Connect with us

Government

The Shaky Logic Behind Hopes for a Quick Recovery

President Donald Trump promises that the economy will soar "like a rocket ship" as soon as the COVID-19 pandemic ends. Writing for the Independent Institute,…

Published

on

President Donald Trump promises that the economy will soar "like a rocket ship" as soon as the COVID-19 pandemic ends. Writing for the Independent Institute, R. David Ranson, like many who fear the government more than they fear the virus, agrees.

“We ought to be thankful that the economic system is resilient in a way that the human body is not,” Ranson says. As the figure shows, he foresees a short, notch-shaped “interruption,” preceded by an anticipatory stocking-up surge and followed by a similar post-pandemic boomlet as shelves are restocked.

Ranson bases his hopes for such a growth trajectory on the notion that the interruption to production will destroy no physical capital.
[A]fter the production shutdowns end, GDP will shift back above pre-crisis trend as businesses and consumers make up for lost time. Events do not as yet add up to a significantly weaker full-year performance for the US economy. Economic activity will go into hiatus, but it can be made up quickly once the crisis is over.
As I explained in this earlier post, Ranson is right to say that pandemics, which hit the economy from the supply side, disrupt things in a very different way from ordinary recessions, which hit from the the side of demand. He is also right that clumsy, improvised public health interventions like universal stay-at-home orders do more damage than would more nuanced interventions based on the test-trace-isolate principle. Everyone knows that by now. We all hope that we will be better prepared for the next pandemic than we were for this one, so that the tradeoff between saving lives and saving the economy will not be so stark.

But Ranson misses some critical parts of the story. Although it is true that the virus does not destroy industrial equipment or commercial structures, it will destroy some very important intangibles if it goes on for long.

For one thing, it will destroy critical business relationships. Employer-employee relationships, supply-chain relationships, and lender-borrower relationships cannot necessarily be turned on and off without harm. It will take time to re-establish them, leading to slower recovery. Policies like payroll protection loans will help a little, but they are not a panacea.

A second problem is that even a temporary downturn will lead to widespread bankruptcies among the many firms and households who were over-leveraged going into the crisis. Fixed-payment obligations like bonds, mortgages, and leases cannot easily be suspended during the Ransom’s "interruption." Bankrupt business entities cannot instantly or painlessly be brought to life after the crisis is over, even if they were viable concerns to begin with, which not all were. Bankrupt consumers will have to limit their consumption for months or years as they rebuild their credit. State and local governments, whose revenues are falling, but whose fixed bond and pensions obligations remain, will have to undertake painful layoffs or tax increases. Either will be a further drag on the recovery.

Finally, Ranson completely misses, or is indifferent to, how unevenly the costs of the “interruption” will be distributed. People who work in restaurants and airports will be hammered, while those who staff grocery stores and Amazon warehouses may even see their paychecks swell with overtime. Investors who foolishly put their money in airlines or cruise ships will suffer badly, while those who invested in on-line service providers or makers of medical supplies will do well. Losses to the former will exceed gains to the latter. Inevitably, some whole communities will have more losers than winners. They will recover slowly.


In Ranson’s view, the greatest dangers we face from the pandemic come from “over-zealous efforts to quarantine and delay the spread of disease” and “a larger and more authoritarian central government unlikely to be scaled back afterwards.” In my view, the greater danger comes from those who tell us everything will be fine if we just stay calm and carry on.

Previously posted at NiskanenCenter.org

Read More

Continue Reading

Government

China Shortens Travel Quarantine In COVID Zero Shift

China Shortens Travel Quarantine In COVID Zero Shift

China unexpectedly slashed quarantine times for international travelers, to just one…

Published

on

China Shortens Travel Quarantine In COVID Zero Shift

China unexpectedly slashed quarantine times for international travelers, to just one week, which suggests Beijing is easing COVID zero policies. The nationwide relaxation of pandemic restrictions led investors to buy Chinese stocks.

Inbound travelers will only quarantine for ten days, down from three weeks, which shows local authorities are easing draconian curbs on travel and economic activity as they worry about slumping economic growth sparked by restrictive COVID zero policies earlier this year that locked down Beijing and Shanghai for months (Shanghai finally lifted its lockdown measures on May 31). 

"This relaxation sends the signal that the economy comes first ... It is a sign of importance of the economy at this point," Li Changmin, Managing Director at Snowball Wealth in Guangzhou, told Bloomberg

At the peak of the COVID outbreak, many residents in China's largest city, Shanghai, were quarantined in their homes for two months, while international travelers were under "hard quarantines" for three weeks. The strict curbs appear to have suppressed the outbreak, but the tradeoff came at the cost of faltering economic growth. 

The announcement of the shorter quarantine period suggests a potentially more optimistic outlook for the Chinese economy. Bullish price action lifted CSI 300 Index by 1%, led by tourism-related stocks (LVMH shares rose as much as 2.5%, Richemont +3.1%, Kering +3%, Moncler +3%). 

"The reduction of travel restrictions will be positive for the luxury sector, and may boost consumer sentiment and confidence following months of lockdowns in China's biggest cities," Barclays analysts Carole Madjo wrote in a note. 

CSI 300 is up 19% from April's low, nearing bull market territory. 

Jane Foley, a strategist at Rabobank in London, commented that "this news suggests that perhaps the authorities will not be as stringent with Covid controls as has been expected." 

"The news also coincides with reports that the PBOC is pledging to keep monetary policy supportive," Foley pointed out, referring to Governor Yi Gang's latest comment. 

She said, "this suggests a potentially more optimistic outlook for the Chinese economy, which is good news generally for commodity exporters such as Australia and all of China's trading partners." 

Even though the move is the right step in the right direction, Joerg Wuttke, head of the European Chamber of Commerce in China, said, "the country cannot open its borders completely due to relatively low vaccination rates ... This, in conjunction with a slow introduction of mRNA vaccines, means that China may have to maintain a restricted immigration policy beyond the summer of 2023." 

Alvin Tan, head of Asia currency strategy in Singapore for RBC Markets, also said shortening quarantine time for inbound visitors shouldn't be a gamechanger, and "there's nothing to say that it won't be raised tomorrow." 

Tyler Durden Tue, 06/28/2022 - 07:38

Read More

Continue Reading

Economics

Energy Stocks Are Down, But Remain Top Sector Performer

High-flying energy shares have hit turbulence in recent weeks but remain, by far, the leading performer for US equity sectors so far in 2022, as of yesterday’s…

Published

on

High-flying energy shares have hit turbulence in recent weeks but remain, by far, the leading performer for US equity sectors so far in 2022, as of yesterday’s close (June 27), based on a set of ETFs. But with global growth slowing, and recession risk rising, analysts are debating if it’s time to cut and run.

The broad-based correction in stocks has weighed on energy shares lately. Energy Sector SPDR (XLE) has fallen sharply after reaching a record high on June 8. Despite the slide, XLE remains the best-performing sector by a wide margin year to date via a near-36% gain in 2022.

By contrast, the overall US stock market is still in the red via SPDR S&P 500 (SPY), which is down nearly 18% year to date. The worst-performing US sector: Consumer Discretionary Sector SPDR (XLY), which is in the hole by almost 29% this year.

The case for, and against, seeing energy’s recent weakness as a buying opportunity can be filtered through two competing narratives. The bullish view is that the Ukraine war continues to disrupt energy exports from Russia, a major source of oil and gas. As a result, pinched supply will continue to exert upward pressure on prices in a world that struggles to quickly find replacements for lost energy sources. The question is whether growing headwinds from inflation, rising interest rates and other factors will take a toll on global economic growth to the point the energy demand tumbles, driving prices down.

The market seems to be entertaining both possibilities at the moment and is still processing the odds that one or the other scenario prevails, or not. Meanwhile, energy bulls predict that the pullback in oil and gas prices is only a temporary run of weakness in an ongoing bull market for energy.

Goldman Sachs, in particular, remains bullish on energy and advises that the potential for more prices gains in crude oil and other products “is tremendously high right now,” according to Jeffrey Currie, the bank’s global head of commodities research. “The bottom line is the situation across the energy space is incredibly bullish right now. The pullback in prices we would view as a buying opportunity,” he says. “At the core of our bullish view of energy is the underinvestment thesis. And that applies more today than it did two weeks, three weeks ago, because we’ve just seen exodus of money from the space… investment continues to run from the space at a time it should be coming to the space.”

Meanwhile, a bit of historical perspective on momentum for all the sector ETFs listed above reminds that the trend direction remains bearish overall. But contrarians take note: the downside bias is close to the lowest levels since the pandemic first took a hefty bite out of market action back in March 2020 (see chart below). This may or may not be a long-term buying opportunity, but the odds for a bounce, however, temporary, look relatively strong at the moment.


Learn To Use R For Portfolio Analysis
Quantitative Investment Portfolio Analytics In R:
An Introduction To R For Modeling Portfolio Risk and Return

By James Picerno


Read More

Continue Reading

Commodities

Gold as an investment; a long-term perspective

To many investors, gold was a disappointment during the COVID-19 pandemic and the high-inflation period that followed. Instead of protecting a portfolio…

Published

on

To many investors, gold was a disappointment during the COVID-19 pandemic and the high-inflation period that followed. Instead of protecting a portfolio from inflation, the price of gold declined from its all-time high reached in 2020.

At the same time, inflation in the US and other advanced economies kept rising. Nowadays, inflation in the UK is expected to reach double-digit territory at the end of this year and runs at more than four decades high in the US.

Moreover, the news that a huge gold deposit was discovered in Uganda made many wonder what the point of investing in gold is if it isn’t so scarce. The new deposit has some 320,000 tonnes of extractable pure gold.

But time is on gold’s side. As an uncorrelated asset with the main financial markets, gold has its place in an investment portfolio.

Because of that, an analysis of the price of gold from a long-term perspective is useful as it helps filter the noise. After the bullish breakout in the early 2000s, the price of gold is in a bullish run, unlikely to end despite the recent underperformance.

Only bullish patterns followed the early 2000s bullish breakout

In the early 2000s, gold traded below $400/ounce. A bullish breakout led to several bullish patterns – including the current one, which may end up being bullish after all.

First, it was a pennant – a continuation pattern that was responsible for sending the gold price to $1000/ounce for the first time ever. What followed was an ascending triangle.

After the market had cleared the horizontal resistance given by the $1,000 level, it did not stop all the way to $1,900 in 2012. The move was reversed in the years to follow, but an inverse head and shoulders pattern propelled the price to a new all-time high in 2020, as uncertainty during the COVID-19 pandemic reigned on financial markets.

From that moment on, gold is in a consolidation area. Because it hesitated at horizontal resistance, one may argue that the price of gold forms an ascending triangle. The last time it did so, the market traveled more than $900, so bears might want to watch the current pattern closely.

Gold price’s resilience against the dollar has been impressive

Perhaps the best way to interpret the market is through the eyes of the US dollar. The gold price has been resilient against a rising US dollar, and the chart below shows it accurately.

From June 2020, the gold price did not move much, while the US dollar declined initially, only to recover the lost ground. Hence, gold’s price resilience in an environment of a rising US dollar adds strength to the yellow metal because a strong dollar limits the effects of inflation by offsetting the price of imports.

To sum up, gold is consolidating. A move to a new all-time high should trigger more strength, and a higher dollar might accompany it.

The post Gold as an investment; a long-term perspective appeared first on Invezz.

Read More

Continue Reading

Trending