Dispersion - what does it mean?

 From the newsletter, Owenomics, we see that stock dispersion is at levels not achieved since 2008 and 2000. Now, this may not be an indicator of a market top, but it does tell us something about market behavior. 

Dispersion is not the same as volatility. Volatility measures deviations from the mean over a given time period. Dispersion measures the deviation of returns across a set of assets. It is a cross-sectional measure. Higher dispersion means there is a greater variation in the winners and losers relative to the mean return. This could mean there is a disruption in the current market regime or a rotation between industries and firms. It could mean there are a few very strong winners or losers.

Past periods of strong dispersion include the bursting of the tech bubble in 2000, the bursting of the housing bubble in 2008, and the Great Financial Crisis. Disruption leads to dispersion, but greater dispersion does not necessarily imply a general market decline.

The end of being drunk on AI?

 

There is an interesting index on token expenditures called the Silicon Data LLM Expenditure Index that measures the price of tokenization for AI. It is showing a decline as users move to cheaper models. If the price of tokens increases, demand will respond. 

Companies are now monitoring token usage and prices and ensuring that employees don’t treat tokens as a free good. This is natural behavior on the part of firms, but it also means that revenue growth for AI providers will likely slow and fall short of market expectations. 

The wealth gap - the economics of envy

One of the most dramatic changes in the US over the last 35 years has been the distribution of wealth between the middle class and the top 1%. From a gap clearly in favor of the middle class, the number now puts the top 1% at more than 25% of total wealth. 

The cause of this gap reversal may be twofold. Low interest rates support those with higher wealth tied to equity risk. Low interest rates harm those with cash deposits rather than risky assets. Second, significant wealth has been created through innovation, benefiting entrepreneurs and venture capital investors. The first is based on the choice of monetary policy. The second is based on capitalism. It is not obvious that tax policy can reverse this if the impact is to drive down the price of risky assets. 

Any adjustment to this distribution should be driven solely by what will best increase economic growth through risk-taking.

One reason for the rise in US socialism

Should we be surprised by the rise of socialism in the US? No, if you look at the numbers. This is important because changes in the regulatory or tax environment will affect the return on capital, which will, in turn, impact the valuations of all companies. In an already overvalued world, a change in the government regime can be a catalyst for a downturn.

The evidence is in the changing percentages of profit to GDP and of employment compensation relative to GDP. Historically, employment compensation was always higher than profits, but that shifted in the post-2008 period. What happened? The cost of capital fell as rates approached zero. This allowed profits to increase as capital costs fell. Coupled with a change in industry structure, with the most profitable companies in the tech sector and not as heavily concentrated in labor-sensitive companies, the dynamics of profits to employee compensation flipped. There was no diabolical plot driven by greed, except to say that monetary policy assumed a trickle-down effect from lower rates that may not have worked as expected. Now we will have to live with the consequences.