bloomberg reports on an analysis projecting that if the yen again depreciates back or beyond 160 per dollar, US and/or Japanese intervention will resume.

Can currency intervention reverse a falling yen when underlying pressures persist?

Core argument: The yen fell as much as 1% Monday to past 159 per dollar, erasing half the rally from the July 31 US-Japan intervention, which had lifted the currency near 155.

Japan’s currency slid as much as 1% Monday to past 159 per dollar, wiping out half the rally triggered by the July 31 US-Japan intervention. The exercise, the first coordinated effort since 1998, had lifted the currency near 155 before the retreat resumed. The currency moves highlight the limits of that mechanism in changing the yen’s broader trajectory when the forces behind its decline remain largely intact. Those forces include wide interest-rate differentials between Japan and the US, concerns over Japan’s fiscal outlook, and geopolitical uncertainty. The yen’s retreat on Monday came alongside a rise in the price of oil amid continuing tensions over Iran. Japan imports most of its energy, leaving it vulnerable to higher prices.

Takeaways by Macro Roundup® AI

  1. The yen fell as much as 1% Monday to past 159 per dollar, erasing half the rally from the July 31 US-Japan intervention, which had lifted the currency near 155.
  2. The July 31 operation was the first coordinated US-Japan currency intervention since 1998, and the yen's renewed retreat highlights the mechanism's limits while wide Japan-US interest-rate differentials, Japanese fiscal concerns, and geopolitical uncertainty remain largely intact.
  3. The yen's Monday decline coincided with rising oil prices amid continuing tensions over Iran, leaving Japan, which imports most of its energy, vulnerable to higher prices.

Related Articles:

  • The Carry Trade That Can’t Be Unwound — Japan's consolidated public sector has liabilities of 255% of GDP, with asset purchases having shortened their duration and bank reserves at the Bank of Japan — floating-rate liabilities — worth 75.5% of GDP, down from 90.7%. Its largely unhedged 56%-of-GDP position in foreign securities and 50%-of-GDP equity holdings would take losses if the yen appreciates and real rates climb.
  • The Global Fiscal Train Wreck — Ten-year forward yields ten years ahead have risen across major advanced economies, not just the US, a global theme the author attributes to the debt buildup during the pandemic. The author argues economies have begun shifting from a good to a bad debt equilibrium, which he sees behind the rally in precious metals prices tied to a "debasement trade.
  • Yen Intervention = US Self-Preservation — Japan's two traditional options for supporting a weak yen — much higher Japanese interest rates or large sales of dollars and US Treasuries — would both pressure US yields, as Japan holds about $1tn of Treasuries. US willingness to back Japan via its exchange stabilization fund and the Federal Reserve's international repo facility suggests officials see that risk.

AI Summary. Bank of America data show spending and wage growth have largely converged across income groups, narrowing the previously wide gap between higher- and lower-income households, though the top 5% of earners continue to outpace the rest. After-tax wage growth reached 5.2% year-over-year for lower-income and 4.2% for middle-income households.

David Michael Tinsley, Joe Wadford, Liz Everett Krisberg, Vanessa Cook, et al. Bank of America
Date Posted:
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Over the last two years, after-tax wage growth for the top 5% has outpaced the rest of the distribution. BofA internal data show after-tax wage growth for the lowest income tercile has surpassed that of the top 5% for the first time since December 2024.

Is the spending and wage gap between income groups narrowing?

Core argument: After-tax wage growth reached 5.2% YoY for lower-income households and 4.2% YoY for middle-income households in July, which the Consumer Checkpoint analysis views as one factor behind the narrowing spending growth gap across income cohorts.

We have discussed the “K-shaped” divide between higher- and lower-income households’ spending and wage growth. But since May, our data has shown a significant narrowing in this gap. As of July, spending and wage growth have largely converged across income cohorts, with the exception of the top 5% of earners, who continue to outpace the rest. A similar dynamic was evident in discretionary spending. In our view, one factor behind the narrowing spending growth gap is stronger after-tax wage growth. For lower- and middle-income households, after-tax wage growth rose to 5.2% YoY and 4.2% YoY, respectively, in July.

Takeaways by Macro Roundup® AI

  1. After-tax wage growth reached 5.2% YoY for lower-income households and 4.2% YoY for middle-income households in July, which the Consumer Checkpoint analysis views as one factor behind the narrowing spending growth gap across income cohorts.
  2. Data since May show a significant narrowing of the "K-shaped" divide in spending and wage growth, which had largely converged across income cohorts as of July.
  3. The top 5% of earners continue to outpace other income cohorts in spending and wage growth, with a similar pattern evident in discretionary spending.

Related Articles:

  • What the World Cup Revealed About America — About 73m US households hold retirement accounts, mostly defined-contribution plans whose balances have risen $6.7tn, and 45m households account for nearly $15tn in annual outlays, close to 3x Germany's economy and 70% of China's GDP. This group's spending has sustained faster growth than comparably wealthy economies.
  • K-Shaped Economy? — Available spending data does not support the narrative of a bifurcated "K-shaped" consumer economy: surveys show households earning under $50,000 reported spending growth of 5%, versus 4.6% for those earning over $100,000. Government data show the top income decile's share of aggregate spending at 22.8%, down from 23.4% a year earlier.
  • The Record Divide Between Corporate Profits and Worker Pay — Labor's share of gross domestic income fell to 51%, the lowest since records began in 1947, while profits' share rose to 12.1%, the highest since 1950. Inflation-adjusted hourly wages are up 3% since the end of 2019, compared with a 50% rise in profits.

AI Summary. Free cash flow at large technology companies is deteriorating rapidly as data-center spending absorbs it, even as the rest of the corporate sector generates more cash. Across the S&P 500, earnings per share have risen much faster than free cash flow over a protracted stretch, raising questions about how quickly artificial-intelligence capital spending will turn into profits.

John Authers Bloomberg
Date Posted:

As the Mag 7’s free cash flow has turned negative, that of the S&P 500 net the Mag 7 has ticked up since the start of the year.

Is data-center spending eroding big tech's free cash flow?

Core argument: Tech companies' free cash flow is deteriorating at an unprecedented pace as data centre spending consumes it, even as the rest of the corporate sector generates more cash.

Questions are mounting over how quickly the capex ploughing into AI will translate into profitability, but tech’s earnings growth is still impressive — it’s just that the cost of that investment is increasingly hard to ignore. Their free cash flow is deteriorating at an unprecedented pace as spending on data centres gobbles it up, even as the rest of the corporate sector generates more cash. The numbers for the overall S&P 500, as shown by Bloomberg’s Graph Fundamentals function, confirm a protracted run in which earnings per share have risen much faster than free cash flow. This started after companies had made big pandemic cost cuts and then went into overdrive after the arrival of ChatGPT.

Takeaways by Macro Roundup® AI

  1. Tech companies' free cash flow is deteriorating at an unprecedented pace as data centre spending consumes it, even as the rest of the corporate sector generates more cash.
  2. S&P 500 earnings per share have risen much faster than free cash flow in a protracted run, as shown by Bloomberg's Graph Fundamentals function.
  3. The divergence between S&P 500 earnings per share and free cash flow began after companies made big pandemic cost cuts and went into overdrive after the arrival of ChatGPT.

Related Articles:

  • The Buyers of AI Are Still Waiting for the Payoff — Companies in the S&P 500 outside the technology sector are spending heavily on artificial intelligence without showing gains in profit margins, with health care margins halved since 2015, consumer staples near 6%, and consumer discretionary near 8%. So far the artificial intelligence capital spending boom appears in sellers' margins rather than buyers'.
  • The Summer I Turned Pretty — A warning sign in a boom cycle is when companies closest to final demand weaken while capital spending beneficiaries keep thriving, as when telecom operators' shares rolled over while communications equipment stocks kept rising. Semiconductor stock prices and free cash flow are soaring while large cloud providers' shares stagnate and their free cash flow plummets.
  • A Slower AI Payoff Would Be Everyone’s Problem — If artificial intelligence profits arrive later than expected, committed capital spending and depreciation would still hit on schedule, squeezing margins, stretching balance sheets toward more debt and possible ratings downgrades, and repricing equities. Because a handful of large technology firms dominate the indices, the author argues the damage would spread to chips, power, data centers and the broader market.

AI Summary. Anthropic, an artificial-intelligence company valued at $965bn, faces investors taking a more critical look at its business as it approaches a public listing. Company executives have played down Chinese competition, arguing that most users want the most capable models available and that Chinese systems trail top models by at least a few months.

Berber Jin, Corrie Driebusch and Kate Clark Wall Street Journal
Date Posted:

Anthropic is meeting with investors ahead of a planned IPO in September or early October. The firm has downplayed the potential impact of Chinese competition, arguing “most users want the most intelligent AI systems available at any given time.”

Does Chinese competition threaten a leading AI company's valuation?

Core argument: Anthropic, valued at $965 billion, faces fresh challenges ahead of its planned IPO that are leading investors to take a more critical look at its business.

The $965 billion artificial-intelligence juggernaut is staring down a host of fresh challenges that are leading investors to take a more critical look at the company’s business. Company executives have played down the impact of Chinese competition in meetings, telling investors that Anthropic is hyperfocused on offering cutting-edge AI models, the people said. Chief Executive Dario Amodei and other top U.S. AI leaders have publicly said that most users want the most intelligent AI systems available at any given time, suggesting that Chinese systems are less of a threat since their capabilities generally trail those of top AI models by at least a few months.

Takeaways by Macro Roundup® AI

  1. Anthropic, valued at $965 billion, faces fresh challenges ahead of its planned IPO that are leading investors to take a more critical look at its business.
  2. Anthropic executives have played down the impact of Chinese competition in investor meetings, saying the company is hyperfocused on offering cutting-edge AI models.
  3. Anthropic Chief Executive Dario Amodei and other top U.S. AI leaders have publicly said most users want the most intelligent AI systems available at any given time, with Chinese systems' capabilities generally trailing top AI models by at least a few months.

Related Articles:

  • They’re Shooting at Everyone!: The Yossarian Effect in Capital Markets — A concentrated set of highly correlated assets financed with 3-4x leverage meant a large move in one part of the market forced selling elsewhere. Funds holding no idle cash sold liquid winners such as semiconductors and other artificial intelligence names to fund SpaceX purchases, with index inclusion triggering further forced reallocation.
  • The Summer I Turned Pretty — A warning sign in a boom cycle is when companies closest to final demand weaken while capital spending beneficiaries keep thriving, as when telecom operators' shares rolled over while communications equipment stocks kept rising. Semiconductor stock prices and free cash flow are soaring while large cloud providers' shares stagnate and their free cash flow plummets.
  • OpenAI Leans Toward Waiting Until Next Year for I.P.O. — OpenAI is leaning toward delaying its initial public offering until next year, according to people involved in the company's deliberations. Advisers have cautioned that retail investor enthusiasm may be limited, following a decline in SpaceX's stock after its public offering and choppy markets in which technology stocks have dragged down indexes.