“…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
“…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
“A full-throated defense of economic dynamism.” - The Wall Street Journal
“…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
“…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
“Unintended Consequences represents the most cogent and persuasive analysis of the Financial Crisis to date.” - Andrei Shleifer, 1999 John Bates Clark Medal Winner
“…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
“…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
“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
“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
“…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 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
Analysis of expansions, slowdowns, recessions, recoveries, and the indicators that reveal turning points in economic activity. Coverage connects output, demand, profits, employment, investment, credit, and policy across the business cycle.
AI Summary.Countries that become dependent on increasingly uneconomic investment have found adjustment difficult, as in Japan, where average GDP growth fell from about 5% to under 1% after 1991 and its share of global manufacturing fell by nearly 60%. Rebalancing requires a larger role for consumption, and absent a sharp rise in consumption growth, it occurs through slower production growth.
Michael PettisChina Financial Markets
Date Posted:
Pettis argues that China faces the same dilemma as Japan after 1991: reducing uneconomic investment requires consumption to become a larger source of demand. But raising household income may undermine manufacturing competitiveness, while China’s higher debt limits its ability to cushion the adjustment.
How costly is rebalancing away from dependence on uneconomic investment?
Core argument: Japan’s average GDP growth fell from around 5% in the decade before 1991 to under 1% in the decade after, while its share of global GDP fell by nearly half between 1991 and 2008.
Every country that has become excessively dependent on increasingly uneconomic investment has found it difficult to begin an adjustment that its leaders knew was necessary. Japan in the 1980s, Brazil in the 1970s, and the Soviet Union in the 1960s all faced versions of this problem. The Japanese experience shows how costly that adjustment can be. Rebalancing meant for Japan, and means for China, increasing the role of consumption in driving GDP growth, and if an economy cannot rebalance through a sharp increase in consumption growth – and historical precedents suggest that this is extremely unlikely – it must, almost by definition, rebalance through slower growth in production. This is especially difficult when the international competitiveness of manufacturing depends on the same distribution of income that constrains consumption. Raising the role of consumption, in that case, requires raising household income relative to production, but this automatically reduces the cost advantages on which manufacturing depends.
Takeaways by Macro Roundup® AI
Japan’s average GDP growth fell from around 5% in the decade before 1991 to under 1% in the decade after, while its share of global GDP fell by nearly half between 1991 and 2008.
Japan’s share of global manufacturing fell by nearly 60% over the broader period, illustrating how costly adjustment can be for an economy dependent on increasingly uneconomic investment.
Rebalancing means raising consumption’s role in driving GDP growth, and since historical precedents suggest a sharp increase in consumption growth is extremely unlikely, China would rebalance through slower growth in production.
Related Articles:
Two Asian Giants, One Economic Trap— China's combined public and private debt is estimated at about 300% of GDP, and an updated "Japanisation" index indicates China has scored as more Japanised than Japan for the past five years. Analysts attribute the 1.7% yield on 10-year Chinese government bonds to weak credit demand, with investors parking cash in government debt.
Why Global Imbalances Matter— Countries running persistent trade surpluses, such as China, Germany and Japan, have built their economies around an excess supply of tradeable goods and services, leaving them dependent on deficit countries to absorb it. That dependence gives deficit countries bargaining power and exposes surplus countries to pressure to expand domestic demand.
Is China’s High-Quality Investment Output Economically Viable?— China's technological progress and infrastructure do not refute claims of overinvestment, since overinvestment often produces real physical assets and technological gains yet still counts as overinvestment when it generates less real value than the resources, subsidies, and transfers it consumes. When such losses are capitalized, assets are carried above their real economic value.
AI Summary.China's leadership interprets weak consumption, slow household income growth, rising unemployment, persistent deflation, and growing external surpluses as acceptable costs of a development model that equates growth with capital accumulation and technology deployment. In this view, higher wages, consumption, and services follow naturally once productive industries mature.
Oliver Melton and Logan WrightForeign Affairs
Date Posted:
Oliver Melton and Logan Wright note that Zhongnanhai’s push to expand production amid weak consumer demand is entrenching deflation. The current leadership, they argue, views some deflation as a feature of “hard-won efficiency gains” and is not concerned about growing reliance on foreign demand.
Does China view weak consumption and deflation as acceptable development costs?
Core argument: China’s leadership sees the same data—rising external surpluses, weak consumption, slower household income growth, weak credit demand, rising unemployment and underemployment, and persistent deflation—but draws different conclusions about what these developments indicate and what Beijing should do in response.
The party is sticking to this path because the leadership believes it is working. It sees the same troubling data—including rising external surpluses, weak consumption, slower household income growth, weak credit demand, rising unemployment and underemployment, and persistent deflation—but it has reached wildly different conclusions about what these developments indicate and what Beijing should do in response. China’s worldview treats development as equivalent to capital accumulation and sees productivity as determined by the control and deployment of technology. It posits that the growth of the service sector, higher wages, and higher consumption are the consequences of that physical underlying foundation—they follow naturally in later stages of the development process once the productive industries have flourished. The resulting structural imbalance that weakens household income growth, the service sector, and public services was thus not an accident; in China’s economic development theory, this is seen as self-discipline that will pay off with more rapid long-term development.
Takeaways by Macro Roundup® AI
China’s leadership sees the same data—rising external surpluses, weak consumption, slower household income growth, weak credit demand, rising unemployment and underemployment, and persistent deflation—but draws different conclusions about what these developments indicate and what Beijing should do in response.
China’s economic worldview treats development as equivalent to capital accumulation and productivity as determined by the control and deployment of technology, with service-sector growth, higher wages, and higher consumption following once productive industries have flourished.
The structural imbalance weakening household income growth, the service sector, and public services is treated in China’s economic development theory not as an accident but as self-discipline that will pay off with more rapid long-term development.
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The Future, Made In China— China's economy runs on parallel tracks: a property crash, a booming high-tech manufacturing sector, and university graduates trained for traditional white-collar jobs entering a labor market geared toward advanced manufacturing. Researchers at Stanford and Harvard found a swing from optimism to pessimism, with about 28% of citizens expecting living standards to improve.
China Sees Nearly 10% Decline In Marriages in 2026 So Far, Foreshadowing Lower Birth Rate— China recorded 4.648m marriage registrations in the first nine months of the year, down 504,000 from a year earlier, a nearly 10% decline that points to a full-year drop. Marriages peaked at 13.469m in 2013 and have generally trended downward since, with divorce registrations at 2.082m.
The Year of the Trojan Fire Horse: China’s Imbalanced Economy and Unrelenting Mercantilism— About 30% of Chinese industrial companies are unprofitable "zombies" kept alive by subsidies far larger than those elsewhere, rather than exiting amid falling industrial producer prices. Countries with large increases in manufactured imports from China also saw slowdowns in domestic manufacturing, including declining manufacturing shares of output across most of Southeast Asia.
AI Summary.An opinion essay argues that a burst artificial intelligence investment bubble would cause a recession followed by a slow, jobless recovery, as recessions driven by private-sector overreach respond poorly to monetary stimulus. It contends a 4% federal funds rate and political gridlock limit both monetary and fiscal responses.
Paul KrugmanKrugman Wonks Out
Date Posted:
Through the early 1980s, US recessions were effectively engineered by the Fed to curb inflation. Later recessions reflected private-sector overreach; two of the three followed burst bubbles, and recoveries were slow because rate cuts are less able to revive spending after a bust. Monetary policy may thus be ill-suited to offset a collapse of the AI bubble.
How would an AI investment bust affect recession and recovery?
Core argument: Paul Krugman cites Bernstein and Cummings’ estimate that an AI bust would deliver a negative shock three times larger than the dot-com bust, noting AI-related tech spending and stock market valuations as shares of GDP exceed 1990s boom levels.
The Nixon, Ford, and Volcker recessions resulted from deliberate Fed tightening to curb high inflation, pushing interest rates to very high levels. Since the 1980s, however, inflation has been much less of a problem. Why, then, have recessions continued? Because of private-sector overreach: overenthusiastic companies and lenders taking excessive risks. The 1990–91 recession followed overinvestment in commercial real estate, fueled by runaway lending by newly (and disastrously) deregulated S&Ls. The 2001 recession followed the collapse of the 1990s tech bubble. The 2007–09 recession, the worst since the Depression, followed the bursting of a housing bubble fueled by effectively unregulated “shadow banks.” If another recession comes soon, AI-industry overreach may be responsible. Tight-money recessions are easy to end: the Fed can simply lower rates and loosen credit. But after a burst bubble, lower rates may not revive borrowing and spending, even before rates hit zero [though in two of the three busts rates did indeed hit zero]. Fiscal stimulus is a heavier lift.
Takeaways by Macro Roundup® AI
Paul Krugman cites Bernstein and Cummings’ estimate that an AI bust would deliver a negative shock three times larger than the dot-com bust, noting AI-related tech spending and stock market valuations as shares of GDP exceed 1990s boom levels.
Krugman argues that recessions caused by private-sector overreach (1990–91, 2001, 2007–09) produce prolonged jobless recoveries, unlike the V-shaped rebounds after Fed tight-money recessions (1969–70, 1973–75, 1980–82), and places an AI bust in the second category.
Krugman states that the 4% federal funds rate limits the monetary response compared with the dot-com bust, when the Fed cut rates 5.5 percentage points from 6.5% to 1%, while political gridlock forecloses fiscal stimulus for at least two years.
Related Articles:
Change Is Accelerating Because It’s All Interconnected— The authors estimate that artificial intelligence equity valuations discount roughly 3.5% annual productivity growth and trend nominal output growth well above the recent past, while consensus forecasts and broader markets imply growth closer to recent experience. On that basis, either AI stocks or broader macro markets are meaningfully mispriced.
Financing the AI Buildout— The authors estimate roughly 57 gigawatts of operating US data center capacity against a planned development pipeline of about 509 gigawatts, which is not a completion forecast since projects may be delayed, scaled back, or abandoned. Their central scenario has 182.8 gigawatts of added capacity becoming operational through 2032, 117.2 gigawatts completed later, and 226.9 gigawatts never completed.
US Labor Productivity Increases at Fastest Pace in a Year— US labor productivity, measured as nonfarm business output per hour, rose at a 3.6% annualized rate, up from an upwardly revised 2.1% pace, while unit labor costs fell 0.7%. The acceleration suggests a capital spending boom is translating into greater efficiency, according to Bureau of Labor Statistics data.
AI Summary.The author argues the AI boom's economic significance lies more in stock market gains than in data center construction, and that the inability to monetize AI investments could end the boom. Simulations using the Federal Reserve's FRB/US model suggest that an end to the buildout plus a roughly 30% market decline would slow growth to about 1.5%, short of recession.
Jason FurmanEconvitals
Date Posted:
Furman estimates that the data-center buildout, which began in mid-2024, had raised US GDP by only ~0.3% by 2026Q3, as the equipment is largely imported and the US was already near full employment. Counting AI-driven stock market gains, the effect rises to ~0.6%. If the buildout ended and stocks fell ~30%, growth would slow to ~1.5%.
How would an end to the AI boom affect growth?
Core argument: If the AI data center buildout ended and the stock market fell about 30%, the FRB/US model predicts growth would slow to roughly 1½ percent, short of even a shallow recession.
The data center buildout is set to be among the largest investment expansions in peacetime American history. How different is our economy today because of it? The answer, based on a simulation using the large-scale macroeconomic model used by the Federal Reserve (FRB/US), is not much. The buildout by itself has raised GDP by only about 0.3%, because most of the investment is imported, and imports do not add to U.S. GDP or lower the unemployment rate. The stock market boom that came with it matters more—together they have raised GDP by about 0.6% and lowered the unemployment rate by about 0.3 percentage point.This analysis suggests that the economy could survive less data center buildout just fine. Investment would fall, but so would imports and interest rates, and GDP would be little changed. A broader fall in the stock market would be a bigger deal, The bottom line: so far the AI economy is less a story about data centers than about the stock market—and that is also where the risk is.
Takeaways by Macro Roundup® AI
If the AI data center buildout ended and the stock market fell about 30%, the FRB/US model predicts growth would slow to roughly 1½ percent, short of even a shallow recession.
The economy could withstand less data center buildout, making the AI economy so far less a story about data centers than about the stock market, which is also where the risk lies.
Public policy changes or an inability to monetize AI investments could stop the AI boom, and financial-system complexities such as unwinding leverage, absent from the FRB/US model, pose a tail risk resembling 2001 more than 2007–09.
Related Articles:
Change Is Accelerating Because It’s All Interconnected— The authors estimate that artificial intelligence equity valuations discount roughly 3.5% annual productivity growth and trend nominal output growth well above the recent past, while consensus forecasts and broader markets imply growth closer to recent experience. On that basis, either AI stocks or broader macro markets are meaningfully mispriced.
The S&P 500 And Cembalest’s “AI Universe” After The Midterms— An "AI universe" index of 42 stocks groups companies into three categories: 28 direct AI firms including NVIDIA, Microsoft, Alphabet, Amazon, Meta and Broadcom; 8 AI-linked utilities such as Vistra, NextEra and Constellation; and 6 capital equipment makers including Eaton, Quanta and GE Vernova.
US Labor Productivity Increases at Fastest Pace in a Year— US labor productivity, measured as nonfarm business output per hour, rose at a 3.6% annualized rate, up from an upwardly revised 2.1% pace, while unit labor costs fell 0.7%. The acceleration suggests a capital spending boom is translating into greater efficiency, according to Bureau of Labor Statistics data.
AI Summary.European and Asian buyers pay over $30 per million British thermal units for natural gas while US buyers pay around $3 and Canadian buyers about $1.5, a roughly 12x gap that is the widest on record. US liquefied natural gas exports have not been enough to fully link the domestic market to global prices.
Javier BlasBloomberg
Date Posted:
Is Database:
Database
The price of natural gas in Western Europe and Japan is now a record 12x that of the North American price, as the shale revolution and ample domestic reserves shield North American gas consumers from the fallout of the Iran war.
How wide is the gap between US and overseas gas prices?
Core argument: European and Asian gas buyers pay north of $30 per mBtu while US buyers pay around $3 and Canadian buyers about $1.5, a gap reaching a ratio of 12 times.
While European and Asian consumers are now paying north of $30 per million British thermal unit for their gas, US buyers pay around $3 per mBtu. Last week, US gas prices briefly touched a two-year low of $2.5 per mBut — in the middle of an energy crisis. Canadian costs are even lower, at about $1.5 per mBtu. The price difference between gas in Europe and Asia versus North America, reaching now a ratio of 12 times, has never been wider; not during the 2022 gas shock following the Russian invasion of Ukraine, nor in 2011-2012 after the Fukushima nuclear accident. Today, the US is exporting huge amounts of gas as LNG. But even that isn’t enough to fully connect its domestic market to the global one. As such, America is making a double profit: First, it enjoys ultra-low gas prices; second, it’s paid enormous sums for its exports.
Takeaways by Macro Roundup® AI
European and Asian gas buyers pay north of $30 per mBtu while US buyers pay around $3 and Canadian buyers about $1.5, a gap reaching a ratio of 12 times.
The price gap between European and Asian gas and North American gas has never been wider, exceeding the spreads during the 2022 shock after Russia’s invasion of Ukraine and in 2011–2012 after the Fukushima accident pushed Japan toward gas.
US gas prices briefly touched a two-year low of $2.5 per mBtu, and large LNG exports have not fully connected the domestic market to the global one, leaving America with low domestic prices and large export earnings.
Related Articles:
U.S. Economy Less Vulnerable To Geopolitical Oil Price Shocks Than In The Past— The United States became a net oil exporter in late 2019, and oil and oil product spending fell from near 8% of GDP in 1980 to 3% in 2024. The authors estimate a 15% global oil supply disruption would now cut annualized U.S. real GDP growth by 0.3pp, versus 1.7pp in the rest of the world.
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.
AI Summary.U.S. crude oil production rose from about 5m barrels per day in the late 2000s to nearly 14m by 2025, turning the country from a major petroleum importer into a net exporter. The authors estimate that adverse oil supply news shocks, which once contracted industrial production, now expand it.
Diego Känzig, James Stock and Luca ZanottiNational Bureau of Economic Research
Date Posted:
The US shifted from a large net oil importer to a net exporter around 2010. Computing separate impulse responses pre-and post-2010, Känzig, et al find that adverse global oil-supply news switches from reducing US industrial production to raising it by a similar magnitude.
Has becoming a net oil exporter reversed how supply shocks affect output?
Core argument: Before 2010, an adverse oil supply news shock produced a persistent contraction in U.S. industrial production of roughly -0.6 percent after a year, while from 2010 onward the point estimate turns positive over most horizons and peaks near +1 percent.
As Figure 2 shows, U.S. crude oil production rose from roughly 5 million barrels per day in the late 2000s to almost 14 million barrels per day by 2025. Over the same period, net imports of crude oil and petroleum products fell steeply and turned negative in 2019. The United States thereby went from being one of the world’s largest petroleum importers to a net petroleum exporter. We examine whether the U.S. response to oil supply news shocks differs in the post-shale period by allowing the impulse responses to change from January 2010 onward. Figure 7 reports the results. Before 2010, an adverse oil supply news shock produced a persistent contraction in industrial production, reaching roughly -0.6 percent after a year. From 2010 onward, the point estimate instead becomes positive over most horizons and reaches almost +1 percent at its peak. Both the pre-2010 contraction and the post-2010 expansion are economically large and statistically significant over a range of horizons. This contrast mirrors the evidence from the time-varying VAR.
Takeaways by Macro Roundup® AI
Before 2010, an adverse oil supply news shock produced a persistent contraction in U.S. industrial production of roughly -0.6 percent after a year, while from 2010 onward the point estimate turns positive over most horizons and peaks near +1 percent.
U.S. crude oil production rose from roughly 5 million barrels per day in the late 2000s to almost 14 million barrels per day by 2025, with net imports of crude oil and petroleum products turning negative in 2019.
The pre-2010 contraction and the post-2010 expansion in U.S. industrial production following oil supply news shocks are both economically large and statistically significant over a range of horizons, mirroring evidence from a time-varying VAR.
Related Articles:
U.S. Economy Less Vulnerable To Geopolitical Oil Price Shocks Than In The Past— The United States became a net oil exporter in late 2019, and oil and oil product spending fell from near 8% of GDP in 1980 to 3% in 2024. The authors estimate a 15% global oil supply disruption would now cut annualized U.S. real GDP growth by 0.3pp, versus 1.7pp in the rest of the world.
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.
AI Summary.The author argues that a slowdown in artificial-intelligence capital spending would remove a stimulus that has been masking weakness, colliding with overcapacity, falling prices, refinancing needs and weaker labor income. On this view the main risk is deflationary, transmitting through investment, employment, consumption, credit, housing and asset prices at once.
Paul KedroskyApplied Complexity
Date Posted:
Kedrosky argues that the “inevitable transition” from the current inflationary AI-buildout regime to a new regime in which AI-driven productivity gains exert deflationary pressure is “where the real macro risk lies.”
Would an AI spending slowdown create deflationary rather than inflationary risk?
Core argument: The author argues the dangerous phase arrives when the AI capex boom slows, removing stimulus just as overcapacity, falling prices, refinancing needs and weaker labor income hit together, with a refinancing wall waiting in 2028.
If AI investment has been masking underlying weakness, a slowdown removes the stimulus just as overcapacity, falling prices, refinancing needs and weaker labor income hit together. A refinancing wall sits waiting in 2028. Failure is over-determined. This moment sits at the intersection of the four forces that have produced the most consequential boom-bust cycles in Western economic history: loose credit, government policy, technology, and real estate. There are, as a result, myriad catalysts, each with a low probability of happening, but which collectively guarantee collapse. That is why the principal risk is deflationary rather than inflationary. An AI bust could transmit through capex, employment, consumption, credit, housing, and asset prices simultaneously.
Takeaways by Macro Roundup® AI
The author argues the dangerous phase arrives when the AI capex boom slows, removing stimulus just as overcapacity, falling prices, refinancing needs and weaker labor income hit together, with a refinancing wall waiting in 2028.
The principal risk from an AI bust is deflationary rather than inflationary, according to the author, because it could transmit simultaneously through capex, employment, consumption, credit, housing, and asset prices.
The author places this moment at the intersection of loose credit, government policy, technology, and real estate — the four forces behind the most consequential boom-bust cycles in Western economic history — and sees a plausible decade of Japan-style balance recession with fiscal stimulus constrained by massive deficits.
Related Articles:
Financing the AI Buildout— The authors estimate roughly 57 gigawatts of operating US data center capacity against a planned development pipeline of about 509 gigawatts, which is not a completion forecast since projects may be delayed, scaled back, or abandoned. Their central scenario has 182.8 gigawatts of added capacity becoming operational through 2032, 117.2 gigawatts completed later, and 226.9 gigawatts never completed.
A Catalyst For The AI Bubble Break— 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.
AI Set to be Largest CapEx Cycle Ever … and Soon Majority Externally Financed— Hyperscaler and data-center investment is tracking toward $1.5tn annually by 2030, which in real terms would exceed the 2005-06 housing boom, the 1990s fiber peak, and the 1882 railroad peak combined. External debt and equity are projected to fund close to 90% of the buildout, making it dependent on credit markets.
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 PeaseGMO
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
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.
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.
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.
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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.
