Bilal’s Macroscope – 9 Scary Charts for Halloween

Halloween is almost upon us, so what better way to celebrate than with some scary charts on macro. Here are nine:

1) Interest Costs for the US Treasury Are Surging

The US budget deficit has ballooned since COVID, and more recently bond yields have jumped. Together this means the US government will have to pay more on interest. For context, in the 12 months up to March 2021, only 4% of US government spending went to paying interest. Today it is nearer 10%.

Another way of appreciating this is to look at the (net) interest paid as a share of GDP. Even then, we find the share has jumped to 2.5% from a low of 1.2%. But this number will likely rise further as debt will roll off and need to refinance at higher prevailing bond yields. We can assess the full impact by assessing the interest cost if we assume all the debt was refinanced at the prevailing 10y yield. We find that the (gross) interest cost would jump to 4.6% (Chart 1). This would be the highest level since the mid-1990s.

2) No One Wants to Work in Healthcare

The biggest government expenditure is on health. Both Medicare and Medicaid are huge programmes. Today, the spend is almost 6.5% of US GDP. The trouble is that the trend has increased in recent decades. Back in the early 1990s, it was nearer 2.5%. But that is not all. While the share of workers employed in healthcare increased up to 2010, it has since stagnated (Chart 2). So, we have rising healthcare costs and demand, yet less workers entering the sector. This is recipe for healthcare inflation.

3) ChatGPT, Not Students, Doing Homework Now

We have heard the stats around ChatGPT, the fastest growing software release ever. But who is using it? Turns out, it is likely to be students using it to do their homework or tests. We look at the frequency of search terms citing ‘ChatGPT’ and find it directly correlates with searches for ‘SAT’ exams (Chart 3). The search also follows the student term and holiday cycle. So is ChatGPT really just an educational support tool?

4) Most Equity Performance Driven by the 1% of S&P500

2023 has seen remarkably imbalanced equity performance. If we split the S&P500 by the size of the company, we find that the top 1% have delivered a YTD return of +40% (Chart 4). This grouping comprises the Magnificent Seven and Berkshire Hathaway. The next 4% delivered +5% returns, while every other grouping has lost money. The worst has been the bottom 10% of companies, which have delivered average returns of -10%. Equity markets may struggle with such fragile foundations.

5) Massive Divergence Between BoJ Policy Rate and Inflation

While every other central bank has been busy hiking rates to fend off higher inflation, the BoJ has stubbornly stood pat even as inflation has surged (Chart 5). It is all the more startling as the BoJ did hike in the late 2000s when inflation was much lower. The currency has already tumbled, but are bonds next?

6) Germany Has Lost Its China Support

While Europe was suffering its sovereign crisis, Germany could always rely on exports to China to bail it out. The trouble now is that German exports to China are starting to fall (Chart 6). With China domestic auto production ramping up, it seems the Chinese no longer need German cars. Is this the end of the German exceptionalism in Europe?

7) China Is Very Leveraged

For all the attempts of China policymakers to deleverage the economy, credit data suggests it has failed. China has seen an explosion of credit since the GFC, which continued after COVID. Meanwhile, neighbouring India has seen a more benign credit picture (Chart 7). No wonder China is struggling under the weight of debt.

8) UK Shoppers Have Given Up

One of the best measures of an economy’s health is its shopping behaviour. Here we find that UK retail sales (in real terms) has been anemic for the past few years (Chart 8). It seems people lack the confidence to shop. This contrasts other countries like the US and France. Will 2024 see this weakness broaden to the whole economy?

9) India Has a Women Problem

India has delivered stellar growth and equity performance in recent years. Now wonder it is a darling of strategic investors.

However, one area where it falls down is female participation in the workforce. Whereas China has seen female participation reach 84% of male employment, India stands at a paltry 33% (Chart 9). That is about the same level as Pakistan and lower than Sri Lanka and Bangladesh.

Could this derail the India structural bull case?

Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.

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(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)