Interest rates are falling globally, changing the political and economic landscape for 2024. Should rates continue their descent, especially at the quickening pace observed since October, the sour brew of American economic sentiment could meaningfully improve. Indeed, we got our first indication of such a pivot in Friday’s University of Michigan consumer survey, which reported that inflation expectations “plunged from 4.5% last month to 3.1% this month,” as overall positive sentiment soared from a reading of 61.3 to 69.4. Inflation has been coming down for months, and oil prices have been coming down too. But consumer sentiment readings have been poor for a while, reflecting that negativity can be sticky, and that good news may act with a lag. If inflation and interest rates keep moving in the same direction, it now appears sentiment is finally willing to follow.
The Vibecession is one of the more regrettable episodes in US economic analysis, because its thesis held that economic conditions were great, but Americans had been convinced by partisan politics and “the media environment” to think otherwise. If only the airwaves carried a more accurate and thus positive message, the US populace would more readily see they’d erred in assessing their own economic situation. Oof. Social science comes with a minimum set of responsibilities, and whether we are working within cultural anthropology or economics, concluding that “people are just plain crazy” is a no-no, a kind of giving up on the discipline. Thus, it was embarrassing to say the least to see some economists pound the table in a shouty recap of all the great data, asserting that it was “impossible” that Americans could be unhappy, while others capitulated and said, well, it must indeed be the damn radio waves, warping the national mind.
To clarify, there is a consistent layer of highly embittered, low-information voters who have been angry about the US economy for a long while. Given that several economic expansions over past decades left large swaths of the country unimproved, however, those angry views are quite justified. Two things can be true at once: a voter can be almost entirely ignorant of who is making policy, can be wrong about all sorts of national facts, can parrot nonsense and lies from AM talk radio, and yet, can still be right about their own difficult, overall economic condition. The riddle of the Viebcession, however, was not to solve for this group, but rather, the rest of America that remained steadfastly grumpy as the economy, wages, and inflation improved during 2023.
The Gregor Letter addressed the riddle this October: see We Are Unhappy. That essay offered up the most generic and orthodox of explanations, suggesting that we were still too near in time to the inflation experience, and that interest rates themselves had amplified the pain:
Two areas that are perhaps ripe for exploration, therefore, are the universe of prices that Americans don’t experience every day, and also, how the rise in long term interest rates have bled into everything—not just in credit card rates and mortgage rates, but in prices too…Americans experienced inflation in real time, starting roughly two years ago, in daily prices like food, simple services, and energy. But there’s a large category of prices that come into the field of vision on a much longer cycle…Interest rates are also potentially overlooked as a source of stress because, although national data shows a solid improvement in personal debt levels, the punishing rates on credit cards and mortgage rates will have also shown up for Americans more recently, starting slowly as 2022 began, and turning more severe coming into 2023.
Helpfully, we are now getting some academic work that attempts to show how emotionally sticky an inflation episode can become, leaving its imprint on human thinking even as it passes out of existence. Ryan Cummings and Heale Mahoney at Stanford assert that it takes time for consumers to digest the prior year’s inflation experience, and that the decay of this negative sentiment moves at a slow rate.
As the British like to say, well fancy that:
We estimate the impact of current and prior years’ inflation on consumer sentiment and find that the impact decays at a rate of about 50 percent per year. Despite much lower annual inflation, the cumulative negative effect of recent inflation on sentiment declined only 40 percent between June 2022 and today. If we experience 2.5 percent inflation over the next 12 months, we estimate the cumulative downward drag will drop by another 50 percent.
The Vibecession was ultimately useful in the way it unmasked the indulgent and self-serving inclinations of a range of groups. Journalists and especially political writers convinced themselves the media environment was so comprehensive in its influence that it had full-spectrum deterministic impact on Americans. No, it didn’t, and it doesn’t. Economists fired off FRED chart after FRED chart in exasperation that dumb and crazy Americans “just weren’t getting it.” The common error was of course an old one: abandoning materialism. Yes, humans do have a capacity to detach from reality but you can always count on material circumstances to exert their gravitational pull.
The US 10 Year Treasury yield has fallen from 5.00% to 4.25% in just seven weeks. The other global benchmark, the German 10 Year, has fallen from 3.00% to 2.25% in 9 weeks. In roughly the same period oil prices have fallen from $94 to $71 for West Texas Intermediate. And inflation readings keep falling also. These are all big moves to unfold in such a short period of time. To cap things off, we got a blockbuster productivity report which is kind of the holy grail if you’re a central banker, because higher output coming from the same number of hours worked portends a whole grab bag of good things to come.
American sentiment is starting to change about the economy, but without any comparable change in the media environment is. Imagine that! As real wages improve further while inflation and rates fall, the majority of Americans will continue to process the change as they integrate new information with their remembered experience.
Further reading: “Digesting Inflation,” the essay cited above from Cummings and Mahoney at their Briefing Book newsletter, is worth reading in full. Especially because they too identify a thick, hyper-partisan layer of the public, around 30%, that consistently sees the economy through the lens of the current President’s party affiliation. This highlights the other mistake made by Vibcession advocates: fallacy of composition, applying the partisan layer to the whole.
Further listening: if you are prospecting for falling inflation and rising productivity as we head into 2024, this WAMU podcast covering AI features wonderful nuggets of reader email, as people tell stories of how ChatGPT has changed their work lives.
Well known American investor and market strategist and commentator Byron Wien died last month at age 90. Known for his year-end Ten Surprises—in which he examined events that investors gave only a 33% chance of occurring when he deemed the odds were a bit better than 50%—Byron definitely added a twist to the raft of new year predictions that have become so common. In that spirit, here are Ten Surprises for 2024:
On election day 2024, Donald Trump will not be the GOP nominee on the ballot. There are a number of complicated routes to such an outcome, but it’s clear there’s quite a consensus across the board that Trump is the ultimate nominee despite the endless trap doors that lie ahead for the former President. The case currently brewing at the Colorado Supreme Court which must adjudicate whether Trump can even be on the ballot in light of the 14th Amendment may seem arcane, but it is surely headed to the US Supreme Court. The more serious threats come in the form of the two election interference cases at the federal level and the state level, in Georgia, which are likely to produce verdicts before the election.
There will be no recession in 2024. With falling interest rates and a portfolio of market history suggesting recessions invariably show up after a big hiking cycle, market observers are getting very squeamish about the economy next year, pointing to the likelihood of rate cuts and a recession. What they still are not considering: the countercyclical effects of the various infrastructure and investment legislation here in the US.
A two-state solution will be back on the table. In the most dire of moments for the state of Israel and the Palestinian cause, with a trail of failed two-state initiatives stretching back decades, and revived animosity that no doubt has reached new extremes, now is the least likely time to even have the two-state conversation. And yet, it is out of those ashes that such a conversation will return.
Road fuel demand in the OECD fails to do much in the face of a broad economic recovery. This will seem highly unusual, because of course even in regions where petrol demand has been weakening for years, economic rebounds nearly always bring demand up from a low. Well, that rebound already happened in 2021 and 2022 after the pandemic. 2024 is going to confound the oil market because China, the actor who’s been rescuing oil demand for years, simply doesn’t show up to help.
Putin finds a way to justify a withdrawal from Ukraine. Yes, we know that young Russian men are expendable to Putin, that he rules with an iron fist, and he can outlast the patience of everyone. However, the permanent loss of a tranche of natural gas demand from Europe, and the sustained weakness in the price of oil, are going to impact Putin’s economy further as commodities in general do not respond in price as expected during global economic strength. Ironically, the culprit in weaker commodity demand will be China, where Xi has structurally damaged the economy.
A polycrisis descends on US universities and results in a national conference to sort out problems and come up with some common guidelines. Eruptions from campus speech policies expand further in 2024 just as admissions policies come under renewed scrutiny after the first statistics emerge in the post affirmative-action era. Yeah, that’s mouthful for sure—but how else to describe a polycrisis? The President of Penn resigned this weekend after shaky public testimony in front of Congress last week. More disagreements, confusion, and resignations are to come. 2024 will also produce the first admissions data after the Supreme Court ruled against affirmative action last year (Fair Admissions, Inc v. Harvard) and watch out! It’s a good bet many schools will over-correct in the wake of the SCOTUS decision, that some will under-correct, and, that without affirmative action admits to paper over the reality of legacy admissions, other schools will be unmasked as private clubs, far over-preferencing the children of rich alumni.
Americans finally go ga-ga for high speed rail as the new Los Angeles-Las Vegas route breaks ground. Better rail service has been a dream for thirty years, and before the advent of electric vehicles, was the obvious solution. Now, with cars costing more to purchase and maintain, and with interest from the private sector to build and own rail routes, the least likely outcome is at hand: HSR is getting built and Americans, when they see it, will want more of it. Brightline, which has already built and run a successful project in Florida, was given $3 billion by the US government to run an HSR line between LA and Vegas. The HSR portion will actually terminate in Rancho Cucamonga, with local service taking passengers the rest of the way to Union Station. The ascent of HSR in this region will spark a wildfire of demand that the main route, SF-LA-SD, is finally built.
Productivity gains from early artificial intelligence tools are going to start coming through far more quickly than most expect. The big software platforms like Microsoft, Adobe, and Oracle have already paired their existing enterprise solutions to various AI helpers. At the other end of the spectrum, even the consumer level ChatGPT offerings are helping real estate brokers, professors, accountants, and other small businesses. We are going to get data quantification of these gains through company conference calls, academic studies, and certainly through productivity reports. Part of the surprise is that most may assume AI is something big and spectacular (or scary) that is about to happen. No, it’s already happening in myriad small ways.
Ohio returns as presidential election weathervane, once again picking the winning nominee. From 1964 through 2016 Ohio had a perfect record, always picking the winning presidential nominee as the pendulum swung back and forth between Republican and Democratic presidents-elect. But in 2020, that streak broke as the state chose Trump, when Biden won the overall contest. Many have since written off Ohio, asserting, with good reason, that it has become a pure red state and will never again perform bellwether duties for the national mood. But that was before the vote last month to change the state’s constitution, to make abortion a health right. The result? 57% of Ohio voters voted in favor of establishing that right, a shocking blow to religious conservatives and the Republican Party that represents them. The echo and ripple effects of that vote will loom large next November.
Twitter (X) goes bankrupt and the creditors form an alliance with MacKenzie Scott and Lauren Powell Jobs to resurrect the social site. Powell already has experience in this area as the majority owner of The Atlantic. Scott, a novelist, is also a billionaire (via her ex, Bezos) and has shown razor-sharp intelligence as an effective donor to American non-profits. Whether X technically goes bankrupt or is abandoned by Musk won’t matter much. The site will strike a middle ground on speech, forcefully coming down hard on pornography, flash-mobs, incitement, and violence, but will lean towards caveat emptor as the governing policy against false information.
Pledges to triple clean energy capacity by 2030 and to triple nuclear capacity by 2050 are the headlines from COP 28. Leaving aside for the moment whether the world gets its act together to achieve such results, we still face the problem of total global power demand growth, and whether the rate at which we deploy clean generation can overtake that growth. Your correspondent has spent the past few weeks peering into the work produced by various groups or individuals on this question and finds, once again, that everyone wants to talk excitedly about cleangen growth, but not total demand growth.
Between 2010 and 2022 total global demand growth for power advanced from 21589.6 TWh to 29165.1 TWh. That’s a compound annual growth rate of 2.68%. Most analysts understandably believe the growth rate over the coming years is going to be higher for the obvious reason that energy transition is all about moving the world over to the powergrid. OK, so what is a plausible rate?
In the chart below, The Gregor Letter has used 3.25% as a high case and 2.75% as the low case for total demand growth from 2022-2030. Notice that the low case of 2.75% nearly matches the historical rate.
Helpfully, the IEA in Paris has also produced three scenarios for total demand growth to 2030. From their latest data set that accompanies the World Energy Outlook 2023, here are their 2030 endpoint projections and the implied growth rate from 2022-2030, with a starting value of 29033.2 TWh (nearly identical to the EI Stat Review estimate for 2022).
• Stated Policies Scenario: 35801.9 TWh | Implied Rate: 2.75%
• Announced Pledges Scenario: 36369.55 | Implied Rate: 2.93%
• Net Zero Scenario Emissions by 2050 Scenario: 38206.96 | Implied Rate: 3.57%
So, the IEA and The Gregor Letter are playing the same game. The difference being that their projections derive from far more extensive modeling while here at the letter, the three growth scenarios are chosen as simple and plausible outcomes to the historical growth rate. Generally speaking, it’s not enough to triple wind and solar generation to the year 2030 to effect actual declines in global power. We would need nuclear, hydro, and another round of coal retirements (a muted advantage given how much coal is being replaced with natural gas) to get to actual declines by 2030.
For those who disagree, please show your work.
The Gregor Letter respects the views of ecological economics and the quantification of how humans are impacting the carrying capacity of the planet. Deserving of less patience, however, are many of the discipline’s practitioners and the claims they make about the future. To the extent that ecological economics is informed by biology, evolution, human psychology, and growth studies, it’s a useful if not excellent framework to understand the past. But many who use these tools have faltered intellectually in the face of renewables technology, because human dependency on fossil fuels plays such a key role in their thesis. Biomass, coal, oil, and natural gas fit beautifully into the grand scheme of ecological economics, and a world of limits. This however sets up a trap the discipline has encountered, but never overcome, in which it clearly states that dependency and growth of fossil fuels is destroying the planet, but, that without those fossil fuels we cannot continue to grow.
William Rees, professor emeritus at UBC in Vancouver, made this exact claim recently on The Overpopulation Podcast. Fossil fuels, he said, are destroying the planet but without them we will destroy the economy. To buttress his overall view, he made the additional claim that by last year wind and solar had only reached 2.5% of total global energy consumption. Which, is not true. Wind and solar reached double that share last year, at 5.4%. But it’s important to remember this was a conversation, not a white paper, and we can be sure that if Rees were tasked with citing the correct figure to an essay for publication, he would do so. That said, this undercounting reflects bias and this bias is observed frequently among the wider universe of those pounding the table about overpopulation, and planetary limits.
Let’s also express some overall kinship with Rees’ concerns: The Gregor Letter too is worried that so far renewables have been largely additive, not substitutive, to total global energy. For sure, you can find domains where wind and solar have eaten into fossil fuels like California, Europe, the UK. And it is also factual to say renewables have suppressed the growth of fossil fuels on the global scale. Hell, the world generated as much electricity in 2021 from wind and solar alone as was generated from all sources in the entirety of the EU: 2895 TWh. Wind and solar are changing our world. But as the letter keeps pointing out: they are not enough!
It must be the case, therefore, that Rees is saying that the current energy transition is not like the first two. Each of the first two energy transitions uncovered cheaper, more powerful energy sources that propelled the economy forward. He is clearly of the view that renewables are an illusion, by contrast, dangling the false promise that they are cheaper, better, and faster. That claim just doesn’t pencil out. Using electricity and EV, California can literally run all 36 million of its vehicles on half the energy required to run them on petrol. Yes, that requires a new round of natural resource extraction and a concurrent decline in the extraction of oil. This is another area where speakers from the planetary limits community have become every bit as deranged as ideologues from the anti-scientific Right, who everywhere and at all times makes specious arguments.
The test is being run right now, fortunately, on the third energy transition of the past 250 years and the record will reflect reality. As you look up at the chart, it’s important to remember that we have consistently seen in domain after domain that once a new technology reaches a 5% share, it’s a warning that a take-off is about to occur.
—Gregor Macdonald