Hello and welcome to another episode of the subscriber-only Odd Lots newsletter written by Tracy Alloway and Joe Weisenthal. Tracy is off this week, so this week it's only me, Joe.
What Joe is thinking about
This week I'm thinking all about macro, and the unusual economic situation we find ourselves in. The job market is booming. The stock market is booming. And yet economic confidence (based on various surveys) is pretty dismal. There are various reasons why things are trending down, but the easiest answer is probably just inflation, particularly in gasoline and food.
On the episode of the podcast we have coming out on Monday, we speak with economist Jason Furman, who is currently a professor at Harvard and was previously the chair of President Obama's Council of Economic Advisers. He's been what I would characterize as a friendly critic of this administration's eco policies. He's largely supported stimulus (and continues to support the various spending plans), but has not shied away from pointing out the downsides of inflation. He has argued that even if you accept in principle the idea of erring on the side of doing too much, that there are still downsides to overshooting too much, and both policymakers at the White House and the Fed should be wary of them.
Anyway, Jason has a new paper out outlining his macro view. If you want to do some homework prior to Monday’s episode, you should read it here.
One thing he said that stuck is that economists don’t actually care as much about inflation as most people do. In other words, if CPI goes from 2% to 4% in a year, to an economist this isn’t necessarily some big disaster, especially if (as we’re seeing right now) it’s being accompanied by booming job growth and booming wage growth. But to the general public, this is seen as a much more serious problem.
This gets to something else important, which is that at some point it becomes impossible to hive off economics from politics. People have values. People have teams. People have groups that they identify with more than others. Some people are thrilled with the fact that the labor market is booming, and that workers for John Deere were just able to strike for higher pay.
Other people identify more with small-business owners, who are getting squeezed between higher pay for workers and a strained logistics system that favors megacorps like Walmart, Home Depot and Amazon.
Sometimes these calls are pretty easy. In March 2020, there wasn’t much political opposition to spending more, both to support household incomes or business payrolls. In November 2021, the dividing lines are getting extremely sharp, with different teams perceiving themselves to have diverging priorities in this environment.
On the Podcast
On Monday, we returned to one of our favorite subjects, which is semiconductors. We talked about a company we’ve been meaning to discuss forever, which is the Dutch lithography giant ASML. Our guest was Chris Miller, a professor at the Fletcher School at Tufts, and the author of a forthcoming book on the chip industry. I know I’m not supposed to play favorites, but of all the ones we’ve done in this series, well … this one might have been my favorite.
There are two things that are fascinating about ASML. One is that it’s the only company in the entire world that has commercialized Extreme Ultra Violet (EUV) lithography, meaning that if you want to make the world’s most cutting edge chips you must be an ASML customer. There is not a second player you can turn to. The other fascinating aspect is that there’s no imminent prospect of anyone else achieving this rarified position. And it’s not because of some great science breakthrough on ASML’s part. Other people know how EUV works. It’s just that to build one of ASML’s machines (which go for around $150 million each), you need to coordinate a distinct supply chain of 4,000 suppliers, many of whom only build parts for ASML. This is the part that’s virtually impossible to replicate. On top of the supply chain, just using the machines takes a lot of practice, so even if you built a machine, and replicated the supply chain, you might not know how to use it. So even with hundreds of billions of dollars in spending and years and years of work, what ASML has built may not be replicable by any competitor. Anyway, read the transcript here. Fascinating stuff.
-- Then on Thursday, Tracy returned to one of her (and my!) favorite topics: bond market structure. It’s the year 2021, and the bond market remains incredibly fragmented, across platforms and various desks. It’s not nearly as cheap, efficient or transparent as say, the listed equity market is. So Tracy spoke with Larry Harris of the USC Marshall School of Business and a former chief economist at the Securities and Exchange Commission about the problem. Harris was recently on a board which tried to address some of the issues, but without much luck.
What we’re reading
-- Total container throughput at the Port of Los Angeles actually fell in October vs. a year ago.
-- Inflation is bad. Killing jobs is worse.
-- How to improve vaccine distribution and uptake across Africa.
-- The WSJ says Larry Summers would be a better choice for Fed chair than either of the two main options Biden is considering.
-- John Maynard Keynes was more than an economist, according to his pre-eminent biographer Robert Skidelsky.
-- Japan is still refusing to do the whole inflation thing.
Odd Lots Newsletter: There's No Separating Economics from Politics - Bloomberg
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