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Out-of-equilibrium economy will keep the Fed 'hostage' to stock market, strategist argues – MarketWatch

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It’s the time of year to look back over the last 12 months, but one strategist reached back to the 19th century to describe what’s going on.

In 1898, Swedish economist Knut Wicksell said equilibrium was only attained if the marginal return on capital is the same as the cost of money, notes Kit Juckes, the London-based head of currency strategy for French bank Société Générale. (Here’s a nice summary of Wicksell’s views, from the St. Louis Federal Reserve.)

Fast-forward a bit, and Juckes points out that the yield on the U.S. 10-year Treasury has averaged 6.2% over the last 50 years. During that time period, nominal gross domestic product growth (real GDP growth plus inflation), also has averaged 6.2%.

That is, of course, a far cry from present conditions, where the 10-year yield can’t break 1%, and the economy has been contracting over the last 12 months. And even over the last decade, 10-year yields have been trailing GDP growth.

Juckes nearly summarizes what has happened. “Central banks spent the 1980s getting inflation under control, but the 1990s saw the emergence of downward pressure on CPI [consumer price index] inflation in particular, from a number of sources: baby boomers entered the labor force, the Soviet Union’s collapse massively boosted Europe’s labor force, China’s entry into the world economy changed supply of a host of goods, technology had a similar effect and for good measure, labor unions became far less powerful,” he writes.

After the 2008-09 financial crisis and during the COVID-19 pandemic, “interest rates are glued to the floor.” But even as inflation is under control, Juckes says it is obvious economies aren’t in equilibrium, as low interest rates have sent “asset prices into orbit. And while that is lovely for those who own assets, it increases inequality, fuels political division between asset-rich and asset-poor, and leaves the Fed hostage to equity markets because they can’t afford to trigger a correction in indices that would send the U.S. economy back into recession. That gives markets far too much power over policy,” he says.

The next rate hike cycle will peak even lower than the last one — the effective Fed funds rate was 2.4% in 2019 — “because equity valuations will make it so.” Juckes says this disequilibrium will leave the global economy fragile and prone to another crisis.

The buzz

Pharmaceutical company AstraZeneca
AZN,
+1.05%

on Wednesday said the coronavirus vaccine it has developed with the University of Oxford has been approved by the U.K. government. The U.S., meanwhile, said the U.K. strain that spreads more quickly has been identified in Colorado. Hospitalizations reached a daily record of 124,686 on Tuesday, according to the COVID-19 tracking project, as California extended its lockdown.

Congressman-elect Luke Letlow, a Louisiana Republican, has died at age 41 from coronavirus.

The fate of both the $2,000-per-person stimulus check, as well as the defense bill previously vetoed by President Donald Trump, is still in question in the U.S. Senate. Analysts expect the upper chamber to kill the additional stimulus-check legislation approved in the House, but the proposal has won support from a handful of Republicans even as Majority Leader Mitch McConnell has blocked a vote.

With polls extremely close on the key Senate races in Georgia, President-elect Joe Biden and Vice President-elect Kamala Harris will separately travel to the Peach State to campaign for the two seats, the Biden press office said. Democrats would take control of the Senate if they win both elections.

The U.K. Parliament is expected to easily clear the trade agreement reached with the European Union.

The markets

After the S&P 500
SPX,
-0.22%

and Nasdaq Composite
COMP,
-0.38%

fell all the way to the second-highest level in history, U.S. stock futures
ES00,
+0.35%

NQ00,
+0.39%

were again pointing upward.

The U.S. dollar
DXY,
-0.29%

fell. The yield on the 10-year Treasury
TMUBMUSD10Y,
0.950%

was 0.95%. Bitcoin
BTCUSD,
+2.99%

rose as high as $28,752, a fresh record, according to CoinDesk data.

The tweet

iframe.twitter-tweet
width: 100% !important;

There was a lot of discussion on social media about this CNBC interview with Interactive Brokers
IBKR,
-1.20%

chairman Thomas Peterffy, where he said for the first time in its history, its customers were net short out-of-the-money stock options. “It’s usually about Tesla
TSLA,
+0.35%

and Amazon
AMZN,
+1.16%

and Apple
AAPL,
-1.33%

— that’s where most of the action seems to be. So the Robinhood folks are long these options and Interactive customers are short these options,” said Peterffy. Robinhood is the brokerage that many young investors trade on.

Random reads

A Greek nurse erected his own intensive care unit after not liking the treatment options available when his wife, her parents and her brother got COVID-19.

Archives reveal a comedian’s prank call to test out an impersonation may have saved the government of former U.K. Prime Minister John Major.

Need to Know starts early and is updated until the opening bell, but sign up here to get it delivered once to your email box. The emailed version will be sent out at about 7:30 a.m. Eastern.

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Economy

Biden’s Vaccination Goals Could Lift the Economy – Barron's

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This commentary was issued recently by money managers, research firms, and market newsletter writers and has been edited by Barron’s.

Too Much Stimulus, Too Few Shots

Paulsen’s Perspective
The Leuthold Group
Jan. 21: The broad U-6 unemployment rate is currently 11.7%, and the regular U-3 rate is still 6.7%. Unemployment is higher today than about 73% of the time since 1950, so it is understandable why both monetary and fiscal policies remain full tilt.

Economic programs traditionally take time to improve unemployment after a recession. However, the Covid-19 crisis created a unique divergence within the job market that will not be solved by customary economic policies, but instead by vaccinations.

Consequently, with literally a “shot in the arm,” the job market may come back to life much quicker than almost anyone anticipates. Should this occur, policy officials will be left with a nearly fully employed economy and massive, excess stimulus—potentially creating additional problems down the road.

The fastest route to economic recovery—and perhaps the best approach to minimize unintended consequences longer term—is not another round of relief checks, but instead greater resources behind President Joe Biden’s desire to “put shots” in 100 million arms within 100 days.

Nutty Speculation

Investor Advisory Service
ICLUBcentral
Jan. 20: Outside of imperiled commercial real estate, almost no asset class looks cheap right now. Bonds certainly do not impress, with safe yields still near zero while inflation knocks on the door. Equities look better. The Wall Street Journal estimates the S&P 500 index’s forward price/earnings ratio at 25, almost exactly where it stood a year ago at this time. Investors will need to be selective. Corners of the market are clearly in bubble territory. This doesn’t have to end badly for investors, as the 2000-01 “tech wreck” left many stocks unscathed even as speculative stocks fell sharply.

Some of the stories we are witness to right now can scarcely be believed. The CEO of a fashionable growth company with a P/E over 1,000 and a market cap of almost $1 trillion recently tweeted his support for a social-media upstart called Signal. Investors responded by blasting money into an unrelated penny stock called Signal Advance, which saw its share price increase from $0.60 per share to a high of $70.85. Again, this is a totally unrelated company with a similar name. The stock cooled off somewhat, but as of this writing, Signal Advance remains up more than 1,000% from its unaffected price. The market is littered with similar stories of rampant, uninformed speculation.

Investors who stick to reliable companies backed by solid fundamentals still have a good chance to grow their purchasing power over time, even in an elevated market. Investors who throw their money into the wind will lose it. It is as simple as that.

Goodbye, Financial Crisis Funk

2020 Fourth Quarter Investor Letter
Pelican Bay Capital Management
Jan. 14: We believe that the theme for 2021 will be optimism. Society is poised to emerge from isolation and deprivation wrought by the pandemic. We collectively faced a crucible, and while it still may be hard for many to recognize it, we are all stronger and better prepared for the future….

Looking back at the pandemic, it may prove to be a blessing for society, providing the trigger that shakes us out of the funk we have found ourselves in since the financial crisis. The digitization of work and productivity is a boon for workers everywhere, as many are finally free of the 9-to-5 grind and daily commute to a large, stuffy office building. The interior of the country will have a renaissance, as high-quality jobs no longer require a cubicle in unaffordable city centers along the coasts. Suddenly, the immense challenge and costs of reversing climate change seem less daunting. Most important, we have unlocked a medical miracle that will have a profound impact on health care and longevity, akin to the engineering gains ushered in by the space race of the 1960s.

Covid Relief Could Shrink

Special Commentary
Wells Fargo
Jan. 22: We view Biden’s $1.9 trillion proposal [for Covid-19 relief] as an opening bid and not necessarily an outline that will be translated into bill language verbatim. But, the 19-page outline is fairly detailed for an opening bid, and it firmly signals that another Covid relief deal will be a day-one legislative priority for the Biden administration.

Our expectation is that a deal will eventually be struck, probably in March, but that the final legislation will be much smaller than what is in Biden’s proposal and more along the lines of the $900 billion package that was enacted in December.

We think that the balance of risks is skewed towards a smaller deal, or no deal at all, rather than a bigger deal closer to the initial Biden proposal. That said, when paired with the $900 billion package enacted at the end of December, this should be plenty of fiscal support to see the U.S. economy through to the summer when, hopefully, vaccine distribution is well on its way to completion.

Needed: More Houses

December Existing Home Sales
Amherst Pierpont
Jan. 22: Existing-home sales ended the year in a familiar place—stronger than expected. The December sales pace increased to 6.76 million units, up slightly from November though down somewhat from October’s 14-year high. For the year, existing-home sales totaled 5.64 million, up by more than 5% from 2019. It would have been hard to foresee that back in April!

The release strikes an optimistic tone, as the National Association of Realtors, or NAR, expects demand to remain robust in 2021, which seems like a good bet to me, as well. The biggest impediment to higher sales at this point is a dearth of available supply. The number of existing homes on the market fell by 16% from November and by 23% from a year ago. The months’ supply figure dropped to 1.9%, the first time ever below two months (going back to 1982). The NAR release applauds the sharp increase in housing starts in recent months but argues, as I have, that starts will probably need to remain vigorous for at least another year or two to catch up to the once-in-a-generation rise in demand for homes that occurred in large part because of the pandemic.

In Japan, Ouch!

Daily Notes on the Global Economy
High Frequency Economics
Jan. 22: Here is more bad news about Japan’s overall economic situation: National department-store sales in December were 13.7% lower than a year ago, according to figures this morning from industry association JDSA. In November, they were 14.3% lower than a year ago. Sales are not only depressed by public health measures, but also the population is aging fast and shrinking. That means fewer young households establishing new homes and families, and fewer customers for large-scale retail stores overall. Declining retail spending as the nation depopulates is a secular crisis, upon which the pandemic has been overlaid. Ouch!

To be considered for this section, material, with the author’s name and address, should be sent to MarketWatch@barrons.com.

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What does the economy need now? 4 suggestions for Biden's coronavirus relief bill – The Conversation US

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Editor’s note: The Biden administration has made it clear it wants to inject more money into the U.S. economy and provide more aid for priorities like vaccines, reopening schools and state governments. We asked four economists to share what’s on the top of their wish lists for Biden and Congress, and why.

A better way to save businesses while helping workers

Steven Pressman, Colorado State University

Since March, 20,000 U.S. businesses have failed every month, on average. Small companies, which employ nearly half of all workers, have been hit hardest. The U.S. economy will struggle to recover without significant support for small businesses and their workers.

One way Congress addressed these problems back in March is by offering small companies forgivable loans if they kept workers on their payroll for 10 weeks. While helpful, the Paycheck Protection Program came with major flaws, such as a design that led to lots of fraud. In addition, billions of dollars went to companies that didn’t need it, while some of those in greatest need couldn’t secure adequate funds.

The U.K. had a different solution. Its government created the Coronavirus Job Retention Scheme, a form of wage and job insurance for workers. The government pays up to 80% of usual wages – subject to an income cap – to furloughed workers that companies retain as employees. Companies cover another 20% of usual wages. Low-income workers also receive additional monthly payments of up to the equivalent of about US$500.

Workers can be partially furloughed, working three or four days per week rather than five. This solves the problem of what to do about workers whose hours get cut or who go from full-time to part-time status.

The plan has helped companies reduce their labor costs, while maintaining flexibility to bring workers back when conditions allow. Importantly, aid goes to workers – not companies – which has ensured workers and their incomes have been protected throughout the crisis. And aid goes only to workers whose companies experience problems due to the coronavirus pandemic.

Unemployment rates in the two countries tell part of the British success story. In the U.K., unemployment increased gradually last year from 4% pre-pandemic to 4.9% in October. U.S. unemployment, in contrast, almost doubled from 3.5% to 6.7% in the that same period, peaking at nearly 15% in April.

The U.K. program has provided support to workers throughout the pandemic’s ups and downs. The Paycheck Protection Program was meant to be temporary, although more funds were added in December.

In the U.K., fraud has been limited because companies don’t get the money. And the government has encouraged workers to become whistleblowers, while imposing large penalties on the officers of companies engaged in fraud.

Rather than continuing to fund the Paycheck Protection Program, Congress and the president should switch gears and enact a program like the U.K.‘s that will see America through the crisis, however long it lasts.

Protesters display placards during a demonstration to support for tenants and homeowners at risk of eviction in Boston on Oct. 11.
An eviction crisis looms for the Biden administration.
AP Photo/Steven Senne

Addressing the eviction crisis

Melanie Long, College of Wooster

The sharp rise in unemployment due to the pandemic has left many Americans struggling to pay the bills. Renters have been among the most vulnerable.

Compared with homeowners, renters are more likely to be poor, young and either Black or Hispanic – the exact same demographic of those who have suffered the most from the pandemic’s economic fallout.

The result has been a looming eviction crisis that has been staved off by a patchwork of federal, state and local moratoriums. Millions of renters could face homelessness once existing moratoriums expire and accumulated back rent comes due.

About 9 million households have fallen behind on rent payments, with over 1 million estimated to owe $5,000 or more. This could also worsen the public health situation and slow the economic recovery.

To address this crisis, I believe Congress needs to both provide short-term solutions and long-term fixes.

For starters, it’s vital that the Centers for Disease Control and Prevention’s eviction moratorium continue. On Jan. 20, Biden extended the moratorium – which was set to expire at the end of January – to March 31. But that will likely need to be extended further.

Another critical need is rental and housing assistance. Biden’s proposed stimulus package already includes $30 million to help renters and support struggling landlords. Adding even more assistance could have major economic benefits as low-income beneficiaries especially are likely to spend every extra penny on food and other goods, stimulating the economy.

Access to affordable housing has been worsening for years, especially in communities of color. The gap between black and white homeownership rates has widened since the 1960s. The fact that only 42% of Black Americans own their homes, compared with 72% of their white peers, means most of them are renters, making them more vulnerable to losing their homes. It’s also largely to blame for the stark racial wealth gap in the U.S., which in turn reduces economic growth.

Congress could begin to address these deeper problems by providing down payment assistance in historically redlined communities, which would help households that are not currently on the edge of a financial cliff take advantage of historically low interest rates as so many others have.

A woman tries to work on her computer while two young girls try to get her attention.
Women have borne the brunt of increased child care needs during the pandemic.
MoMo Productions/DigitalVision via Getty Images

Helping women get back to work

Veronika Dolar, SUNY Old Westbury

During the pandemic, unemployment has been felt most acutely by women.

Women in the U.S. lost a total of 156,000 jobs in December, even as men gained 14,000. There were nearly 2.1 million fewer women in the labor force at the end of 2020 than there were pre-pandemic.

One reason for this is that women are more heavily represented in sectors that saw the biggest job losses in December, such as hospitality and private education. But another important one is that women generally have been expected to increase their already disproportionate share of household child care duties after COVID-19 shut down schools.

All of this could lead to a significant decline in women’s total wages over time – one estimate puts it at $64.5 billion a year. This would result in a sharp drop in economic activity and billions in lost tax revenue for state and federal budgets.

But Congress could help offset this outcome in several ways.

One of the most critical is helping parents find affordable child care facilities. More than a quarter of child care centers in the U.S. remain closed because of the pandemic, and those that are open are often unaffordable. Child care costs have increased 47% during the pandemic.

Biden wants to address this by providing $25 billion to directly support child care providers and $15 billion to help low-income families afford care.

While this funding would go a long way to ensuring mothers have access to affordable child care, the lack of flexibility at most providers means women with uncertain work hours or who need other accommodations will still struggle. A more comprehensive plan should include some support to hire babysitters or even child support vouchers that could be spent as needed.

The other side of this issue is ensuring new mothers and fathers can take time off work to care for their children themselves. Biden’s proposal includes up to 14 weeks of paid family and medical leave, which will help ensure women don’t have to choose between a new baby and their career.

Unemployment insurance reform

R. Andrew Butters, Indiana University

Millions of Americans who have lost their jobs as a result of the pandemic have relied on the unemployment insurance system to pay for bills, rent and food.

But that system, in terms of staffing and technology, wasn’t designed to handle the unprecedented need seen today. About 5 million people made continuing claims for jobless benefits in January. That’s down from a record 25 million in May but still near the highest the figure had ever been previously.

Aid packages passed in March and December extended the benefits to people who don’t normally receive them – such as gig workers and part-time employees – and included a federal supplement. But these changes added strain to the system and made it more difficult to prevent fraud and process legitimate claims.

[Deep knowledge, daily. Sign up for The Conversation’s newsletter.]

Keeping unemployment benefits flowing to people out of work due to the pandemic is essential to the economic recovery, both so that the unemployed can afford to live and also for the broader economy, which depends on consumer spending.

But this requires ensuring the system is effective and reaches everyone who needs help. Lawmakers could begin to do this by making some temporary changes permanent.

For example, traditionally, independent contractors, part-time employees and some other categories have been ineligible for unemployment benefits. In March, Congress created two programs that specifically provide them with benefits. But those programs expire in March. Lawmakers shouldn’t simply extend them again but ensure these growing segments of the workforce always have access to benefits.

Lawmakers could also make sure extended benefits – that is, allowing the unemployed to receive up to 50 rather than only 26 weeks of insurance – don’t expire in the March.

And I believe the relief package should also consider investing to help state offices hire more workers, update their technology infrastructure and coordinate more effectively with other states. This should lead to timelier and more accurate payments and protect against the most sophisticated attempts at fraud.

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Biden's rescue plan will give U.S. economy significant boost: Reuters poll – The Guardian

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By Indradip Ghosh and Richa Rebello

BENGALURU (Reuters) – U.S. President Joe Biden’s proposed fiscal package will boost the coronavirus-hit economy significantly, according to a majority of economists in a Reuters poll, and they expect it to return to its pre-COVID-19 size within a year.

Biden has outlined a $1.9 trillion stimulus package proposal to jump-start the world’s largest economy, which has been at the epicenter of the COVID-19 pandemic having lost over 400,000 lives, fueling optimism and sending Wall Street stocks to record highs on Thursday.

Hopes for an upswing in U.S. economic growth, helped by the huge stimulus plan, was reflected in the Jan. 19-22 Reuters poll of more 100 economists.

In response to an additional question, over 90%, or 42 of 46 economists, said the planned fiscal stimulus would boost the economy significantly.

“There are crosswinds to begin 2021 as fiscal stimulus helps to offset the virus and targeted lockdowns. The vaccine rollout will neutralize the latter over the course of the year,” said Michelle Meyer, U.S. economist at Bank of America Securities.

“And upside risks to our…growth forecast are building if the Democrat-controlled government can pass additional stimulus. The high level of virus cases is extremely disheartening but the more that the virus weighs on growth, the more likely that stimulus will be passed.”

For a Reuters poll graphic on the U.S. economic outlook:

https://fingfx.thomsonreuters.com/gfx/polling/oakveynqovr/Reuters%20Poll%20-%20U.S.%20economy%20outlook.png

The U.S. economy, which recovered at an annualized pace of 33.4% in the third quarter last year from a record slump of 31.4% in the second, grew 4.4% in the final three months of the year, the poll suggested.

Growth was expected to slow to 2.3% in the current quarter – marking the weakest prediction for the period since a poll in February 2020 – amid renewed restrictions.

But it was then expected to accelerate to 4.3%, 5.1%, 4.0% in the subsequent three quarters, a solid upgrade from 3.8%, 3.9% and 3.4% predicted for those periods last month.

On an annual basis, the economy – after likely contracting 3.5% last year – was expected to grow 4.0% this year and 3.3% in 2022, an upgrade from last month.

For a graphic on Reuters Poll – U.S. economy and Fed monetary policy – January 2021:

https://fingfx.thomsonreuters.com/gfx/polling/azgpoljbkvd/U.S.%20economy.PNG

Nearly 90%, or 49 of 56 economists, who expressed a view said that the U.S. economy would reach its pre-COVID-19 levels within a year, including 16 who expected it to do so within six months.

“Even without the stimulus package, we had already thought the economy would get back to pre-COVID levels by the middle of this year,” said Jacob Oubina, senior U.S. economist at RBC Capital Markets.

“With the new stimulus package there will be more direct money in people’s pockets, easily boosting the economy, provided a vaccine rollout progresses in a constructive manner.”

But unemployment was not predicted to fall below its pre-pandemic levels of around 3.5% until 2024 at least.

When asked what was more likely for inflation this year, only one said it would ease. The other 40 economists were almost evenly split between “a significant pickup” and price pressures remaining “about the same as last year.”

Still, the core Personal Consumption Expenditures (PCE) price index – the Federal Reserve’s preferred inflation gauge – was forecast to average below the target of 2% on an annual basis until 2024 at least, prompting the central bank to keep interest rates unchanged near zero over the forecast horizon.

“I don’t think it will be an increase in underlying (inflation) trend, it is sort of a rebound in prices that have been depressed during the pandemic,” said Scott Brown, chief economist at Raymond James.

(For other stories from the Reuters global long-term economic outlook polls package:)

(Reporting by Indradip Ghosh and Richa Rebello; Additional reporting by Manjul Paul; Polling by Mumal Rathore; Editing by Rahul Karunakar and Hugh Lawson)

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