Edward Conard

Top Ten New York Times Bestselling Author

  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “Unintended Consequences should be read by anyone who takes for granted the superiority of progressive taxation and has not thought carefully about the trade-offs involved.” - The New Republic
  • “There are an amazing number of good ideas and interesting points made in Unintended Consequences. The thinking underlying it, and the obvious depth of understanding of the author, are very impressive.” - Steven Levitt, coauthor of Freakonomics; 2004 John Bates Clark Medal
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “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 full-throated defense of economic dynamism.” - The Wall Street Journal
  • “…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
  • “Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
Upside of Inequality Oxford Unintended Consequences

AI Summary. Historically, controlling for valuations, a 1% rise in the share of the market represented by initial public offerings has been associated with roughly a 4% decline in prices. With large artificial-intelligence company listings expected and share issuance exceeding buybacks, equity supply could shift from shrinking about 1% a year to growing near 5%, implying returns roughly 20% below average.

Ben Inker and John Pease GMO
Date Posted:

GMO estimates net US equity supply could increase by ~5% or more of total market capitalization over the next year. Inker and Pease note that in 1999–2000, “IPOs peaked at ~5% of total market cap. It doesn’t take much new supply to overwhelm the market.”

How does rising equity supply from new listings affect stock returns?

Core argument: Controlling for valuations, a 1% increase in the market share of IPOs has historically led to an approximate 4% decrease in prices, a multiplier the author applies to a coming surge in equity supply.

Controlling for valuations, a 1% increase in the market share of IPOs has historically led to an approximate 4% decrease in prices [Exhibit 2 in gallery]. Consider what is happening to equity supply. SpaceX’s non-Elon sales alone exceed 1% of the U.S. stock market’s value. We are likely to see IPOs from both Anthropic and OpenAI—together valued at about 5% of the U.S. stock market’s total investable market cap —over the next 12 months. For the first time in twenty years, with the brief exception of the GFC, we are seeing net dilution in the U.S. stock market (i.e., share issuance exceeding share buybacks), as the hyperscalers continue their capital expenditure spree. In aggregate, we are going from a world where equity supply was shrinking by roughly 1% per annum (with buybacks exceeding primary or secondary issuance) to one in which equity supply will be increasing by close to 5%, if not more. If you believe the 4x multiplier [implied by the regression line in Exhibit 2], this means we should expect returns that are some 20% below average (roughly 6% real) over the next 12–18 months from the headwind of rising equity supply alone.

Takeaways by Macro Roundup® AI

  1. Controlling for valuations, a 1% increase in the market share of IPOs has historically led to an approximate 4% decrease in prices, a multiplier the author applies to a coming surge in equity supply.
  2. U.S. equity supply is shifting from shrinking roughly 1% a year, with buybacks exceeding issuance, to growing close to 5% or more, the first net dilution in twenty years apart from the Global Financial Crisis.
  3. Anthropic and OpenAI, together valued at about 5% of U.S. investable market cap, are likely to go public within 12 months, while SpaceX’s non-Elon sales alone exceed 1% of the U.S. stock market’s value.

Related Articles:

  • Momentum, Rotation and the Value in Growth — After a fifteen-year stretch in which US equities, technology and growth stocks led, equity gains have broadened geographically, with the US the weakest of the major regions. The five largest US stocks now trade at a price-to-earnings ratio only marginally above the other 495, after holding a consistent premium since 2017.
  • SpaceX and OpenAI Are Ending Wall Street’s Era of Stock Scarcity — JPMorgan projects that share sales will add roughly $1.5tn of stock to the US equity market over the next two years even after buybacks, which would be the strongest net equity issuance since at least the late 1990s. Equity has grown cheaper relative to debt as a funding source.
  • One Hundred Years in the U.S. Stock Markets — Over a century, U.S. publicly traded stocks generated roughly $91tn in shareholder wealth enhancement, with returns strongly positively skewed and dominated by a relatively small number of high-performing firms. Because most possible outcomes fall below the mean in a skewed distribution, the authors argue financial planning should focus on median outcomes or the full distribution.
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