Curley Reprise; Density Change; Fading Fade America; Redemption Risks; Generational Flippening
Five Idea Friday: 20 some-odd charts to carry you through the weekend
Curley Effect reprise
a conquered frontier over time
Fading the Fade America trade, and a riff on Europe
BDC Minsky redemption risks (or nah)
great generational flippening (sooner than you think)
👉👉👉Reminder to sign up for the Weekly Recap only, if daily emails is too much. Find me on twitter, for more fun. 👋👋👋Random Walk has been piloting some other initiatives and now would like to hear from broader universe of you:
(1) 🛎️ Schedule a time to chat with me. I want to know what would be valuable to you.
(2) 💡 Find out more about Random Walk Idea Dinners. High-Signal Serendipity.5 Idea Friday
Some quick-ish hitters for your weekend reading pleasure.
1. Curley Effects (reprise)
Apropos of last week’s riff on the Curley Effect, by which poor governance is rewarded by driving out the opposition, thereby reinforcing the numeric advantage of the base, this little story on Massachusetts out-migration caught my eye.
The Bay State is hemorrhaging achievers:
~$4.2B in gross incomes walked out the door in 2023.
Now, to be fair, MA instituted its 4% surtax on $1M+ incomes in 2022, so it’s hard to say how much of this exodus is attributable to the tax. Outflows were already in progress before then, and the Pandemic obviously distorts the picture quite a bit. Plus, high-earners may have left in anticipation of the tax, so there are lots of reasons not to read too closely into the 2023 figure.
Still, though, that’s a lot of income walking out the door.
The wealthy now make up a larger share of defections from Massachusetts. The top earners were responsible for 70% of the $4.2 billion in net outflows in 2023, a jump from the previous year and more than double the level from 2019.
Pareto effects are pretty persistent all over the place, so losing your high-earners can have substantial long-term effects.
For their part, the state’s chief confiscators are, however, quite pleased with themselves, for now, at least:
The state’s millionaires-tax collections have increased every year since 2023 and so far in fiscal 2026 have jumped 19% year-over-year to $1.3 billion.
That haul “shows most conclusively that the people with very high incomes continue contributing revenue at rising rates based on their residence in Massachusetts,” progressive organization Massachusetts Budget and Policy Center said in a statement.
It is technically true that “people with high incomes continue contributing revenue at rising rates,” so one can’t argue with that, I suppose.
“Continue” is doing a lot of work there, though.
2. Conquering the untamed wilds
OK. Now back to the regularly scheduled programming.
Random Walk is a sucker for good data visualization, and has more than a passing interest in geographic component of demographic change.
Put the two together, and it’s more than I can possibly resist:
The “Wild West” is such a ubiquitous phrase, at this point, and it rarely has anything to do with the actual West, anymore, but man, that phrase must have hit differently a century ago.
The “West” was basically some pockets of civilization in CA and WA, and that was pretty much it.
It’s also strange to think how central “conquering new frontiers” was for quite so long, and now it just kind of isn’t. New frontiers are good. Go Elon, Go.1
ICYMI
3. Fading ‘Fade America’
These aren’t terribly evolved thoughts, so much as a mini-chartpilation on the “Fade America,” trade. Or rather, Fading the Fade America trade.
If you look at the performance of dominant “investment themes,” since 2022, one these three is definitely not like the others:
The three fastest growers are:
Taiwan Technology (i.e. AI)
European defense; and
International Development Banks
That first one makes a lot of sense, and it’s really a US market play, more than anything else. All that hyperscaler Capex is pouring into the chipmakers, and chipmakers need fabs that only TSMC can provide.
The other two are definitely ex-US, and personally, I’m not touching those, mostly out of ignorance, but partly because wrt to Europe especially, I wouldn’t touch it with a 10-foot pole.
Now, to be fair, presumably part of the impetus for investing ex-US has to be some question about US upside left to capture.
I mean, just look at how huge US companies have already become:
Seven US techcos have nearly the same combined weight as the next seven biggest countries in the world index.
To make the point even starker, look at how huge US companies have already become quite recently:
The top 10 companies in the index are ~6x larger by market cap than in 2015, and almost 2x the share of the overall index, for any of the past 4 decades.
If you were calling the top for the US, I suppose I could forgive you. I don’t agree, but fair enough.
At the same time, is there any reason to expect that Europe is going to turn this around, in any way shape or form?
The EU is dominated by a clique of ancient companies that are 50+ years old, while the US has minted an entire solar system of younger companies that dwarf Europe on their own.
There are some exceptions, of course. Revolut is a growing monster of a bank. The weightloss miracles drugs are pretty sweet. Spotify seems to make people happy. Maybe Mistral can stay in the frontier model game?
But, it remains the case that Europe is old and getting older. It’s stifled by a legion of hall-monitors who seem to think that rule-making is the only cultural achievement worth celebrating, and its headline decisions on energy, foreign policy, trade, and immigration (not to mention general economic dynamism) have been somewhere between pathetic and exactly wrong. And that’s being polite.
I knew things were bad, but I didn’t know they were this bad:
Real European wages are still negative compared to 2021.
For most of the major players, the picture is at least heading in the right direction. But Italians lost 10% of their real income in 2 years, and the number has barely budged! What a splendid time for an inbound energy shock!
OK, OK, but European Defense isn’t a bet on Europe, per se. It’s just the defense spending (which supposedly is going to be 5% of budget or whatever). I find it hard to believe that the aging, indebted formerly great continent with legacy industries getting swallowed by China is going to keep that up, but maybe.
For now, at least, the output is definitely there:
Weapons and spacecraft are surging outputs, while general manufacturing flatlines, and chemicals are sent back in time, erasing a quarter century of gains.
The latest Eurostat data captures the divergence neatly. Eurozone industrial production fell 1.2 per cent year on year in January, with chemical output down a chunky 6.6 per cent. Meanwhile, production of weapons and ammunition jumped 31 per cent to a record high.
Germany tells the same story, just with more angst. Overall manufacturing output shrank 1.6 per cent on the year to January and was no bigger than it was in 2010. But weapons production? Up 78 per cent to levels never experienced before.
In other words, it’s a split picture, with everything riding on a defense buildup (while traditional semi-cyclical stalwarts hit the skids).
IDK. That’s a trade, not a theme, and who’s to say how long they keep that up. All the power to them, if they can, but it’s just a pretty grim picture, overall.
To be clear, I’m rooting for Europe . . . just not the people in charge, and well, if that’s what Europeans want (which isn’t obviously the case), then I guess maybe I’m not rooting for Europe, but that would be a damn shame.
Hilariously, BofA recently pulled and apologized for a short recommendation on European Private Credit. The gist of the thing was that US PC sold off, so Euro PC would too, which perhaps isn’t the soundest reasoning, and maybe the retraction was justified, but idk.
4. Private Credit ‘Contagion’
Picking up from the Private Credit theme, Random Walk continues to think the fear and loathing is a bit overdone.
It’s not that everything is hunky-dory—it’s not and declining software multiples have made things worse—but just because some loans are going to sour, doesn’t mean they all are, or that some wider-spread crisis is in the offing.
Without going into all of that right now—just search for the word “chicanery” if you’re curious—this one little chart on contagion, caught my eye:
~80% of direct lending lives in long-duration or closed-end structures.
Only 20% sits in the more liquid, or semi-liquid “callable” style funds.
The reason that matters is pretty straightforward: with “credit crises,” it’s rarely about the credit, and almost always about liquidity. Minsky Cycles, and all that jazz.
In other words, the bad thing that happens to credit markets is when everyone loses confidence in everyone else’s willingness to lend, and then debt that everyone expected to roll is suddenly due in full. That’s when defaults start to cascade, banks get run, and all hell breaks loose, in a self-reinforcing kind of way.
That’s basically what happened during the GFC.2
When people see the big redemptions on private credit, they think “uh oh, it’s happening again.” And maybe so, but (a) redemption caps exist for a reason (specifically because redeeming everyone all at once would be a Minsky disaster); but more to the point (b) most private credit isn’t remotely redeemable.
Indeed, as per above, 80% of it can’t be run at all.
And the good news (or bad news, depending on where you sit), is that the redeemable parts are highly concentrated:
10 Funds account for 70% of the Evergreen NAV.
Whatever the redemption risk, it’s very concentrated.
That’s just not a recipe for wider contagion. Famous last words, I know (a phrase I keep repeating), but it is what it is.
5. Demographic Flippening
It’s still under-appreciated the extent to which the youngs are different than the olds.
From the information they consume (and the medium by which they consume it), to core life milestones (like marriage and family), to the things they believe (like “free speech,” or “jews are bad,”), the youngs really are quite different.
Perhaps it always feels like that, but in this case, I’m not so sure. The simplest reason I’m not so sure is that the youngs literally are different, in that decades of low babymaking, combined with historically high levels of immigration, translates into a next generation with a composition very much unlike that which preceded it.
Throw in some major technological changes that have occurred (and are occurring) specifically during their lifetime, particularly around social media, and it shouldn’t be surprising that Gen-Z (and younger) behave a bit like a different people with a different outlook on life . . . because they kind of are.
Anyway, take that for what you will, but we’ll find out soon enough.
2030 to be exact:
By this estimate, at least, 2030 represents something of a flippening: the point at which the young voters outnumber the has-beens.
As much as getting younger is generally something to look forward to, I’m a little nervous about this one.
Without trying to be too much of an old man shouting at the sky (because the reality is that I’m neither), it sure does feel like the mechanisms for cultural transmission have broken down quite a bit. And I think the G7 have culturally been on a pretty good run, for the most part, for a pretty long time.
I suppose we’ll see what bits and pieces get carried into the future, sooner than many might think.
Previously, on Random Walk
Private Credit and Insurance, two peas in a pod (reprise), and a chart dump on default rates
five charts on the rise of private credit in life insurance
Energy in 1776
It’s July 4th, so Happy Birthday America, and we’re going to keep it light and only semi-topical.
Random Walk is an idea company dedicated to the discovery of idea alpha. Find differentiated data, perspectives and people, and keep your information mix lively. A foolish consistency is the hobgoblin of small minds. Fight the Great Idea Stagnation. Join Random Walk. Follow me on twitter. Follow me on substack:
As an aside, I’m trying to get my eldest to read Jules Verne, and even though she’s a very precocious reader, it’s a real struggle. “But think of the sense of adventure that inspired so many!” isn’t as persuasive, as I’d hoped.
Complex long-duration assets were financed with short-term liabilities, and when the short-term lenders began to lose their nerve, the only way to repay them was to offload those long-duration assets, which led to collapsing asset values, which led to more nervous short-term lenders, which led to more firesales, and so on and so forth.