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STREETWISE: The economy and the markets are intertwined – Sarasota Herald-Tribune

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Lauren Rudd
 |  Sarasota Herald-Tribune

The late Madame Marie of Asbury Park would have tried to convince you that tarot cards and tea leaves provided a degree of insight into the future of all things, including the stock market. Personally, for the stock market I would suggest you use data related to the health of the economy instead.

While not perfectly correlated, the economy and the financial markets are intertwined, meaning the economy’s cyclic behavior will play a key role in determining a successful investment strategy.

Data regarding the economy’s health is not hard to obtain. We are continually bombarded with a prodigious stream of economic news, reports and statistics. The problem is to distill out the information that is salient to making profitable investment decisions.

Investors often utilize so-called “expert opinion” to capsulize economic information. However, it should come as no surprise that many experts could have a self-serving motive. While their credentials are often impeccable at first blush, they also understand where their employers’ profits are coming from.

Government economists are in a similar position. They are charged with advising an administration on economic matters. Should they then be faulted for defending the administration’s resulting economic programs and policies?

After all, it wasn’t too long ago that the consensus seemed to be that the current rally was headed for a bad end, sending markets back to lower numbers due to the coronavirus coming out of China.

Yet, the S&P 500 has done well up until recently. And you would think that to a great degree the voices of doom would have gone mute. To the contrary: Calls have continued as they sought refuge in the debacle brought about in part by groups such as r/wallstreetbets, also known as WSB.

Speculators, as opposed to investors, saw an opportunity to make themselves rich quickly for the market to claim new highs. There can only be one ending, despite some rooting for those that are causing consternation to major short sellers.

From an investment perspective, you are probably best advised to view most prognostications with a degree of skepticism, as you balance them against your personal judgment as to what the future portends. Always keep in mind the four key attributes of any financial or economic indicator: relevancy, timeliness, availability and stability.

For example, the most widely watched indicator for measuring inflation is the Consumer Price Index (CPI). Every month the Labor Department samples the prices of items that make up a representative basket of goods. A change in the prices of these goods will move the index up or down.

The consumer-price index rose 0.4% in December compared with November. From all of 2020, the index rose 1.4 percent. This is supporting evidence that the Fed will likely continue to hold to its stated position of keeping interest rates unchanged for the remainder of this year and possibly into 2022, as they have stated on at least two recent occasions.

Little discussed is that by maintaining public confidence that inflation will remain under control is a critical aspect to keeping prices contained.

So, what about the current unemployment level? Is there an effect? A paper by the San Francisco Federal Reserve concluded that the rate of unemployment is all but irrelevant to the trajectory of inflation.

That research could be important to the Fed’s thinking on interest rates. The paper’s researchers tested what would happen to inflation if the level of sustainable unemployment were 2 percentage points higher than currently thought, or if there were a lot less slack in the labor market than currently estimated.

The result was very little inflationary change. However, when the researchers modeled what would happen if inflation expectations were to rise, they found so too would actual inflation.

“Inflation dynamics today are primarily explained, not by economic slack, but by the public’s expectations that monetary policy will keep inflation close to the Federal Reserve’s target,” the researchers wrote. “Giving people a reason to doubt the central bank’s commitment to maintaining inflation near target is clearly costly.”

You can write to Lauren Rudd at Lauren.Rudd@RuddInternational.com or call him at 941-706-3449. For back columns go to RuddInternational.com.

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Growing the economy, not cutting debt, must be our priority – The Irish Times

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The economic policy response to the pandemic has been compared to wartime. Coronavirus has changed many things, not least the terms of the debate about government intervention in the economy. The raw numbers speak for themselves.

In Ireland, the initial response consisted of measures that totalled around €24.5 billion. This amounted to 14 per cent of the annual size of the economy, as measured by GNI* – which tries to strip out some of the distortions caused by the multinational sector. The cost has grown as restrictions have been extended. The eventual size of the bill will, of course, depend on how long those restrictions last.

Fourteen per cent (and growing) of your economy is a bill that would have been unimaginable a year ago, particularly as most of it has been borrowed. Most economists would have said that it is a fiscal trick impossible to pull off, at least not without a crisis in government debt markets.

We haven’t had a crisis because most of the money was lent to us by the ECB. Depending on which looking glass you use, we are either borrowing from ourselves or printing the money. Or, ultimately, a bit of both.

The UK chancellor, Rishi Sunak, last week made, by my calculations, his 16th fiscal announcement of the pandemic. He called it a budget. It was really just another update (albeit an extensive one) on spending and taxation in the wake of the crisis. Pages of estimates and pure guesses about the future of the UK economy revealed a pandemic bill, so far, reckoned to be £407 billion. That’s about 19 per cent of UK GDP. Sunak stated, correctly, that nothing like this has ever been seen, apart from during the two world wars.

So it looks like the UK has been more generous than Ireland. But we are probably not comparing like with like. It is too early to be reaching that kind of judgement. Either way, we are looking at jaw-droppingly large numbers, amounts of borrowed money that have caused barely a flutter of excitement in government debt markets. Until very recently, at least.

That wartime comparison was also drawn recently by Ken Rogoff, former chief economist at the IMF. During the great financial crisis, Rogoff became famous in certain circles for warning that governments shouldn’t allow debt to reach, let alone exceed, 100 per cent of GDP. Such thinking lead to the subsequent decade of austerity. Conventional wisdom dictated that debt had to be stabilised and preferably reduced.

Rogoff recanted this week, Well, sort of. He admitted that his 100 per cent warning was, in reality, just a rule of thumb for normal times. Recognising just how abnormal current circumstances are, he suggested that today’s priority should be spending on pandemic relief and, I think, trying to grow your way out the problem.

Rule of thumb

Debt-to-GDP is a ratio. All we have are Rogoff-style rules of thumb about what is sustainable – or not. Economics provides zero precision about the right ratio. Austerity was about managing down the numerator: that focus on borrowing. The current crisis means that we should focus on the denominator: get growth up.

It’s a point of view not shared by Sunak. He presented a gloomy outlook for the UK economy and did nothing about that outlook: the pandemic will leave permanent scars. In the short term, he extended supports and reliefs until September. For the medium term all that awaits the UK are tax hikes and spending cuts. It was, said Simon Wren-Lewis, professor at Oxford, an austerity budget resonant of the Cameron-Osborne years.

Sunak laid claim “to levelling with the British people”. He didn’t. He should have said that we have little idea about where the economy will be in the years following the pandemic’s end and that he will act appropriately when we do know.

If anyone believes he means to raise taxes and slash spending in the run-up to the next general election, I have a bridge to sell them. He should have said that all the forecasts, slavishly followed by all of the media, will all be wrong.

Sunak said nothing about Brexit costs, the green economy or the social care crisis. There was no extra money for front line workers. He did nothing for the UK’s rate of economic growth. It was all about the numerator, not the denominator.

The Economist newspaper this week called for a post-pandemic rewrite of the social contract. Sunak’s response was a big raspberry.

If Paschal Donohue is looking for pointers about what to do in a post-crisis world he should not take any cues from the UK. Sunak got it wrong and revealed a mindset unmoved by the seismic changes wrought by the pandemic. A century ago Keynes wrote prophetically about the post-war fiscal settlement and the awful consequences of wrong-headed orthodoxy. He would marvel about how little has changed.

Pandemic relief is one thing, the next is growth. The US is where all of the new thinking – and action – is going on. The bet – not without risks – is that we have to focus on the denominator.

Bond markets may or may not in future be so quiescent but much power here lies in the hands of the ECB. Growing our economies – and that social contract rethink – are the mammoth tasks that await.

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US Economy Ready to Surge With Stimulus, Expanding Vaccines – BNN

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(Bloomberg) — With Democrats on the verge of passing an almost $2 trillion stimulus bill and Covid-19 vaccinations moving ahead, the U.S. economic outlook is much sunnier than it looked in early January.

The latest Bloomberg monthly survey of economists shows the annualized pace of growth in the first quarter will be 4.8%, twice as fast as respondents expected just two months ago. For the full year, gross domestic product is projected to rise 5.5%, which would be the fastest since 1984 and is up from January’s estimate of 4.1%.

After January’s key run-off elections in Georgia, where Democrats secured two Senate seats to win slim control of the chamber from Republicans, economists were generally penciling in a pandemic relief package worth around $1 trillion. Democrats stuck together to push through a bill almost double that size; no Republican senators voted for the plan on Saturday. The plan next goes back to the House for a final vote.

An additional round of $1,400 stimulus checks for millions of Americans, combined with supplemental jobless benefits and the acceleration in vaccinations, should help sustain growth throughout the year, said Stephen Stanley, chief economist at Amherst Pierpont Securities LLC.

Government stimulus will “give a shot of adrenaline for a short period of time,” Stanley said. He noted that “it will kind of fade out, and the more fundamental aspect of things, which is really just opening up and getting back to something closer to the pre-pandemic norm for activity, should kick in.”

The Bloomberg survey of 67 economists was conducted Feb. 26 to March 3.

While economic growth is primed for a strong 2021, it could also mean another partisan divide over the next item on President Joe Biden’s legislative agenda: a multitrillion-dollar plan focusing on infrastructure.

What Bloomberg Economics Says…

Easing activity restrictions and rising vaccinations will allow consumer spending to regain its long-held status as the key economic engine this year. While another round of stimulus is set to push growth to its pre-pandemic trend by midyear, a stealth buildup of $1.7 trillion in extra savings means even more dry tinder for spending.

— Yelena Shulyatyeva and Andrew Husby, economists

For the full note, click here

Democrats hope the package could get bipartisan support, but Republicans — and possibly some moderate Democrats — are likely to be concerned about how the proposal would be funded, certain add-on provisions, and the size of the overall plan, especially if the economy shows sustained progress in the coming months.

U.S. Vaccines Pass 85 Million Doses

Recent reports have shown broad economic improvement in the U.S. Retail sales rose in January by the most in seven months, and a measure of U.S. manufacturing expanded at the fastest pace in three years in February.

The labor market, which has been slower to recover, showed a higher-than-expected employment gain in February, though jobs remain well below pre-pandemic levels.

Meanwhile, the daily rate of vaccinations has quadrupled and new coronavirus infections have plummeted since early January. Governors in Texas and Mississippi — despite criticism from health experts — announced plans to lift coronavirus-related restrictions entirely, citing a decline in hospitalizations and an increase in inoculations.

Getting the pandemic under control is still key to the economic recovery, “and then the checks, and the money — all this stuff will accelerate it really quickly once you’ve done that,” Heather Boushey, member of the White House Council of Economic Advisers, said in an interview.

©2021 Bloomberg L.P.

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Spike in Canada exports to U.S. leads to surprise January trade surplus

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exports

By Julie Gordon

OTTAWA (Reuters) – Canada‘s exports to the United States, its largest trading partner, rose sharply in January, leading to a surprise trade surplus, Statistics Canada said on Friday.

Canada‘s trade surplus with the rest of the world was C$1.41 billion ($1.11 billion) in January, the largest since July 2014. Analysts polled by Reuters had predicted a deficit of C$1.40 billion.

“In a sea of really bad news this is an island paradise. Everything is up,” said Peter Hall, chief economist at Export Development Canada.

“This is very strongly driven by our top trading partner,” Hall said, noting that demand from the United States will continue to be strong as its economy strengthens with increased vaccinations spurring a broader recovery from the COVID-19 pandemic.

The Canadian dollar clawed back some of its earlier decline after the data, trading 0.1% lower at 1.2678 to the greenback, or 78.88 U.S. cents.

Canada‘s exports jumped 8.1% in January, led by a large sale of used aircraft to the United States. Even without the atypical aircraft sale, aggregate exports would have been up, with strong exports of gold bars, crude oil and lumber.

Excluding the swings of 2020, exports posted their largest increase since August 1995.

“The return to surplus in January … is consistent with expectations that Canada‘s trade position will improve through 2021 amid returning global demand and firmer energy prices,” said Ryan Brecht, a senior economist at Action Economics.

Canada‘s export of services rose slightly on an increase in transportation services, but they still remain 16.3% below the February 2020 level.

Imports edged up 0.9% in January, mostly on higher imports of energy products. Canada‘s December trade deficit was revised to C$1.98 billion.

 

(Reporting by Julie Gordon in Ottawa, additional reporting by David Ljunggren and Dale Smith, Fergal Smith in Toronto; Editing by Paul Simao and Bill Berkrot)

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