Pdq Weight Watchers Points
Food and Agriculture Organisation
This United Nations Agency reported yesterday that for the 10th consecutive month world food prices have risen in March. So if you have a sense that your weekly supermarket shop is getting dearer, you may well be right. The rises are led by vegetable oil, dairy product and meat prices. Prices overall are at their highest since June 2014. Not included in the current price rise drivers is sugar-down 4% on the month but up 30% over the past year. As always, food price movements are both seasonal and subject to supply and demand variations, so if your Waitrose shop is causing you pain, it may be time to get real and get down to Tescos or maybe even Asda.
ECB-European Central Bank
Christine Lagarde seems prepared like many European politicians to become a hostage to fortune by stating that risks beyond the next few months to EU economic growth are receding following the Covid pandemic. While hard evidence provided in support of that statement is in somewhat short supply, it is of course true to say that that prognosis becomes more likely given that already over a year has elapsed since LockDownOne…unless of course Europe does not succeed in rolling out vaccines faster than the growth in the rate of infection. In which case Lagarde's hope that the ECB will not need to spend the EUR 185 Trillion allocated for the Pandemic Emergency Purchase Programme looks less well founded. EUR however at $1.1925 well off its lows at the end of March of $1.17. That of course is more than somewhat to do with USD retracing and giving back some of its strong gains rather than EUR strength bolstered by Fed Chairman Powell's strong talk about his inflation fighting credentials.
Singapore
Hit by a drop of 86% in its tourist trade last year to a mere trickle of 2.7 million foreign visitors, Singapore is pitching a post pandemic recovery by setting out its stall to become one of if not the global centre of the cruise liner industry. Currently Singapore accounts for a third of all cruises but that is somewhat skewed by most other centres being shut and Singapore tapping into the lucrative "cruises to nowhere" industry for its 5.7 million citizens. USD/SGD at 1.34 almost its best level in the past 2 years.
Me and Bobby McGee
Readers will recall the 1969 archetypal Roger Miller song made famous by the likes of Janis Joplin and the Grateful Dead. Clearly it has also been on the mind of POTUS when he allocated the split of the monster economic stimulatory measures in the USA. What President Biden has done here has largely passed unnoticed: he is trying to wean Americans off the automobile and on to public transport. Take the following figures: in the past 65 years $10 Trillion has been spent on highways and roads versus $2.5 Trillion on subway and passenger trains and buses. In the latest package $85 Billion has been set aside for mass transit transportation to be spent in the next 8 years. A further $80 Billion has been put aside for intercity rail such as Amtrak. While $115 Billion has been allocated to the road system, this is mostly for repairs to potholed highways and crumbling bridges. Quite a turnaround. Here is the great song by Roger Miller:
Busted flat in Baton Rouge headin' for the trains feelin' nearly faded as my jeans
Bobby thumbed a diesel down just before it rained took us all the way to New Orleans
I took my har'poon out of my dirty red bandana
And was blowin' sad while Bobby sang the blues
With them windshield whipers slappin' time
And Bobby clappin' hands we finally sang up every song that driver knew
Freedom's just another word for nothin' left to lose
Nothin' ain't worth nothin' but it's free
Feeling good was easy Lord when Bobby sang the blues
Feeling good was good enough for me good enough for me and Bobby McGee
From the coal mines of Kentucky to the California sun
Bobby shared the secrets of my soul
Standin' right beside me Lord through everything I done
And every night she kept me from the cold
Then somewhere near Salinas Lord I let her slip away
Lookin' for the home I hope she'll find
I'd trade all my tomorrows for a single yesterday holdin' Bobby's body next to mine
Freedom's just another…
La la la la la…
Have a Great Weekend!
Discussion and Analysis by Humphrey Percy, Chairman and Founder
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It's a Moderna world…
The whirlwind surrounding the AstraZeneca-Oxford vaccine continues with new warnings from UK and EU medical regulators flooding in yesterday. Following a review into the efficacy, benefits and risks associated with the vaccine the double-dose shot is once again in the firing line. The guidance from the European Medicines Agency is that there is a link between blood clots and the Astra-jab. Accordingly, this should be listed as a rare side-effect of the jab. However, given that its public benefit hugely outweighs the individual risk of taking it, this body continues to endorse the jab in its Covid-19 vaccination guidance without reservation. The response from the UK Medicines and Healthcare Products Regulatory Agency [pauses for breath], was different: under 30s should be offered an alternative vaccine to the AstraZeneca jab.
If you hadn't seen this news, which did have a marked impact on GBP markets yesterday, I'd forgive you for thinking that my understanding of prepositions requires improvement. Having seen the initial rollout of the vaccine in the Eurozone, notably Germany and France, be accompanied by an age cap of 65, why are regulators now instead putting a floor on advised recipients of the vaccine at age 30? The argument for this age floor is unclear. Cynics might suggest that given the risk-based and consequently age-staggered vaccination programme that the Medicines agency has pursued, putting an age floor in allows a regulatory response to avoid accusations of negligence whilst not yet harming the rate of inoculations in the UK.
This explanation too might hold weight. Those side-effects reported to the regulator in the UK included at least 19 deaths following injection with the vaccine in question. Of those, only three persons who sadly lost their lives were under 30. Given the systemic importance of the AstraZeneca jab to the UK vaccination programme and in turn the boost given to GBP by the medical covid-response, GBP has suffered following this review.
Yesterday, the UK administered its first public Moderna vaccinations in Wales. The level of vaccinations offered produced by other pharma companies fell to their lowest level so far this year as UK supplies of Pfizer and AstraZeneca equivalents continue to encounter delays. With the elevated positioning achieved by an 8% rally year to date in Sterling and with shifting market positioning ahead of the FOMC minutes release last night, yesterday was a day of profit taking and de-risking to the detriment of the Pound.
Discussion and Analysis by Charles Porter
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Global Growth
With the IMF calling for global economic growth of 6% in 2021, markets are taking heart that this represents the largest increase in the past 50 years. That's why they ignored the drop of 3.3% in 2020 being the largest fall since the 1950's. The third IMF stat is perhaps the most striking from yesterday: the US economy will be stronger by 2024 than it would have been had there been no Covid. What that means is that if markets were in any doubt as to the awesome stimulatory firepower unleashed by the USA, this should nix that. Also it makes sense of the market reaction to Jay Powell assuring that there will be no inflationary problem and rates are on hold until 2024: in short they do not buy it.
NZ/Australia Bubble Covid Bridge
Is this a sign of things to come or two countries rather off the beaten track that can afford to do this? Good news for citizens of those countries but not the answer for Europe or North America let alone Asia and Latin America. Vaccination and not isolated vaccination but worldwide programme rollouts it is becoming increasingly clear will be needed for travellers to return to pre Covid freedom to roam. Both AUD and NZD pretty much unchanged v USD.
Two Laughing Boys
This 1626 painting by Frans Hals valued at EUR 15 Million was stolen as part of Dutch what shall we do in lockdown larceny last August following a heist of Vincent Van Gogh's Spring Garden painting in March 2020. Holland's finest have linked the two thefts and arrested a suspect in Baarn, Netherlands yesterday. No sign of the paintings however, but the Dutch sleuths are hopeful citing their success in 2011 when the Two Laughing Boys was last stolen-and recovered.
Schools Out
Never mind that, it was nearly lights out for Alice Cooper this day in 1988 when rehearsing for a show and a safety rope broke leaving him hanging by his neck. A quick thinking roadie cut him down and Alice went on with his now 50 year+ career and singing his greatest 1972 hit, Be My Lover:
She struts into the room
Well I don't know her
But with a magnifying glance
I just sorta look her over
We have a drink or two, well maybe three
And then suddenly, she starts telling me her life story
She says
Baby, if you want to, be my lover
You better take me home
Cause it's a long long way to paradise
And I'm still on my own.
Told her that I came from Detroit City
And I played guitar in a long haired rock and roll band
She asked me why the singer's name was Alice
I said 'listen baby, you really wouldn't understand'
And I said
Baby, if you want to, be my lover
You better take me home
Cause it's a long long way to paradise
And I'm still on my own.
On my own,
Discussion and Analysis by Humphrey Percy, Chairman and Founder
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Head above water
GBP has struggled in recent weeks to find new momentum. Thanks to its somewhat meteoric rise so far this year, this lack of sustained upward price momentum has fuelled second guesses of a correction in the UK currency. Sterling's range bound existence on a trade weighted basis this month has allowed Sterling bulls to unwind portions of their long bets in favour of the Pound and to take profit. The problem for navigating the immediate future of GBP lies in the fact that fundamentals lie in favour of buying the currency, but it's lofty price, at least compared with its intra-pandemic valuation creates conflicting forecasts. Ignorant of price therefore, Sterling's a no-brainier: a world-leading vaccination programme, inflation outpacing expectations, lower political post-Brexit risk (just about!) to name only a few. But inclusive of price, it's a more challenging picture: does GBP still hold upside growth despite an 8% rally year to date?
Spoiler alert: yes, probably.
When the UK announced a Brexit deal on Christmas Eve, the Pound didn't jump. This was to the surprise of many who supposed that given more than four years of blaming the 2016 referendum and the subsequent negotiating period for undermining GBP, the removal of a significant proportion of the political obstacle should allow for a smooth advance higher. In fact the only thing that shifted immediately was the year-end overnight borrowing/swap market in Sterling in a colossal risk adjustment market-wide shift. This did not, however, translate into spot, like-for-like valuations. This was partially because the deal failed to satisfy those with high hopes of a strong trade deal and the swift reminder of other political risks that had been created or still remained as a result of the process: queue Sturgeon, Farage, Juncker, Barnier & co. Rather the adjustment in GBP was a slow burner with evidence of money moving back into the UK and a reallocation of capital onto UK shores throughout 2021 to date. As the post-pandemic environment facilitates higher levels of productive capital allocation, there's a lot of reasons to suggest GBP will be a beneficiary of this.
So if pricing, levels and technical factors are what might stand in the way of a rising GBP, how is GBP strength still the likely base case? The answer is GBP finally, after an 8% rally this year, has its head above water. The post-referendum channel bound trade weighted GBP has finally, seemingly, been broken and only now does the Pound have the technical case to support further appreciation despite its sharp rally and historically lofty valuation. With the range broken, GBP should have the floor upon which to navigate a post-pandemic, post-transition environment higher. Due to the valuations in GBP, and the combined fragility of the post-Brexit trade deal and the post-pandemic recovery period, this case will be regularly challenged and frequently volatile.
Discussion and Analysis by Charles Porter
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Europe's third wave
Rising infection rates across much of Europe have been leading to souring fortune for the Euro with the world's most liquid currency pair EURUSD providing a good snapshot of the rising Eurozone concerns over the past weeks and months. Announcements of lockdown impositions across Europe have spilled out like clockwork with core members of the Union limiting social mobility one after the other in order to attempt to limit the spread of the virus. Introducing peripheral measures and localised lockdowns until now, France and its President Emmanuel Macron have now conceded that a national lockdown totalling at least four weeks must take place to limit further hospitalisation and deaths associated with the covid-19 pandemic. Following the first lockdown, Macron's stance on education has afforded him a degree of support as a proponent of the importance for schools to remain open. With strong evidence of viral spread in schools affirmed by the data from their testing programmes, through a combination of homeschooling and seasonal holidays, schools will now remain closed for three weeks at least in France, in a reminder of the severity of the spread in continental Europe.
The limited measures across a handful of member states over the last couple of months have seen elements of lockdown introduced across the Netherlands, Italy and Germany amongst other states. Rising infections across Europe's open borders is fostering a more severe economic downturn from the third wave of the pandemic than had been expected moving into this seasonal shift. This undermining of expectations and a downgrading of economic forecasts provide the key to understanding the most likely path of the Euro. Globally, a third wave has been common place but it is the severity of Europe's particular experience this time around and the souring of sentiment within the Eurozone that will limit progress in the Euro over the coming weeks.
In the UK, the vaccination programme is now sufficiently advanced in order to isolate a statistical significance to the role of the vaccination programme upon transmission and hospitalisation in the aggregate population. This follows experimental findings and empirical studies of nations including, for example, Israel who led an early immunisation push. This fact is giving further weight to the importance of a successful immunisation programme which at the moment is relatively non-existent in the Eurozone. Whilst the depreciation of the Euro associated with revised expectations to date will provide a discount in the Euro and a lower base from which to magnify a catch-up effort, the momentum remains on the side of continued underperformance rather than catch-up. The reality it seems in the Eurozone therefore is weakness in sentiment and the bloc's currency for longer than anticipated until forecasts begin to align once again.
The continued fallout from the handling of the vaccination programme and in particular the bloc's handing of the Astra vaccine could damage its fortune in markets. With Macron having to backtrack on his policy surrounding the importance of the schooling and education sectors remaining open, we are reminded of the potential political implications of this third wave. With elections in France only a shade over 12 months away, a populist energy is building in France. This shift is evident across the Eurozone and visible within recent electoral outcomes across Germany and the Netherlands and could mean the legacy of covid-19 continues to affect the Euro long after the market's fixation on relative case rates expires.
Discussion and Analysis by Charles Porter
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Archegos
Much will be written interspersed with plenty of handwringing as to how Archegos Capital could have built up leverage to an extent which at present is unknown but is estimated at USD 50 Billion. An estimate of investment bank losses is (currently) tentatively set at USD 6 Billion. How and why? All investment banks offer "prime brokerage" services which work as follows: an asset manager or hedge fund with a credible amount of capital raised from investors, or in the case of Archegos primarily from one investor, approaches a PB and pitches them their business model and strong risk management capability; the undoubted risk management capabilities of the investment bank are assumed to be flawless. Once approved, the asset manager or hedge fund is granted credit and liquidity lines which translates into a leverage ratio on their capital with the proviso that all positions or exposures are reported in real time to the PB. What is not appreciated by those not in the PB market is that the PB has the right to firstly change the leverage ratio by increasing the margins on those exposures with immediate effect and secondly and crucially the PB has the right to take action by intervening and reducing those exposures unilaterally and without the intervention of the asset manager.
This was a lesson that I learnt in the hitherto sunny climes of Bermuda almost 30 years ago when the PB of the hedge fund where I worked decided that they should (because they could) double the margin on the positions that we held in the Indian stock market- overnight. Happily because we held a large supply of US Treasury Bills, we were able to meet that increased margin requirement and therefore there was no call for the PB to intervene and sell our Indian stock market positions.
The unfolding Archegos drama which has much more risk to be unwound, started with Viacom shares initially falling 10% last week which in turn led to an increase in margin calls for Archegos, was then compounded by an increase in those margin levels and was then rounded off by the PB selling assets into a falling market. As with all large funds, and although Archegos is not well known, it is large, they had multiple PBs. The two largest are Nomura and Credit Suisse, but the knock on effect of the sales of stocks and much larger amounts of derivatives has caused a ripple effect on the valuations of all investment banks including UBS, Goldman Sachs and Morgan Stanley. Crucially those PB's have procedures to follow regarding selling down positions when values fall, but they do not include doing so in co-operation with other PB's. This is a big story with plenty of questions and now commercial bank Wells Fargo has become part of the story.
Iranian Oil
It's cheap and on the back of US and EU sanctions, it's hard for the Iranians to sell. Or rather that is the official line. The reality is that 1 million barrels a day is being sent to China and China is estimated to be benefitting from 30 million barrels in March. To put this in perspective, Saudi Arabia exported 60 million barrels to China in January and February. This is much of the reason behind the fall back of global oil prices in the last few weeks. WTI trading at $60.61.
Jimi Hendrix on Fire
It was this day in 1967 that Jimi Hendrix had the bright idea of setting his Fender Stratocaster guitar on fire at the Rainbow Theatre, Finsbury Park in London. It was successful but not that successful as Jimi sustained burnt fingers that he had to have treated in hospital. It did not prevent him repeatedly setting his guitar on fire subsequently until his untimely departure on September 18 1970. Here is one of Jimi Hendrix's finest songs, Little Wing from the 1967 album, Axis Bold as Love:
Well she's walking through the clouds
With a circus mind
That's running wild
Butterflies and zebras and moonbeams
And fairly tales
That's all she ever thinks about
Riding the wind
When I'm sad she comes to me
With a thousand smiles
She gives to me free
It's alright, she says
It's alright
Take anything you want from me
Anything
Fly on, little wing
Discussion and Analysis by Humphrey Percy, Chairman and Founder
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Hey Ho up she rises
Carrying 18,300 containers, the cost of the stranded Ever Given vessel in the Suez Canal was costly for its operators, Taiwanese Evergreen, the privately operated canal, global trade, and me. Perhaps my IKEA package that spent nearly a week of it's pre-delivery life on that boat stranded just outside the Egyptian city of Suez is small change in comparison. In fact, the private canal operators are expected to have lost tens of millions of Dollars in foregone passage fees. The estimated hold up to global trade could have knock on effects that leave a lasting impact on annual figures with just-in-time supply chains already at breaking point due to the pandemic. After the spring tide allowed the gigantic container ship to be refloated into wider passages of the canal for inspection, the price of oil immediately fell 1%. The Suez blockage has created interesting dynamics in commodity markets that in turn have fed into commodity currencies and risk assets in interesting ways.
Consider Brent crude oil: the European benchmark of North Sea oil adopted globally. A lot of the supply of Brent crude passes through the canal each day satisfying demand from the Far East. Similar delivery methods to keep this market ticking involved taking over one week of additional travel and shipping time and cost to go around the Horn of Africa. This constrained the supply of Brent crude within the market but also had a knock on impact upon demand as it was reallocated elsewhere geographically where possible. This conflict between supply and demand made the price action messy with the price of many commodities showing a high degree of volatility as they reflected idiosyncrasies of the individual deal and delivery more than generic futures contracts.
Provided that the total volume traded of each commodity whose price rose due to the Suez crisis did not fall, so as to deliver a lesser total revenue, the blockage could be positive for the national currency that has a chiefdom within the export market for that particular commodity. I.e if one nation exports one commodity whose price was inflated, provided they face an ineleastic demand curve it would entail more demand of local currency whose price in turn should rise. The equities rout on Friday has further obscured the impact of the supply chain woes upon commodity currencies. So too the surprise turn in the course of the pandemic in Europe is still unsettling global commodity markets.
There is one further risk that will create opportunities associated with the volatility and uncertainty that it will inevitably cause: data. Did you know airline passenger numbers are up 491% in the US compared with one year ago? 'Tis the season for year on year annualised data crimes due to the medieval levels of economic activity associated with this observation period across the globe one year ago. Rather therefore, a more accurate picture would be one year ago one bloke and his carry-on went on a flight, versus 491 people today – still peanuts versus our pre-pandemic path. This reality will make isolating the trend and recovery from the noise harder and possibly lead to more volatility in markets struggling with erroneous data.
Discussion and Analysis by Charles Porter
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Consensus 2021
As we entered 2021 the consensus trade was: weaker USD on the back of President Biden's trillion dollars of stimulus leading to easy money and a rise in the stock market. Well the last part has been right but at the end of the first quarter, it is clear that the relationship between a weaker USD and stronger Equity markets has broken down. The reason for this is the success of the USA's vaccine rollout and the opposite of that in the EU. That means that as long as the economies of the EU and the USA diverge, it would be wrong to assume a weaker USD. There is now a second plank in the argument towards leading to a stronger USD scenario: the US economy will prompt the Federal Reserve to react which they will do promptly by tightening, and the consequent higher interest rates in the USA will lead to a stronger USD. For consensus traders, EUR/USD at below 1.18 is testing their pain levels so that may prompt if not a rush certainly a brisk move towards the exit of that particular trade.
South China Sea
This time it's tensions between Chinese fishermen and the Philippines instead of Taiwan and their airspace: more than 220 Chinese fishing boats are fishing off the Whitsun Reef west of the Philippines' Palawan Island. While nearly 7000 miles from the UK it is also by no means close to the nearest city in China, Guangzhou -in fact 1000 miles distant. The situation is being monitored but meantime the Philippines have scrambled their air force and are patrolling the area. Tensions in the area have prompted the Philippines to strengthen their Air Force and while it has 15,000 personnel and 211 aircraft, there has been a long period of cuts that has led to a need for modernization. Biggles aficionado, SGM-FX staffer, Euan Maskell explains that while they have 25 combat aircraft including 12 Korean KAI-T250's, most of their deployment is in the shape of helicopters which given the huge size of the Philippines' archipelago is a major challenge when it comes to providing an effective airborne deterrent. They do however have 3 batteries of Israeli Spyder surface to air missiles on order and due to be delivered in Q2 2021 which everyone hopes will be held in reserve-that is if they are not queued on a ship on the north side of the Suez Canal.
Stairway to Heaven
It was this day in 1975 that Led Zeppelin had all 6 of their albums in the Billboard Top 100. One of their best songs which is often described as the best rock group song ever was released in late 1971 and featured on the hugely influential Led Zeppelin IV album. Here is Stairway to Heaven:
There's a lady who's sure
All that glitters is gold
And she's buying a stairway
To heaven
When she gets there she knows
If the stores are all closed
With a word she can get
What she came for
And she's buying a stairway to heaven
There's a sign on the wall
But she wants to be sure
'Cause you know sometimes
Words have two meanings
In a tree by the brook
There's a songbird who sings
Sometimes all of our thoughts
Are misgiven
Ooh, it makes me wonder
Ooh, it makes me wonder
There's a feeling I get
When I look to the west
And my spirit is crying
For leaving
In my thoughts I have seen
Rings of smoke through the trees
And the voices of those
Who stand looking
Ooh, it makes me wonder
Ooh, it really makes me wonder
Discussion and Analysis by Humphrey Percy, Chairman and Founder
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US Federal Reserve
Strong comfort for the markets from the Fed promising to ensure that the US economic recovery is broad and well established before removing its market assistance. USD still firm on the back of this trading at 1.1760 v EUR. Unemployment falling but still 18.9 million drawing benefits hence the Fed focusing on a full recovery-quickly.
Canada
Canadian Dollar weaker on the back of lower oil prices and lower bond yields-the 10 Year Canadian Dollar Government Bond now at 1.45% having been 1.67% just over a week ago. The differential in Canada's bond yields versus the USA's is doing the Loonie no favours.
Bitcoin and Tesla: Elon Musk offers to accept Bitcoin in payment for Teslas
Suspend disbelief(again) but Bitcoin investors (who apparently are the same people as Tesla buyers) have in all seriousness raised a question which is actually being considered: will they be recompensed if they use their Bitcoins to buy a Tesla car and then Bitcoin goes up in value? No question of course about what happens if Bitcoin declines in value! On one hand Bitcoin investors buy the argument that it is a substitute for Fiat currencies but at the same time by asking this question, they clearly do not. Bitcoin has had a losing week having fallen from over $60K to $52K or…..pretty much the price of entry level Tesla models.
Tarzan
In the 1999 animated film re-make of the original Johnny Weissmuller character, Phil Collins played his song, You'll be in My Heart which was one of the five songs he wrote for the Walt Disney film and many would say his best. Here it is:
Come stop your crying
It will be alright
Just take my hand
Hold it tight
I will protect you
From all around you
I will be here
Don't you cry
For one so small
You seem so strong
My arms will hold you
Keep you safe and warm
This bond between us
Can't be broken
I will be here
Don't you cry
'Cause you'll be in my heart
Yes, you'll be in my heart
From this day on
Now and forever more
You'll be in my heart
No matter what they say
You'll be here in my heart
Always
Have a Great Weekend!
Discussion and Analysis by Humphrey Percy, Chairman and Founder
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More stimulus?!
When you look at the inflation concerns that have been developing in the US economy as a result of Biden's €1.9tn stimulus package you may have thought it would be madness to start planning yet another round of $3tn worth of stimulus. After all, if people thought that the existing package risked creating excessive inflation and the economy would be over stimulated during the recovery phase from the pandemic, how can borrowing and spending even more be any different. But I'm not so sure. Whilst the initial headlines may have been a surprise, this new stimulus plan could provide support to the US economy without risking undue inflation and crowding out the private sector.
Let's make it clear initially that the $3tn stimulus plan was a headline grabber. This fiscal stimulus policy was something that the White House is reportedly considering and not something that is a reality or even close to fruition yet. Rather the prospect of it in the US and indeed globally is critical to understanding how the global foreign exchange market will react to national recovery programmes and how nations can determine their own recovery. It is the job of the White House as it is any government to consider every policy possible and to analyse the best path forward. But let's say the US economy (or any other for that matter) really did pursue a fiscal response of this size during the recovery phase of the economy. After the tsunami of stimulus that has preceded it – could the economy soak up that extra spending and what would be the result?
The core of my argument is that the proposed $3tn stimulus plan is completely unlike the stimulus plan of $1.9tn that got markets up in arms and marching for the exit in the bond market recently. The stimulus that President Biden has already passed afforded direct payments to US citizens and was a crisis era response policy. With a world class vaccination programme and a well positioned economy it was thought that the short term fiscal stimulus including putting purchasing power into the pockets of US consumers directly would cause upward price pressure. However, the plans now supposedly under consideration concern infrastructure spending programmes designed to level up the economy, invest in its supply side capacity (typically a deflationary exercise) and expand the productivity of the US economy.
There is and will still be a considerable output gap in nations emerging from the pandemic and productive capacity is likely to remain both below pre-pandemic absolute and projected levels for some time. Therefore, when the nature of spending and borrowing is targeted towards infrastructure and productivity spending, the effect is not inflationary, unlike putting another $1,000 in someone's pocket. Similarly, whilst the amount spent is larger in the proposed infrastructure plan, it is investment and productivity spending that are likely to see the slowest recovery in the private sector having been caught on the back foot for the past year. The time horizon of infrastructure spending is also considerably longer – how long does it take to build a bridge, or upgrade telecommunications or deliver a new cross-country railway versus spending $1,000 in your pocket?
Infrastructure borrowing and spending should be a key component of any successful nation's response to the pandemic and help foster a more even and balanced global recovery than the economic crisis of 2007/8. Encouraging borrowing at the longer end of the yield curve due to the duration of the spending projects, this should steepen rather than crowd out the yield curve and encourage growth expectations. Normally, this would play out to the benefit of the national currency, however, with a unique safehaven status and often idiosyncratic reactions to economic adjustments, the path of USD will be less clear.
Discussion and Analysis by Charles Porter
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Source: https://www.sgm-fx.com/tag/pdq/page/17/
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