An Expensive Speech

Fed Chair Jay Powell's Jackson Hole speech yesterday was just 8-minutes long, but it packed quite a punch. After hiking Fed Funds rate by 75 bps in June and July, Powell tried to mollify investors with some unscripted soothing comments when he said, "the central bank had already reached a “neutral” setting -- where it’s neither stoking nor restraining consumer prices." Mind you the Fed Funds rate was only up to 2.25% while inflation was running at 8.5%. Larry Summers for one, called the comments "indefensible." But the markets loved Powell's words and interpreted it as a "pivot" to more dovish rate moves (i.e., reinstatement of the Fed put), extending a ferocious rally. Between June 16th and August 15th, the S&P 500 and NASDAQ gained 17.2% and 23.3%, respectively. 

However, Powell seemed to put an end to that nonsense this afternoon, when he reiterated that restoring price stability was Fed' #1 priority and that "will likely require maintaining a restrictive policy stance for some time.” And just for good measure, if there was any doubt, he pointedly reminded investors that “the historical record cautions strongly against prematurely loosening policy.” Summers approved.

Okay, so how did the markets react? As you might expect, with the S&P and NASDAQ down 3.4% and 3.9%, respectively. It also meant that it was an expensive day for America's richest, especially tech billionaires. Bloomberg helpfully calculated that Powell's short speech cost America's billionaires $78 billion. Elon Musk lost $5.5bn, while pal(?) Sergey Brin lost $4.7bn. But at least rival Jeff Bezos lost even more $6.8bn, right?

These numbers are absurd. According to the U.S. Bureau of Labor Statistics, the median annual personal income in the U.S. was around $51,500. Roughly speaking, it would take the median American over 106,000 years to make what Musk lost in just one day!

Yet, these numbers are still essentially a drop in the bucket to the fortunes of America's richest. According to wealth porn site Forbes, which runs the Real-Time Billionaire List, Musk was worth $257 bn at close of business yesterday and Bezos $155 bn. Wealth tax anyone?

The New Mad Men: Page, Brin, Zuck, and Bezos

If Matthew Weiner were to ever do an updated version of Mad Men, it would need to be set in the West Coast. Advertising today is the purview of tech giants, whose algorithms direct you to things you didn't even know you wanted. Online advertising dwarf other mediums with Amazon's ad revenue alone more than that of the entire global newspaper industry in 2021! (H/T Scott Galloway)

The chart below (click to enlarge) from Raconteur shows how the internet has changed the advertising game over the past two decades and also decimated the newspaper industry. Before 2004, newspapers and television were responsible for over 70% of the ad business. Today, search, social media, and online video drives ~66% of the ad business. They've particularly cut into the newspaper business, which has gone from collecting ~33% of global ad spend in 2002 to ~5% in 2020.

And if the internet will soon absorb all the world's ad spend, just three companies are likely to take most of the share: Google, Meta/Facebook, and Amazon. Already these three tech giants account for 74% of global digital ad spend and 47% of total global ad spend.

Google/Alphabet is king of digital ad spend, accounting for 44% of all online ad revenues (via search and YouTube) and 16% of all ad spend period. But there's a new kid that's got everyone's attention: Amazon. The ecommerce giant generated more ad revenue than YouTube or Facebook in 4Q21. What's more Amazon's advertising arm represents just 7% of company's $470 billion of net sales.

There are several factors that have impacted Amazon’s inevitable transformation into a colossal advertising entity. These include industry trends, consumer habits, and its continued dominance in the ecommerce industry. About 3 in 4 persons say that when they look for a product online, they search on Amazon. Most importantly for sponsors, ads on Amazon have a higher conversion rate than on Google. When you want to learn about a product you might do a Google search, but if you have made a decision to purchase that product, you go on Amazon to find the best brand/price.

Imagine what Don Draper could do with that...

Girls Just Wanna Have Fun

Finnish Prime Minister, Sanna Marin, who became the country's youngest PM at 34 in 2019, is under fire after a leaked video shows her partying hard with friends.  

Opposition party members have called for Marin to take a drug test...suggesting that her actions are inappropriate for a prime minister. Marin denied any drug use and countered “I have danced, sung, celebrated, done legal things,” she said. Too much vodka? Possibly. But cocaine? No! So there! Stop hating her dance moves.   

Eat the Rich

A Brooklyn artist collective called MSCHF is selling popsicles shaped to be the world’s leading billionaires: Elon Musk, Jeff Bezos, Mark Zuckerberg, Bill Gates, and Alibaba co-founder Jack Ma. New Yorkers can now “Munch Musk,” “Bite Bezos,” “Gobble Gates,” “Snack on Jack” and even “Suck Zuck!”

Alas, "eating the rich," isn't cheap. The ice creams retail at its own inflated price of $10 apiece. 

The Three Types of Inflation

Inflation is dominating the news. While the price of everyday goods, including food and energy—naturally—grab the headlines, the ever-interesting Visual Capitalist reminds us of the other forms inflation within the economic system that impact our lives.

The first is monetary inflation, which occurs when the U.S. money supply increases over time. This represents both physical and digital money circulating in the economy including cash, checking accounts, and money market mutual funds. In the U.S. the Federal Reserve typically influences the money supply by printing money, buying bonds, or changing bank reserve requirements. The Fed controls the money supply in order to boost the economy or tame inflation and keep prices stable. 

Nobel Laureate Milton Friedman once posited that "inflation is always and everywhere a monetary phenomenon." That's because, in theory at least, increasing the money supply faster than the growth in real output may cause consumer price inflation (# 2 below); more money chasing the same amount goods should eventually lead to increases in prices.

                                               Source: Visual Capitalist, New York Life Investments

Next is consumer price inflation ("CPI"), which occurs when the prices of goods and services actually increase. It is typically measured by the Consumer Price Index (CPI), which shows the average price increase of a basket of goods, such as food, clothing, and housing. Supply chain issues, geopolitical events, monetary supply, and consumer demand may all affect CPI. When CPI is persistently increasing at rate above 2% per annum, the Fed may increase interest rates to curtail spending and allow prices to cool down, and vice versa.

Lastly, asset price inflation ("API") represents the price increase of stocks, bonds, real estate, and other financial assets over time. One measure of API is the ratio of household net worth to GDP. Often, a low interest rate climate creates a favorable environment for asset prices by lowering the total cost of asset ownership. This has been evident over the past decade as low rates were met with rising asset prices. In 2021, household net worth as a percentage of GDP stood at 620%. Rising asset prices can sometimes be a misleading sign of a strong economy since no real output is produced—the stock market is not the economy. Instead, it may indicate an asset bubble, which is dangerous because it contributes to rising inequality (as typically the very rich own the vast majority of economic assets). But when bubbles burst, the government has to step in with taxpayers' (i.e., everyone's) money to save the economy (and thereby the rich). The moral hazards in a laissez-faire capitalistic system can give rise to demagoguery.

Happy Birthday: America Turns 246

 

In celebration of America's 246th birthday, the U.S. Census Bureau released some fun facts. E.g., when America declared her independence from Great Britain in July 1776, there were an estimated 2.5 million people* in the 13 original colonies (vs ~7 million in the U.K.); today there are over 330 million Americans** (vs ~68 million Britons). Or that in 2021 the U.S. imported $6.7 million worth of American flags and exported $2.5 million worth. In any case, Happy 4th of July!

*Approximately 450,000 of the 2.5 million were African Americans, who pointedly didn't gain their independence in 1776.

**Over 48 million of whom are African Americans. 

Freakonomics: Will Repeal of Roe vs Wade Lead to More Crime?

In 1973, the U.S. Supreme Court legalized abortion in all 50 states in a seminal case called Roe v. Wade that quickly became a heated cultural divide in the U.S. Last week, after nearly 50 years, the conservative-majority Supreme Court overed turned Roe vs Wade, returning authority on abortion back to individual states. Justice (and history fan) Samuel Alito, writing for the majority, reasoned "abortion presents a profound moral question...the Constitution does not prohibit the citizens of each State from regulating or prohibiting abortion. Roe and Casey arrogated that authority. We now overrule those decisions and return that authority to the people and their elected representatives.” 

Ok, abortion is a hot-button issue and both sides have their points. But there may be another interesting angle to this topic...crime. In 2001 economist Steve Levitt published his (most?) famous paper linking abortions to reductions in crime: "Understanding Why Crime Fell in the 1990s." From 1991 to 2001, violent crime in the U.S. fell more than 30%, after rising for three decades and Levitt wanted to understand why, explains Steve Dubner and Levitt's Freakonomics co-author in a Medium post: 

Levitt explored all the commonly suggested reasons his 2001 paper...The six factors that, according to [his] analysis, did not contribute to the crime drop: a strengthening economy; the aging of the population; innovative policing strategies; gun control laws; right to carry laws; and the increased use of capital punishment. While each of these, in theory, might seem to have some explanatory power, Levitt found that none of them did...Then there were the factors he found did contribute: the increase in the number of police; an increase in the number of criminals imprisoned; and the decline of the crack-cocaine trade, which had been unusually violent. But these three factors could explain only about half of the massive drop in crime. It was as if there was some mysterious force that all the politicians and criminologists and journalists weren’t thinking about at all..."

"...Paging through the Statistical Abstract of the United States...[Levitt] saw a number that shocked him. Abortion rose so much after Roe v. Wade that by its peak (in 1990), there were 1.5 million abortions a year in the U.S. compared to 4 million live births. The magnitude surprised Levitt, and he wondered what sort of secondary effects it might have. He wondered, for instance, if it might somehow be connected to the huge drop in crime. Levitt spent a few weeks working on the idea before ultimately deciding it didn’t quite add up." 

But then one of Levitt’s collaborators, John Donohue, a professor of law at Stanford Law School who also has a PhD. in economics, pointed out the "unwantedness” factor—the expansive literature showing that "children born to parents who didn’t truly want that child, or weren’t ready for that child, were more likely to have worse outcomes as they grew up; not only were health and education outcomes worse, but these so-called “unwanted” kids were disproportionately likely to engage in criminal behaviors."

Levitt and Donohue divided states into three groups: high abortion-rate states, medium abortion-rate states, and low abortion-rate states and tracked crime in all three groups over time. They found there was a 30% difference in what had happened to crime between the highest abortion states and the lowest abortion states by 1997 and through other similar tests concluded that "legalized abortion appears to account for as much as 50% of the recent drop in crime."

The paper generated a lot of buzz in the mainstream media and managed to unite to both the Right and Left in their...condemnation of the results. The Right was uneasy because the findings suggested there were positive outcomes from what they considered a reprehensible act; and the Left felt it was endorsing a form of eugenics and Minority Report-style "pre-crime" judgement.

There have been other criticisms of the paper on methodological grounds, but even in a recent update to the paper, Levitt and Donohue continue to find a strong relationship between abortion and crime between 1997 and 2014 — "states with high abortion rates saw crime rates fall 60 percent more than states with the lowest abortion rates. The magnitude of the effect is enormous." According to Levitt, the “cumulative effect over the last 30 years, if you just look at our numbers, suggests that abortion might explain something like 80 or 90 percent of the entire decline in crime.”

We'll see what the next update of the paper in 20 years or so finds.