April 12, 2024 | Read Online

Byron Gilliam

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"I've thought about it, but I have chosen not to participate."

- Sam Walton when asked for his thoughts on the recession in 1991

📈 Friday Participatory Charts

Macro did its best to make itself great again this week. Inflation threatened to inflect upwards, Treasury yields rose to year-to-date highs, oil hit a seven-month high and gold made new all-time highs.

Equities, however, barely budged.

That may be because companies keep telling us that business is so good that interest rates don't matter to them. When they can fund themselves from profits, the cost of borrowing is immaterial.

Even better, the news on the cost side might be just as good as the news on the revenue side — mostly because of AI.

It's so far been mostly an article of faith that AI will be productive for businesses, but evidence that it will be is mounting: The CEO of Google Cloud noted this week that "Customers have quickly gone from experimenting with generative AI [to] building generative AI agents."

That suggests that companies are finding productive uses for AI, but if "AI agents" is too abstract for you, consider this week's report from the WSJ that robots are being employed as butchers.

For many, this of course raises the specter of mass unemployment, but I don't think it should do — just the opposite.

A recent study on the effect of AI on employment concluded that "if automation proceeds sufficiently slowly, then there is always enough work for humans, and wages may rise forever."

Forever would be pretty good!

Helpfully, historical precedent suggests automation will indeed proceed slowly: The San Francisco MTA, for example, still runs on 5.25-inch floppy disks — and is expected to do so until at least 2030.

If floppy disks can make it to 2030, I think humans can stay employed until at least 2300.

People will worry, of course: A YouGov survey found that 54% of Americans are at least "cautious" about AI, with 15% being "very concerned" that AI will lead to the end of the human race.

I have thought about these concerns and am choosing not to participate — just like Sam Walton chose to not participate in recessions, and equities have chosen not to participate in the current macro scare.

I'm confident that, with both AI and economics, things are going to work out.

But we don't want to be accused of having our collective head in the sand — so let's participate in some charts.

Super concerning?

This week's sell-off in bonds was driven by a third straight month of higher-than-expected services inflation — supercore inflation (which excludes the non-services of energy, food and housing) makes it look like we've stopped disinflating and started inflating again.

What kind of services?

Auto insurance, for example, costs 22.2% more than it did one year ago, according to this week's data. That's largely because it's so expensive to replace all of the semiconductors, cameras and safety sensors that cars are now packed full of (and that didn't stop you from getting in a crash).

Higher for longer?

Concerns over persistent services inflation have two-year Treasury yields back to 5% — just 33 bips below the Fed funds rate.

It's not just the US:

In Japan, two-year yields are at a 15-year high (although that's still only 0.28%).

The next FOMC change might not be lower:

Our start-of-the-year expectation for six FOMC rate cuts (the blue line above) is down to just two (the black line) — and even that may be over-optimistic, with some forecasters now expecting the next change in rates to be up, not down.

The real significance of this chart, however, is how insignificant it's been for equities — you'd normally expect that magnitude of change in rate expectations to send stocks significantly lower, but we're less than 3% off the all-time highs.

Don't quit your day job (please):

The cyclically tight labor market that only the FOMC worries about may become a structural problem given the current demographic trend. People worry about robots and immigrants coming to take our jobs…I worry about them not coming to take our jobs.

Which jobs should we keep doing?

An IFS study cited by @timleunig suggests the economy would benefit from more economists and fewer creative artists. I'll do my part by trying to make this newsletter about economics less creative.

Less creative, more informative:

This chart is just market capitalizations, but it has most of what you need to know about markets this week: Optimism over AI has Alphabet and Amazon on the verge of joining Microsoft, Nvidia and Apple in the exclusive $2 trillion club.

Many will take that as evidence that markets are becoming irrationally exuberant — but I take it as evidence that markets are choosing not to participate in the macro doomerism and embracing AI economy instead.

Have a great weekend, Walmart shoppers.

― Byron Gilliam

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