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The economy and markets in 2020?



Economists, executives and investors are reading the 2020 tea leaves with heightened scrutiny in an effort to divine what this year holds for the U.S. economy and for ordinary Americans. Here are the events they say are most likely to impact and potentially reshape our economic trajectory.


The U.S. presidential election


Economists say if the 2020 election leads to a divided government like the current one, little will change in a meaningful way for businesses and investors. If a single party ends up controlling the White House and both chambers of Congress, though, the economic impact could be greater.


“Equity markets have traditionally performed better under Democrats than Republicans when you average it out on a long-term basis, which defies what most people believe are facts but… financial markets are terrified of the far left wing of the Democratic party,” said Joseph Heider, president of Cirrus Wealth Management. “If Elizabeth Warren or Bernie Sanders look like they could be the nominee of the Democratic party, I think that could have very negative impact on financial markets.”

Both of these candidates’ pledges to rein in big companies and raise taxes on corporations and the wealthy would hit banking, finance and tech sectors — areas that buoyed indexes in 2019 — especially hard. “You never know what would happen, but I don’t think that would be a positive outcome for the financial markets,” said Heider.

“If the Republicans take back the House and maintain control of the Senate and we have a second term for President Donald Trump, I think we get a second round of tax cuts,” said Brad McMillan, chief investment officer for Commonwealth Financial Network.

He argued, though, that a Democratic president and Congress wouldn’t be as destabilizing as some market observers fear. “On one hand, taxes go up — everyone assumes it’s going to kill the economy… but remember government spending is also going to go up significantly,” he said. “Net-net, it’s a much better result than people are thinking.”


Trade tensions with (and beyond) China


Although the president announced on Tuesday that he would sign a phase one trade deal between the U.S. and China at the White House on Jan. 15, this by no means takes worries about tariffs and supply chain disruptions off the table, experts say, especially with the U.S. withdrawing from large multilateral agreements and ceding its position as de facto leader in global trade.

“The real thing that’s going to change the world over the next decade is the U.S. is no longer the mainstay of the global free trading system,” McMillan said.

“As we look forward into 2020, I think the trade wars are either resolved or they accelerate… we’ll have to see how that unfolds,” Heider said. Although Great Britain is not a major trading partner of the U.S., Brexit also could be potentially disruptive, particularly if the country leaves the European Union without a plan in place. “Those are both unknowns,” he added.

A number of market observers express doubt that the current truce between the U.S. and China is more than a pause, and suggest that real or threatened tariffs could continue to cast a chill on business investment in 2020.

“I wouldn’t be surprised if those tariffs came back into play,” said Dan North, chief economist at Euler Hermes North America. If the White House revisits its recently rescinded plan to levy sanctions on nearly all consumer goods coming from China, spending and confidence would drop. “That’s where it will hurt the economy,” North predicted.

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In the past, Trump has pulled back from nearly-complete trade deals over the perception of being unfairly treated — and could very well do so again, observers note.

“The vast majority of the phase one is really centered on agriculture, but the question remains, what’s the enforceability mechanism here? It’s really unclear at this point,” said Lindsey Piegza, chief economist at Stifel Fixed Income.

Beijing has pledged to operate more fairly, but whether or not that promise is kept remains to be seen, Piegza said. “They have time and time again promised to crack down on that with no positive outcomes,” which could derail the prospect of a more significant deal in the future.


The mainstreaming of cryptocurrencies


Facebook’s introduction of its Libra cryptocurrency platform is a shot across the bow to gatekeepers of traditional financial and currency systems that will continue to reverberate, said Lawrence White, an economics professor at New York University’s Stern School of Business.

“We’ll only know in the next couple of years if it turns out to be a non-event, but the Facebook Libra announcement certainly attracted a great deal of attention,” he said.

Although lawmakers in the U.S. have broached regulations for cryptocurrency, and Switzerland’s finance minister recently declared that Libra had “failed,” White maintained that cryptocurrencies are going to be a big topic of interest — and regulatory scrutiny. He pointed out that people who dismissed Libra’s antecedent as a passing fad were proven wrong.

“You wouldn’t have seen the Facebook Libra announcement had there not been the experience of and attention being paid to Bitcoin,” he said.

“Governments are thinking, how do we regulate this? Should we be creating our own digital currencies?” The existence, albeit nascent, of hundreds of other would-be contenders in the space show that cryptocurrencies are going to grow in both visibility and real financial impact, White predicted.


Federal Reserve rate-setting


Many economists hold the view that ultra-low interest rates have helped propel the bull market into unprecedented territory, but that could change in 2020.

“The biggest risk to me is inflation, and that’s not a risk most people are looking at. The CPI figures are starting to creep up a little more,” said Mitchell Goldberg, president of ClientFirst Strategy. “I don’t know if the Federal Reserve will be able to hold off if inflation rises.”

In spite of the president’s frequent complaints about his handpicked Fed Chairman Jerome Powell, Goldberg said he expected Powell to respond to financial, not political, signals. “I think eventually if Jerome Powell needs to raise rates, he will,” he said.

This has potentially market-shifting implications for highly leveraged companies. “The corporate debt situation, because of where rates are, is something we have to be mindful of,” said John Lynch, chief investment strategist at LPL Financial. “You have half the Bloomberg Barclays investment grade index literally a step away from junk.”

Because interest rates are so low, companies have been able to take on debt loads that would otherwise overwhelm them — which could happen if rates rise, Lynch said.

This could also create a downward spiral for indebted households, Piegza said. “I don’t know if we ever got to the point where consumers really cleaned off their household balance sheets enough. The way the U.S. economy has grown out of recession is by the consumer taking on new amounts of debt.” With corporate appetite for investment at a trough thanks to uncertainty over trade issues, consumers are the primary force still keeping the economy in drive. “Right now, we’re relying on the consumer in terms of discretionary purchases but already we’re starting to see some red flags,” she said. “This maybe a precarious position.”


Ballooning U.S. debt


Higher interest rates also have implications for how much the U.S. Treasury — in other words, taxpayers — pays to service the nation’s swelling debt load.

“One thing that’s remarkably forgotten at the moment is our fiscal situation in terms of deficit and debt. Nobody wants to talk about that right now,” North said. “If you look at the Congressional budget projections, the debt-to-GDP ratio keeps creeping up. Nobody has plans to cut back on the debt for all that money we’re borrowing.”

“I view it like climate change,” said Mark Zandi, chief economist at Moody’s Analytics. “We know it’s a problem if we don’t do something about it. We don’t know precisely when it will be a problem or how it will manifest itself. It’s a big deal. It’s just not a big deal today.”

Zandi pointed out that the unpredictability of when, where and how this will emerge as a headwind is precisely what makes it such an ominous threat. “At some point down the road, it’s going to be something that’s going to weigh very heavily on the economy. It’s corrosive. It’s going to wear down the economy over time.”

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China’s economy is raising red flags across markets as rebound disappoints



Financial markets have been raising red flags recently about China’s economy, but analysts said Wall Street is missing the big picture.

Growth in the world’s second largest economy accelerated to 4.5% in the first quarter from 2.9% in the fourth quarter following the relaxation of COVID restrictions late last year.

But more recent data have pointed to slowing growth in retail sales as well as drops in home sales, industrial production and fixed-asset investment.


That disappointed investors hoping for a bigger post-COVID rebound and led Wall Street to trim its growth estimates for the full year. Worries about China’s economy have rippled through markets.

Earlier this month, the yuan fell past a psychologically important level of 7 per dollar for the first time this year. The price of copper, once expected to see sizable gains due to high demand from Chinese factories, hit a four-month low in mid-May.

Meanwhile, shares of luxury brands that are reliant on China’s consumer base, have started tumbling on stagnant activity.

Chinese equity markets were not immune to slowing performance, as the CSI 300 index continued to slip this week. At the end of April, declining hopes for added stimulus brought the Shenzhen and Shanghai indices down by $519 billion in one week alone.

The stalling performance prompted Rockefeller International’s Ruchir Sharma to call the rebound narrative a “charade.”

But for one analyst, the growing pessimism around China’s economy could stem more from unrealistically high expectations and Wall Street’s tendency to prioritize immediate metrics over long-term outlooks.

“I feel sorry for these people in some ways, because every time the Chinese release some data, they have to say something about it,” Nicholas Lardy of the Peterson Institute for International Economics told Insider.

Heightened anticipations may be due to China’s response to the 2008 financial crisis, when Beijing infused the economy with massive stimulus and achieved double-digit growth, Pantheon Macroeconomics’ Duncan Wrigley said.

However, it also led to a huge debt hangover that China has worked to resolve for much of the last decade. So while demand is slowing, limiting debt growth is equally prioritized by party leaders, he said.

The country set a more conservative 5% growth target in March, which both analysts see as achievable. Although the country will avoid full-scale stimulus to reach the goal, it has a number of tools to ensure growth keeps ticking upwards.

Despite its aim to limit debt, China could increase the availability of cheap loans to sectors in need, as well as lift the lending quota for the three main policy banks, while allowing them to invest in local projects, Wrigley said.

If this isn’t enough, he noted that the People’s Bank of China could ease financial conditions later in the year, such as decreasing the reserve requirement ratio for banks.

But youth unemployment remains high, while heightened geopolitical risk may deny China’s access to foreign technology.

And private investment, a major source of growth in China, has nearly collapsed in the past 15 months, Lardy said.

This may have to do with stringent regulation of Chinese business, as President Xi Jinping expands the role of the state in the market, dissuading business owners from investing in their firms, he said.

“That’s the one big negative factor that I worry about more than all the other things that we have talked about. Why is private investment so weak?” he said.



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Quebec proposes making French mandatory for all economic immigration programs




Quebec is proposing that speaking French become mandatory criteria for provincial applicants.

Quebec Premier Francois Legault has proposed major changes to Quebec’s economic immigration criteria.


Speaking on May 25 with the Minister of Immigration, Francisation and Integration, Christine Frechette and the Minister of the French Language, Jean-François Roberge, Legault says the changes will ensure that nearly 100% of new economic immigrants to Quebec will know French before they arrive in the province by 2026. This is meant to promote Francophone economic immigration in Quebec.

“As we have seen for several years, French is in decline in Quebec,” said Legault. “Since 2018, our government has acted to protect our language, more than other successive governments since the adoption of Bill 101 under the Lévesque government. But if we want to reverse the trend, we must go further. By 2026, our goal is to have almost entirely Francophone economic immigration. We all have a duty, as Quebecers, to speak French, to transmit our culture on a daily basis, and to be proud of it.”

Discover if You Are Eligible for Canadian Immigration

Knowledge of oral French will be required for adults. This is meant to ensure that those who wish to settle in Quebec will be able to communicate in French throughout day-to-day interactions at work and in their communities.

The changes are part of a new permanent immigration program for skilled workers in Quebec. The province says the Skilled Worker Selection Program will “take into account the diverse needs of Quebec.”

Candidates in the program will be evaluated in four categories that have not yet been made clear, but the province says that three of the categories will require that the principal applicant and their accompanying spouse have knowledge of French.

There will also be revisions to existing programs. For example, the work experience requirement will be removed from the Quebec Experience Program for graduate students from a French-language study program.

Family reunification measures include making it mandatory for the guarantor to submit a plan for reception and integration that will support the learning of French for the person they are hosting.

Immigration is a shared responsibility between the federal and provincial governments. Quebec’s agreement is unique from other provinces in that it can select all its economic immigrants. Quebec does not have the authority to select family class sponsorship applicants or those who arrive in Canada as refugees or other humanitarian classes.

For 2023, Quebec has targeted that 65% of newcomers admitted to the province will be economic class.

Increasing immigration numbers in Quebec

The province is also considering raising the number of permanent selection admissions from 50,000 to 60,000 per year by 2027. This is in stark contrast to Legault’s recent comments that there was “no question” of Quebec accepting any rise in the number of newcomers and publicly rejecting the federal Immigration Levels Plan, which has a target of 500,000 permanent residents admitted to Canada each year by the end of 2025.

These changes also follow Quebec’s Immigration Levels Plan for 2023, where it was announced that the province would move away from plans that forecast only the coming year and begin introducing multi-year plans for immigration by 2024.

Why the changes?

Quebec is unique in Canada as it is the only province where French is the official language. The province is fiercely protective of its language, saying it is vital to protecting Quebec’s unique culture and status.

Legault is the leader of the Coalition Avenir Québec (CAQ) and is currently in his second term as Quebec’s premier, having been reelected last October. One of the main pillars of the CAQ party is to protect the French language in Quebec.

Immigration was one of the key issues in the recent election. Throughout his campaign, Legault said that Quebec would allow only 50,000 immigrants per year into the province as it would be difficult to accommodate and integrate more than that into Quebec society. He said that accepting more than that would be “a bit suicidal.”

Regardless, Quebec, like the rest of Canada, is experiencing a labour shortage as the population ages and the birth rate remains low. A report released last March by the Canadian Federation of Independent Business shows that the province could face an annual shortfall of up to nearly 18,000 immigrants, who would be able to fill Quebec’s labour needs.



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Lira hits record low, but stocks rise after Erdogan win in Turkey



The Turkish leader won the presidency for a third time after a run-off vote on Sunday.

The Turkish lira has plunged to record lows after the re-election of President Recep Tayyip Erdogan, a sign that currency markets are not confident in the country’s economic future after the longtime leader’s re-election.

The Turkish currency weakened to 20.01 to the dollar on Monday after the high-stakes run-off a day earlier.

But Turkish stocks, on the other hand, rose as Erdogan entered a third decade in power with the benchmark BIST-100 index up 3.5 percent and the banking index rising more than 1 percent.


The lira fell to a record low as the country battles a cost of living crisis and depleted foreign reserves.

On the campaign trail, Erdogan pledged to slash inflation to single digits and boost economic growth, a message he reiterated in his victory speech late on Sunday. But analysts said his economic policies are unorthodox and predicted they will lead to more pain for Turks.

“In our view, Erdogan’s biggest challenge is Turkey’s economy,” Roger Mark, an analyst at the Ninety One investment management firm told the Reuters news agency. “His victory comes against a backdrop of perilous economic imbalances with his heterodox economic model proving increasingly unsustainable”.

Hasnain Malik, head of equity research at Tellimer, an emerging markets research firm, told the agency: “An Erdogan win offers no comfort for any foreign investor.”

“Only the most optimistic would hope that Erdogan now feels sufficiently secure politically to revert to orthodox economic policy,” he said.

Interest rate cuts sought by Erdogan sparked a devaluation of the Turkish lira in late 2021 and sent inflation to a 24-year peak of 85.5 percent last year. The president had argued that higher interest rates cause inflation while central banks around the world were raising rates to reduce price rises.

Turkey’s struggling economy, also reeling after the country’s devastating double earthquakes in February, was a major thorn in Erdogan’s prospect for re-election.

The leader has defended his economic policies, reassuring Turks that investment, production, exports and an eventual current account surplus will drive up Turkey’s gross domestic product.



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