Three key macro factors to watch in today`s market

I have spent a lot of time in these pages writing about the influence of macro-economic factors on market analysis. Indeed, Matt King at Citigroup recently highlighted the growing importance of macro factors on the equity market (chart via Bloomberg):


Here are three key macro factors that I have been watching now for clues to the direction of the stock market and sector selection.

The full post can be found at our new site here.

Hoisted from the Archives from Five Years Ago: Progress in David Andolfatto’s Economics Education Department

Noah Smith periodically asks me why I feel that I do not have time to read David Andolfatto--why what he writes goes never to the top but always to somewhere lower, in the middle of the too-read pile...

Here is one sufficient reason:

David Andolfatto, February 2009:

Here we go again.... Many governments appear to be taking seriously the notion that a massive government 'electric shock therapy' is needed…. Is there any merit in the view that a massive government fiscal action can rescue the day? Apparently, there must be. Why would all these learned people be advocating a policy prescription that is not solidly backed by economic theory and the historical evidence?… I am especially eager to learn how this evidence might be construed as supporting the notion that fiscal policy 'works'…

David Andolfatto, March 2009:

Multiplier Mischief: The current debate over the size of the 'government spending mulitiplier' is a perfect measure of the sway that conventional economic theorizing continues to grip the minds of people who should know better.... The only puzzle remaining is why it takes 4 full years of training to receive a PhD in macroeconomic theory; and why it should take a further 6 years to become a tenured professional by publishing papers examining what we all know to be the self-evident truth embedded in this 'really useful ad hoc model.' Unfortunately, I am apparently one of few who have trouble absorbing this simple theory…

David Andolfatto, November 2011:

A bridge over the macroeconomic divide.... I am generally sympathetic to the idea of expanding the supply of U.S. treasury debt.... A big question is what to do with the funds acquired.... I'm with Krugman that heck, we may as well use it to build physical capital (public infrastructure).... These provisional policy recommendations suggest themselves to me by way of a class of 'new monetarist' models that I like to use to organize my thinking about things…

From my perspective, the most depressing things are:

  1. That it took 31 months for Andolfatto to stop making fun of fiscal expansion and to remember (some of) the lessons of Knut Wicksell's Interest and Prices--which was cutting-edge economics in its day, but that day was 1898...

  2. That even in November 2011 Andolfatto was claiming that the idea that expansionary fiscal policy is a way of raising the natural rate of interest is a 'new monetarist' rather than a pre-Keynesian 'old Stockholm school' theoretical point...

  3. That not only had Andolfatto in 2009 not even bothered to do enough of his homework to understand that he had homework to do, he drew no lessons from his experience--so that in 2011 he already saw himself as having moved so quickly from ignorance to expertise without ever considering that he might still be in the intermediate stage of, you know, a student needing to do his homework...

There are a lot of smart hard-working homework-doing people out there competing for my attention. How many strikes can someone have before they automatically do not go to the top of the pile?


Hoisted from Fall 2011: Progress in Economics Education Department: Yes, a Temporary Fiscal Expansion Would Be a Good Thing:

bradford-delong.com: Grasping Reality with the Invisible Hand… 2016-08-31 22:12:32

Must-Read: The market's social welfare function: take each individual's utility and sum them up. Only, first, take the inverse of their marginal utility of income, and weight their utility by that before summing.

The desires of those who have the least need for goods and services therefore get the greatest weight. The market thus has a very interesting "operationalization" of the principle of "the greatest good of the greatest number":

Takashi Negishi (1960): Welfare Economics and Existence of an Equilibrium for a Competitive Economy:

A competitive equilibrium is a maximum point of a social welfare function...

...which is a linear combination of the utility functions of consumers, with the weights in the combination in inverse proportion to the marginal utilities of income. Then the existence of an equilibrium is equivalent to the existence of a maximum point of this special social welfare function. Therefore, we can prove the former by showing the latter...

Daniel Kuehn on Acemoglu and Robinson’s Piketty Review: Hoisted from the Archives from Two Years Ago

Hoisted from the Archives: Daniel Kuehn: Yes, Acemoglu and Robinson's Piketty Review Is Strange:

I just happened to get to one of the parts in Piketty that Acemoglu and Robinson quote to show that Piketty doesn't think institutions matter (from page 365):

The fundamental inequality r > g can explain the very high level of capital inequality observed in the nineteenth century, and thus in a sense the failure of the French revolution.... The formal nature of the regime was of little moment compared with the inequality r > g.

So what is in that ellipses? [Piketty] explains that the revolution didn't change the course of inequality (relative to monarchical Britain) because the new institutions that were established were much closer to Britain than popular perception in France at the time suggested! It was NOT a big change in institutions, which was why the French Revolution did not shift the parameters....

Immediately after this he goes on to discuss changes in institutions in the 20th century that WERE substantial enough to impact inequality.... In other words, the real point of this section is that institutions matter a lot.... And not only did A&R get that wrong--they deliberately removed the portion of the quote where he made the point....

All of the explanations for the empirical changes in the distribution over time are either (1) institutions, or (2) shocks.... Apparently it's not just Acemoglu and Robinson that missed this memo.... Piketty without institutions in the capital share of income section could probably survive. Piketty without institutions in the inequality section of the book simply wouldn't exist any more.... This is like saying Milton Friedman wasn't all that concerned with money!

Liveblogging World War II: August 31, 1946: Jon Hersey’s „Hiroshima“

Hiroshima The New Yorker

John Hersey: Hiroshima:

At exactly fifteen minutes past eight in the morning, on August 6, 1945, Japanese time, at the moment when the atomic bomb flashed above Hiroshima, Miss Toshiko Sasaki, a clerk in the personnel department of the East Asia Tin Works, had just sat down at her place in the plant office and was turning her head to speak to the girl at the next desk...

...At that same moment, Dr. Masakazu Fujii was settling down cross-legged to read the Osaka Asahi on the porch of his private hospital, overhanging one of the seven deltaic rivers which divide Hiroshima; Mrs. Hatsuyo Nakamura, a tailor’s widow, stood by the window of her kitchen, watching a neighbor tearing down his house because it lay in the path of an air-raid-defense fire lane; Father Wilhelm Kleinsorge, a German priest of the Society of Jesus, reclined in his underwear on a cot on the top floor of his order’s three-story mission house, reading a Jesuit magazine, Stimmen der Zeit; Dr. Terufumi Sasaki, a young member of the surgical staff of the city’s large, modern Red Cross Hospital, walked along one of the hospital corridors with a blood specimen for a Wassermann test in his hand; and the Reverend Mr. Kiyoshi Tanimoto, pastor of the Hiroshima Methodist Church, paused at the door of a rich man’s house in Koi, the city’s western suburb, and prepared to unload a handcart full of things he had evacuated from town in fear of the massive B-29 raid which everyone expected Hiroshima to suffer.

A hundred thousand people were killed by the atomic bomb, and these six were among the survivors. They still wonder why they lived when so many others died. Each of them counts many small items of chance or volition—a step taken in time, a decision to go indoors, catching one streetcar instead of the next—that spared him. And now each knows that in the act of survival he lived a dozen lives and saw more death than he ever thought he would see. At the time, none of them knew anything.

The Great Paradox

Must-Read: Art Goldhammer: The Great Paradox:

In 2004, Barack Obama catapulted himself into the national limelight by denouncing the bitter antagonism between rival camps and suggesting that we heed “the better angels of our nature”...

...[But] as he prepares to leave office, the evidence is everywhere that the abyss has only grown wider and deeper. His enemies denounce him as a foreigner, a traitor, and an agent of every imaginable form of mischief and malevolence. The president’s detractors attack him not only for what he is--a black man who overcame all obstacles to become our head of state--but also for what he symbolizes: the federal government.... Obama’s enemies see the powers of the federal government as illegitimate, the taxes they pay to support it as unwarranted confiscations of their hard-earned dollars, and the regulations it imposes as job-killers.... Yet the opposition to the president and his party is most intense in states like Louisiana that rely heavily on federal dollars, in regions that have suffered most from the dismantling of federal regulations. Arlie Russell Hochschild, a distinguished Berkeley sociologist, calls this the Great Paradox....

Louisiana conservatives feel a deep connection to nature. They have been raised as fishermen and hunters. They remember the beauty of the unspoiled bayous of their childhood. Yet they do not react to the environmental devastation as a liberal like Hochschild would expect.... She develops a useful typology... team players, who put loyalty to party or faction ahead of everything else; worshippers, whose fatalistic outlook compels them to accept losses as a deserved part of God’s inscrutable plan; and cowboys, who see risk as an intrinsic part of life and stoically endure whatever hardships come their way. Underlying all three responses is an ethic of “toughness.”...

The modest whites who form the backbone of the Louisiana Tea Party... identify with the energy companies... refuse to see themselves as victims, because to do so would be unheroic and “weak”... to acquiesce in what Nietzsche would call the “slave morality” of the culture of victimhood.... The companies after all provide the jobs they need to keep from sinking into the subaltern status they fear above all. To regulate the “job creators” would only “force” the companies to look elsewhere, depriving middle- and working-class whites of the livelihoods on which their dignity depends....

One can’t help feeling that if progress is possible, a deeper probing of racial attitudes than is attempted here will be necessary. Empathy is after all such a liberal value, and a bit of the cowboy’s bravado in the face of hostile resistance will also be needed if authentic communication across the divide is ever to take place. Tout comprendre, c’est tout pardonner, but in politics forgiveness is not necessarily a cardinal virtue. 

bradford-delong.com: Grasping Reality with the Invisible Hand… 2016-08-31 21:39:43

Must-Read: Drew Altman: The ACA Marketplace Problems in Context (and Why They Don’t Mean Obamacare Is ‘Failing’):

There absolutely are problems in the marketplaces...

...Premiums will rise much more rapidly next year than they did this year...

...[19% of] marketplace enrollees may have a choice of only one plan next year.... The marketplaces are an important part of Obamacare. However, more uninsured people have been covered by Medicaid expansions than in the marketplaces, even though 19 states have not expanded Medicaid.... The law’s insurance reforms, including protections for people with pre-existing conditions, apply to people buying their own insurance outside the marketplaces as well.... A broad range of ACA reforms in Medicare payments to doctors and hospitals are moving ahead.... Many of these elements of the ACA are working imperfectly and can be strengthened, just like the marketplaces. But recent talk of “Obamacare failing” seems to conflate the marketplaces with the ACA overall....

The issues in the ACA marketplace are real problems that need to be addressed through greater enrollment and policy changes... [should] be treated much more like mundane implementation issues to be addressed by Congress than glaring headlines about failure.

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