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World Economy Like a Patient on Experimental Drugs, Says Tooze – Financial Post

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(Bloomberg) — The turbulence of the pandemic is likely just the curtain-raiser for a coming age of upheaval in the global economy, as climate change and the rise of China upend the established order, according to one of the world’s bestselling financial historians. Columbia University professor Adam Tooze’s last book explored the long aftermath of the 2008 financial crisis. His new one “Shutdown: How Covid Shook the World’s Economy,” published this past week, is a rapid-response history of the economic disruptions caused by the pandemic –- and how policy makers responded. In an interview, Tooze talked about the book’s portrayal of an unprecedented crisis, what governments and investors learned from it, and how economies are being reshaped as a result. 

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Following are extracts from that conversation, lightly edited for clarity.

What is the virus’s legacy for policy making, given what we’ve seen governments and the central banks do?

I’m not a debt alarmist in any way whatsoever, but there’s no doubt that the scale of balance-sheet shift that we’ve seen poses questions about who services those obligations and under what terms and to whose benefit and over what kind of time horizon. And obviously, central bank policy comes into play because of its crucial role in manipulating interest rates. We’ve figured out how a certain sort of central bank intervention works to stabilize market-based financial mechanisms when they’re in crisis. We don’t know what the longer-term consequences of the degree of stimulus are that we’ve been administering. So it’s as though we’re testing drugs on a patient and we know that they work in the short run to mitigate pain and see us through the crisis. But we don’t really know what the long-term effects on the overall financial organism are going to be. There are deep concerns about the stability of some of the key markets, most notably the Treasury market, and I think there will be an ongoing and very important and interesting discussion.

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How has the thinking around welfare states developed? What does that mean when it comes to climate change?

We’ve learned simple lessons about welfare states. If you want to alleviate acute poverty, you send people checks. It works. Does that alleviate the structural long-term causes of poverty? Evidently not.

The book is an extended dialog around the Green New Deal program in the United States, which, to my mind, is the one vision of economic and social policy that — like it or not, and agree with the details or not — actually joined the pieces up. And that is the kind of policy that we need and we desperately need conservatives to come along with their version of what this is going to be. 

The time is certainly running so short that we need to think of everything now in medium- and short-term time horizons. The age in which we could think of climate as a long-term problem is gone. One of the sobering lessons that we learned in 2020 is that really our collective abilities to manage things through social discipline and collective action is very restricted in the West. Science is our best bet and the next immediate question that follows on, if that’s the case, why on earth aren’t we more serious about it? How can we justify a state of affairs when the annual spend of American households on pet food and treats exceeds by some margin the expenditure on energy research by the federal government? This is an absurd betrayal of this generation and future generations.

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Is it important to start repaying pandemic debts now, or can they be left on the backburner?

I don’t have any problem with raising taxes in general if the macroeconomic situation is balanced right and it seems like a sensible thing to do. But to raise taxes, to balance a budget per se in a situation in which you’ve still got serious macroeconomic slack and there’s very little evidence of bond market pressure is gratuitous.The sort of MMT which is essentially functional finance, which says let’s just part the financing thing as a technical matter to be resolved among adults in a technical way and focus on the fundamental questions of what are our capacity constraints, what are the supply constraints which are real, and what are our priorities for spending — that just seems common sense, to be honest. And I’m puzzled by the rationale for something that says, at this moment, budget balance is our priority.

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What do you see central banks doing next? Could they tighten too soon?

We have this painfully, delicately balanced central bank situation, but we’re not seeing the signs so far, and this is rather impressive. I don’t see the imminent risk of any kind of unhappy news. In the U.S., the commitment is to keep the financial markets in general bubbling along. It’s very difficult to see [Federal Reserve Chairman Jerome] Powell and his cohorts engaging in any kind of moves that would destabilize that. This is all premised on my assumption that the inflation symptoms really are transient. If that isn’t the case, then I think the trade-offs become much more difficult for them.

Could high inflation in the U.S. discredit fiscal policy? 

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That’s one of the reasons I really hope it’s transient. Because if it isn’t, then I agree with that kind of diagnosis. But I’m also a historian deeply interested in the events of the 70s. And if that’s our benchmark as to the nightmare scenario of seriously entrenched inflation expectations, I just don’t really see the mechanisms through which that gets built in. It may be a little bit simplistic to focus on the wage-price spiral, but I just don’t see that there. That isn’t to say that wages don’t respond. They do respond in the U.S. But what you’re not seeing is organized labor, cost-of-living adjustments, you’re not seeing that entire corporatist apparatus which in the end I think is key to understanding the 70s inflation. We’ve not been here before. We’ve not seen this kind of spike, we’ve not seen this kind of supply chain disruptions. But I don’t really see the mechanisms through which we could see an entrenched inflationary dynamic.

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Because labor power has been so eroded?

A framing parameter for the activism of monetary policy in this moment has been that no one had to worry about the kind of things that Rudiger Dornbusch was worrying about in the 70s, 80s and 90s. I was stunned to come across this collection of his papers that started circulating on the web about a year ago, and they are so explicit about the trade-offs between what he calls “democratic money” and “sound money.” And it’s just crass in its formulation. We don’t have that problem right now. Democracy does not, in its current form, pose a problem for price stability. And so that changes the entire game for independent central bankers in a world where there isn’t really the risk of getting caught up in a corporatist power battle between capital and labor. You have this weird situation of [ECB President Christine] Lagarde and Powell outdoing each other in their kind of gestures toward issues of social justice and the climate and so on. [Lagarde] is a conservative politician, fundamentally. But in this space, in this moment, free to act in ways that take on a progressive aspect.

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That news conference [Powell] gave, I think it was in April, where all of a sudden we had the chair of the Fed lecturing the journalists on the fact that he had seen the collapse in employment and incomes among those in the bottom half of the American income distribution — I never thought I’d see the like. It was an extraordinary moment. 

How will future economic historians view the Trump presidency?

The interesting thing about the Trump era is, we’ve had a natural experiment. Trump was such a populist right-winger. He just didn’t have a fiscal conservative bone in his body. And so he would boast about metrics which left-wingers used to cite. The black unemployment rate used to be a hammer the left would attack the Fed with — and there we have Donald Trump of all presidents saying he’s been the best president for black people in America since Abraham Lincoln, because the unemployment rate for black men is at a record low. This is a dizzying inversion of the fronts. He really was a Latin American-style populist — but without the social base. It isn’t as though there was some sort of insurgent working-class trade-union movement driving Trump. It was the S&P 500 and the Reddit investment crowd. But it’s not a huge fraction of the American population. He doesn’t actually in any meaningful way represent blue collar America.

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‘Shutdown’ is not an anti-Trump book in any simple sense of the word. He’s obviously terrible for the American constitution in many ways, a figure who’s profoundly disagreeable, but not on economic policy. I think the confusion for the left and liberals in general is precisely that the only people seriously outraged will be the sort of Rubinite centrist conservative Democrats of the 1990s. But they’re a dying breed anyway, you’ve had all of them recanting. Saying we didn’t do enough in 2009. And if you’re an MMTer — if there’s ever been a president more suited and just agreeable to the fiat money concept, there’s never been one better than Trump. As long as the checks had his name on them, it was all good.

©2021 Bloomberg L.P.

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Slow pace of vaccinations is largest drag on the economy in survey of business leaders – NBC News

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Corporate leaders are far less bullish about the economic recovery than they were back in the spring — and they fear that vaccination holdouts could stall or even reverse the progress that has been made.

A new survey by the National Association for Business Economics, or NABE, found a marked pullback in expectations for economic growth and output, especially in the near term. Survey respondents expect real growth in gross domestic product for this year to come in at 5.6 percent at the median — a significant drop from the median 6.7 percent growth expected in May, when the survey was last conducted.

“The erosion of forecasts and confidence has really mirrored what our economists have been saying, because we brought down our Q3 GDP forecast from 7.0 to 5.6 percent,” said Sam Stovall, chief investment strategist at CFRA Research. “We just feel that things don’t look as rosy as they did before.”

Nearly 2 in 5 NABE survey respondents said downside economic risk outweighs upside risk for the year, and just 16 percent said conditions are weighted toward the upside. The figures were reversed in May, when 56 percent ranked upside risk as a higher probability and just 15 percent said saw greater downside risk to the outlook.

The key difference, and the factor that is weighing on hopes for the recovery, is the resurgence of Covid-19 fueled by the highly contagious delta variant of the coronavirus. Everybody who was banking on the pandemic’s receding over the summer has had to modify their expectations in the face of a public health crisis that shows no sign of abating.

“We all believed we were through the pandemic five months ago, and I believe that the variant has caught many people by surprise,” said Joseph Heider, president of Cirrus Wealth Management. “As this lingers on, executives are becoming more concerned and asking, ‘Are we going to have this under control?'”

NABE survey chair Holly Wade, executive director of the NFIB Research Center, said in the survey outlook report, “Panelists point to a variant of the coronavirus, against which the vaccines may be ineffective as the main downside risk.” Nearly two-thirds of respondents identified that as the greatest downside risk to the economy, and 9 percent more cited slowing vaccine uptake as the most worrisome hurdle. A plurality of 44 percent said a faster vaccine rollout is the best chance for higher-than-expected economic gain.

Heider said: “Vaccine resistance is, I think, larger than many people anticipated. I think it’s creating real concerns as to our ability to reach herd immunity. And when we don’t have herd immunity, the unvaccinated are human petri dishes for the virus to mutate.”

Although the virus represents the biggest threat to near-term business recovery, analysts said it is far from the only headwind corporations face. “There’s just many more variables and unknowns than there were six months ago,” said Dick Pfister, CEO of AlphaCore Wealth Advisory.

In addition to the threat of Covid and potential variants, Pfister said, companies and investors are monitoring other unfolding circumstances. The Federal Reserve is edging closer to ending its bond buying, and more policymakers have expressed openness to raising interest rates sooner. The financial peril faced by the heavily indebted Chinese real estate giant Evergrande is making investors nervous, he said, as they try to gauge whether the company’s teetering on the brink of collapse was an isolated incident.

“There’s probably more than just one, and there are some fears from economists that this could be more systematic inside of China,” he said.

A globally connected economy poses other sorts of risks, as well: A cascading series of bottlenecks in the global supply chain affecting semiconductors to energy has triggered much of the growing worry about rapidly increasing prices. The NABE survey found that 17 percent of respondents said supply chain disruptions were having a “significant impact” on business, while 27 percent more cited mild or moderate impacts.

“Inflation expectations have moved up significantly from those in the May 2021 survey,” Wade said. On average, NABE respondents expect inflation to rise by 5.1 percent in the fourth quarter year over year, a jump from an expected 2.8 percent increase in the May survey.

David Wagner, portfolio manager at Aptus Capital Advisors, said the duration and the breadth of global supply disruption have triggered a re-evaluation in corner offices in the U.S. and around the world. In the spring, “it seemed like the supply chain problem was transitory,” but the assumptions were dashed as the summer went on, he said, adding: “Supply chain problems are persisting for much longer than originally expected.

“Now that you’re starting to see some kind of tangible supply chain backlog, I think that’s got more people pessimistic. It caught people by surprise,” Wagner said.

Rob Haworth, senior investment strategist at U.S. Bank Wealth Management, said, “Supply concerns are weighing on the mind of the market and economists because it has limited the amount of output we can get from certain industries.”

Along with the supply shortages that are hindering production and driving up costs, the unbalanced labor market continues to constrain growth, as well — but there also are glimpses within those distortions of potential normalization. Although about one-third of survey respondents said they were facing a surfeit of workers, a larger proportion, 44 percent, said they were not experiencing a labor shortage. Respondents predict wage growth of 4 percent for the year, followed by a 3.5 percent increase next year — rates broadly in line with what many economists consider to be indicative of a well-functioning labor market.

“The labor market is not fully recovered — we’re seeing that across other surveys, as well, and even the Fed’s own Beige Book indicates that hiring has been challenging,” Haworth said. “There’s a lot of room for improvement, but it’s really slow going.”

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Toronto market rises as energy shares reach 3-month high

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Canada‘s main stock index rose on Monday as a rally in oil prices lifted the energy sector to the highest level in nearly three months, while financials gained ground as bond yields rose.

The Toronto Stock Exchange‘s S&P/TSX composite index ended up 60.76 points, or 0.3%, at 20,463.42.

“Energy has rallied pretty nicely” on the jump in oil prices, said Kevin Headland, senior investment strategist at Manulife Investment Management.

The energy sector rose 3.1% to notch its highest closing level since July 5, while crude oil futures settled nearly 2% higher at $75.45 a barrel as investors fretted about tighter supplies.

The heavily weighted financial services sector ended 0.5% higher but information technology lost 1.2%.

The move lower in technology was “a carryover from the U.S., given the jump in 10-year yields today,” Headland said.

The U.S. 10-year yield rose above 1.5% for the first time since June 29 before easing, bolstered by solid economic data and signals the Federal Reserve is shifting toward a more hawkish policy.

Higher yields tend to hurt the shares of companies with high growth prospects because they reduce the value of future cash flows.

The S&P 500, which has a higher technology weighting than the Toronto market, ended lower.

“In the Canadian stock market… we’re playing a little bit of catch-up to U.S. stocks as they outperformed Canadian stocks in the last five sessions,” said Michael White, portfolio manager at Picton Mahoney Asset Management.

The healthcare sector, which includes cannabis producers, ended 2.4% higher. The materials group gained 0.5%.

 

(Reporting by Fergal Smith; Additional reporting by Amal S in Bengaluru; Editing by Dan Grebler)

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Fund Managers See Stocks Outperforming Bonds Despite Economy – Bloomberg

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Gently, but steadily, economic expectations are coming down. It may be an overreaction to the wave of Covid-19 caused by the delta variant, or it may be a response to incoming data, or it could reflect dampening hopes for an expansive new fiscal policy in the U.S. as the standing of President Biden also dampens. But for whatever reason, hopes for a big new “reflation” or even a post-Covid “reopening” have dwindled.

One thing remains unchanged by this, however. The great majority of investors are still convinced that there is no alternative to stocks. Even with drabber economic growth in prospect, which should help fixed-income more than equities, the overwhelming consensus still calls for stocks to outperform bonds.

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