The global economic recession which kicked off towards the end of the Bush presidency and the beginning of the Obama presidency reached a nadir around March 9, 2009. At that point in time, the SPX closed at 676.53. Fast forward to the present day, the SPX currently stands at 3,934.83. The financial charts don’t lie.
There has been a clear and unprecedented upswing since 2009, fuelled largely by government-backed programs to stimulate economic growth. A series of massive stimuli, backed by Federal Reserve Bank bond-buying programs and quantitative easing have facilitated a booming US economy.
During the Obama presidency, from 2008 – 2016, the QE programme embarked upon large-scale purchases of securities and Treasury bonds. The financial crash that began with the sub-prime mortgage crisis and heralded the collapse of Lehman Brothers was a massive global economic catastrophe. The Federal Reserve Bank acted quickly to shore up confidence in the economy by cutting interest rates to 0% – 0.25%.
Before QE kicked in, the Fed owned $477B of federal government-issued debt, out of a total of $5.8 trillion. This amounts to 8% of all federal debt. After the stimulus policies enacted by the Fed and the government, the Fed injected $900 billion + $292 billion + $800 billion into the economy. In terms of percentages, the Fed owned $2.5 trillion worth of Treasury securities, amounting to 18% of all debts.
Source: Dow Jones Industrial Average 2008 – Present Day
The objective of these monetary policies was to lower the cost of borrowing, to hyper-stimulate the economy to get businesses back into the swing of things. Since the global financial crisis, the world economy has been with it characterized by historically low, sometimes negative, rates of interest. The Fed also purchased $1.8 trillion in mortgage-backed securities offered through Fannie Mae and Freddie Mac, between 2009 – 2016.
All of this money flooding the markets had to get soaked up into the economy. The funds found their way into savings accounts, fixed-interest-bearing accounts, retirement accounts, stock markets, debt repayments, living expenses, et al. The Dow Jones Industrial Average (DJIA) enjoyed unprecedented gains in the 12 years since the financial crisis hit.
Stock Market Gets a Massive Boost from Government-Backed Stimuli
During the Trump presidency, 2016 – 2020, the coronavirus pandemic struck in December 2019, and has roiled financial markets and ravaged the global economy ever since. To combat the massive decline in global demand, governments and central banks around the world have pushed the largest stimulus packages ever in history.
In the US, tens of millions of workers were furloughed, businesses shuttered operations, and economic activity ground to a halt. Were it not for the concerted efforts by the House, the Senate, and the Executive, financial ruin would have ensued. At $4 trillion, the tax breaks, loans, grants, and bailouts were the largest stimulus ever to be passed in the US.
Some $2.3 trillion was allocated to businesses, $651 billion in tax breaks, and $454 billion was allocated to the Federal reserve to stabilize financial markets. The PPP (Paycheck Protection Program) allocated $670 billion towards businesses impacted by the coronavirus. State governments and public agencies received a total of $253 billion, and $884 billion (approximately 20%) of relief when two workers and their families. Additional stimulus was passed, and it will pass again under Biden.
Stock markets around the world collapsed in March and April 2020, following consecutive months of global shutdowns, amid a rampant novel coronavirus pandemic. The quick response of governments around the world to lockdown their countries to foreign visitors, quarantine the sick and infirm, and attack the virus with every single resource available in the medical, pharmaceutical, scientific, public and private sector paid dividends.
While the loss of human life has been horrifying, governments have gone to great lengths to shore up economic activity to prevent the worst possible scenario coming to light: collapsed economies around the world. The stock market boom has been fuelled by a glut of new traders to the scene, many of whom heretofore had no interest in trading the financial markets.
The coronavirus created new economies, new realities, and new ways of doing business. In person was replaced by virtual, and seemingly moribund SMEs came roaring back to life with new ways of doing business.
Many business sectors were able to successfully transform operations during the pandemic. These include therestaurant industry, VR sector, the retail industry, e-learning, remote working, entertainment, pharmaceuticals and medical devices, virtual healthcare, contactless technology, logistics, and electronic transfers.
Impact of the Pandemic on the Financial Markets
There can be no denying the devastating effects of the pandemic on economic activity. Government imposed shutdowns have all but eviscerated the energy industry, causing the prices of crude oil, natural gas, and coal to plummet. These commodities enjoy rising prices with increasing demand. With shrinking demand and reduced supply, many energy companies have closed up shop completely.
Yet, the failure of energy companies has been a boon to the fittest operators, by removing excess supply, and shoring up the existing capacity with the companies who remain. Major energy titans like Texaco, Exxon Mobil, Shell, British Petroleum, and the like have been able to keep themselves afloat by way of massive reserves, government-backed loans and stimuli, and diversification strategies.
While travel and leisure stocks plunged (Carnival Cruise lines, Royal Caribbean, Princess, Delta Airlines, American Airlines, British Airways, Virgin Atlantic, Boeing et cetera), other commodities like gold have boomed. The likes of SPDR GLD, Barrick Gold, Newmont Corporation, Rio Tinto plc, and others have enjoyed strong gains. Much the same is true of platinum.
But the biggest winners during 2020, and in the opening quarter of 2021 remained the tech stocks. The performance of the NASDAQ composite index is a case in point. The election of Joe Biden to the highest office has brought with it a reshuffling of priorities vis-a-vis how the US will approach technology moving forward. A focus on green energy is the order of the day. This puts many oil, coal, and natural gas companies in a spot of bother, but it puts companies like Tesla, myriad solar-focused companies, and alternative fuel SMEs in the spotlight.
Given this new green focus, the stocks to watch for February include the likes of Greene Concepts Inc (OTCPK: INKW), a company which sells bottled water and recently sold out all of its supplies on Amazon. Another company with a forward-focus is Alternet Systems Inc. (OTCPK: ALY) which has been manufacturing ReVolt Electric Motorcycles, and yet another is a rather interesting turnaround with Barrel Energy Inc (OTCPK: BRLL) which was in the oil and gas sector, and now manufactures lithium-ion batteries.
For the full year ending December 31, 2020, the NASDAQ gained 43.2%, its fifth best year in recorded history. The Dow Jones Industrial Average gained 7.3%, and the S&P 500 index rose 16.3%. The performance of the NASDAQ is extraordinary, given the hullabaloo that ensued during the year. The tech-heavy index was led by strong performers such as Google, Netflix, Apple, Microsoft, Amazon, Tesla, Facebook, all of which comprise an agglomerated chunk of the NASDAQ.
Innovation, particularly cloud computing, sophisticated IoT technology, and the imminent roll-out of 5G across the board are expected to be the paradigm shift in the economy, led by the tech sector. Electric vehicles, driverless vehicles, robotics, virtual meetings, computing capabilities, and wearable tech are certainly exciting and potentially lucrative fields for the new economy.
How Long Will the Bull Market Last?
That’s the $100 million question that everybody wants to know. We already know that there are several gauges to use to assess the mood of the market, including speculative sentiment, unemployment numbers, inflation forecasts et al. One of them is the VIX (volatility indicator). The CBOE volatility index gauges the performance of the market in real time and determines the level of risk in the markets.
When the VIX is rising (when it’s high, it’s time to buy), there is increasing volatility and traders and investors tend to buy up stocks. When the VIX is falling (when the VIX is low look out below), that tends to be a signal that there will be future volatility, which spurs selloffs. Currently, the VIX is at a level of 21.53, up markedly since the previous close. The VIX is an important economic indicator with regards to stock market expectations, and volatility.
The Monetary Policy of Pakistan: SBP Maintains the Policy Rate
The State Bank of Pakistan (SBP) announced its bi-monthly monetary policy yesterday, 27th July 2021. Pakistan’s Central bank retained the benchmark interest rate at 7% after reviewing the national economy in midst of a fourth wave of the coronavirus surging throughout the country. The policy rate is a huge factor that relents the growth and inflationary pressures in an economy. The rate was majorly retained due to the growing consumer and business confidence as the global economy rebounds from the coronavirus. The State Bank had slashed the interest rate by 625 basis points to 7% back in the March-June 2020 in the wake of the covid pandemic wreaking havoc on the struggling industries of Pakistan. In a poll conducted earlier, about 89% of the participants expected this outcome of the session. It was a leap of confidence from the last poll conducted in May when 73% of the participants expected the State Bank to hold the discount rate at this level.
The State Bank Governor, Dr. Raza Baqir, emphasized that the Monetary Policy Committee (MPC) has resorted to holding the 7% discount rate to allow the economy to recover properly. He added that the central bank would not hike the interest rate until the demand shows noticeable growth and becomes sustainable. He echoed the sage economists by reminding them that the State Bank wants to relay a breather to Pakistan’s economy before pushing the brakes. The MPC further asserted that the Real Discount Rate (adjusted for inflation) currently stands at -3% which has significantly cushioned the economy and encouraged smaller industries to grow despite the throes of the pandemic.
Dr. Raza Baqir further went on to discuss the current account deficit staged last month. He added that the 11-month streak of the current account surplus was cut short largely due to the loan payments made in June. The MPC further explained that multiple factors including an impending expiration of the federal budget, concurrent payments due to lenders, and import of vaccines, weighed heavily down on the national exchequer. He further iterated that the State Bank expects a rise in exports along with a sustained recovery in the remittance flow till the end of 2021 to once again upend the current account into surplus. Dr. Raza Baqir assured that the current level of the current account deficit (standing at 3% of the GDP) is stable. The MPC reminded that majority of the developing countries stand with a current account deficit due to growth prospects and import dependency. The claims were backed as Dr. Raza Baqir voiced his optimism regarding the GDP growth extending from 3.9% to 5% by the end of FY21-22.
Regarding currency depreciation, Dr. Baqir added that the downfall is largely associated with the strengthening greenback in the global market coupled with high volatility in the oil market which disgruntled almost every oil-importing country, including Pakistan. He further remarked, however, that as the global economy is vying stability, the situation would brighten up in the forthcoming months. Mr. Baqir emphasized that the current account deficit stands at the lowest level in the last decade while the remittances have grown by 25% relative to yesteryear. Combined with proceeds from the recently floated Eurobonds and financial assistance from international lenders including the IMF and the World Bank, both the currency and the deficit would eventually recover as the global market corrects in the following months.
Lastly, the Governor State Bank addressed the rampant inflation in the economy. He stated that despite a hyperinflation scenario that clocked 8.9% inflation last month, the discount rates are deliberately kept below. Mr. Baqir added that the inflation rate was largely within the limits of 7-9% inflation gauged by the State Bank earlier this year. However, he further added that the State Bank is making efforts to curb the unrelenting inflation. He remarked that as the peak summer demand is closing with July, the one-way pressure on the rupee would subsequently plummet and would allow relief in prices.
The MPC has retained the discount rate at 7% for the fifth consecutive time. The policy shows that despite a rebound in growth and prosperity, the threat of the delta variant still looms. Karachi, Pakistan’s busiest metropolis and commercial hub, has recently witnessed a considerable surge in infections. The positivity ratio clocked 26% in Karachi as the national figure inched towards 7% positivity. The worrisome situation warrants the decision of the State Bank of Pakistan. Dr. Raza Baqir concluded the session by assuring that despite raging inflation, the State Bank would not resort to a rate hike until the economy fully returns to the pre-pandemic levels of employment and production. He further assuaged the concerns by signifying the future hike in the policy rate would be gradual in nature, contrast to the 2019 hike that shuffled the markets beyond expectation.
Reforms Key to Romania’s Resilient Recovery
Over the past decade, Romania has achieved a remarkable track record of high economic growth, sustained poverty reduction, and rising household incomes. An EU member since 2007, the country’s economic growth was one of the highest in the EU during the period 2010-2020.
Like the rest of the world, however, Romania has been profoundly impacted by the COVID-19 pandemic. In 2020, the economy contracted by 3.9 percent and the unemployment rate reached 5.5 percent in July before dropping slightly to 5.3 percent in December. Trade and services decreased by 4.7 percent, while sectors such as tourism and hospitality were severely affected. Hard won gains in poverty reduction were temporarily reversed and social and economic inequality increased.
The Romanian government acted swiftly in response to the crisis, providing a fiscal stimulus of 4.4 percent of GDP in 2020 to help keep the economy moving. Economic activity was also supported by a resilient private sector. Today, Romania’s economy is showing good signs of recovery and is projected to grow at around 7 percent in 2021, making it one of the few EU economies expected to reach pre-pandemic growth levels this year. This is very promising.
Yet the road ahead remains highly uncertain, and Romania faces several important challenges.
The pandemic has exposed the vulnerability of Romania’s institutions to adverse shocks, exacerbated existing fiscal pressures, and widened gaps in healthcare, education, employment, and social protection.
Poverty increased significantly among the population in 2020, especially among vulnerable communities such as the Roma, and remains elevated in 2021 due to the triple-hit of the ongoing pandemic, poor agricultural yields, and declining remittance incomes.
Frontline workers, low-skilled and temporary workers, the self-employed, women, youth, and small businesses have all been disproportionately impacted by the crisis, including through lost salaries, jobs, and opportunities.
The pandemic has also highlighted deep-rooted inequalities. Jobs in the informal sector and critical income via remittances from abroad have been severely limited for communities that depend on them most, especially the Roma, the country’s most vulnerable group.
How can Romania address these challenges and ensure a green, resilient, and inclusive recovery for all?
Reforms in several key areas can pave the way forward.
First, tax policy and administration require further progress. If Romania is to spend more on pensions, education, or health, it must boost revenue collection. Currently, Romania collects less than 27 percent of GDP in budget revenue, which is the second lowest share in the EU. Measures to increase revenues and efficiency could include improving tax revenue collection, including through digitalization of tax administration and removal of tax exemptions, for example.
Second, public expenditure priorities require adjustment. With the third lowest public spending per GDP among EU countries, Romania already has limited space to cut expenditures, but could focus on making them more efficient, while addressing pressures stemming from its large public sector wage bill. Public employment and wages, for instance, would benefit from a review of wage structures and linking pay with performance.
Third, ensuring sustainability of the country’s pension fund is a high priority. The deficit of the pension fund is currently around 2 percent of GDP, which is subsidized from the state budget. The fund would therefore benefit from closer examination of the pension indexation formula, the number of years of contribution, and the role of special pensions.
Fourth is reform and restructuring of State-Owned Enterprises, which play a significant role in Romania’s economy. SOEs account for about 4.5 percent of employment and are dominant in vital sectors such as transport and energy. Immediate steps could include improving corporate governance of SOEs and careful analysis of the selection and reward of SOE executives and non-executive bodies, which must be done objectively to ensure that management acts in the best interest of companies.
Finally, enhancing social protection must be central to the government’s efforts to boost effectiveness of the public sector and deliver better services for citizens. Better targeted social assistance will be more effective in reaching and supporting vulnerable households and individuals. Strategic investments in infrastructure, people’s skills development, and public services can also help close the large gaps that exist across regions.
None of this will be possible without sustained commitment and dedicated resources. Fortunately, Romania will be able to access significant EU funds through its National Recovery and Resilience Plan, which will enable greater investment in large and important sectors such as transportation, infrastructure to support greater deployment of renewable energy, education, and healthcare.
Achieving a resilient post-pandemic recovery will also mean advancing in critical areas like green transition and digital transformation – major new opportunities to generate substantial returns on investment for Romania’s economy.
I recently returned from my first official trip to Romania where I met with country and government leaders, civil society representatives, academia, and members of the local community. We discussed a wide range of topics including reforms, fiscal consolidation, social inclusion, renewably energy, and disaster risk management. I was highly impressed by their determination to see Romania emerge even stronger from the pandemic. I believe it is possible. To this end, I reiterated the World Bank’s continued support to all Romanians for a safe, bright, and prosperous future.
First appeared in Romanian language in Digi24.ro, via World Bank
US Economic Turmoil: The Paradox of Recovery and Inflation
The US economy has been a rollercoaster since the pandemic cinched the world last year. As lockdowns turned into routine and the buzz of a bustling life came to a sudden halt, a problem manifested itself to the US regime. The problem of sustaining economic activity while simultaneously fighting the virus. It was the intent of ‘The American Rescue Plan’ to provide aid to the US citizens, expand healthcare, and help buoy the population as the recession was all but imminent. Now as the global economy starts to rebound in apparent post-pandemic reality, the US regime faces a dilemma. Either tighten the screws on the overheating economy and risk putting an early break on recovery or let the economy expand and face a prospect of unrelenting inflation for years to follow.
The Consumer Price Index, the core measure of inflation, has been off the radar over the past few months. The CPI remained largely over the 4% mark in the second quarter, clocking a colossal figure of 5.4% last month. While the inflation is deemed transitionary, heated by supply bottlenecks coinciding with swelling demand, the pandemic-related causes only explain a partial reality of the blooming clout of prices. Bloomberg data shows that transitory factors pushing the prices haywire account for hotel fares, airline costs, and rentals. Industries facing an offshoot surge in prices include the automobile industry and the Real estate market. However, the main factors driving the prices are shortages of core raw materials like computer chips and timber (essential to the efficient supply functions of the respective industries). Despite accounting for the temporal effect of certain factors, however, the inflation seems hardly controlled; perverse to the position opined by Fed Chair Jerome Powell.
The Fed already insinuated earlier that the economy recovered sooner than originally expected, making it worthwhile to ponder over pulling the plug on the doveish leverage that allowed the economy to persevere through the pandemic. The main cause was the rampant inflation – way off the 2% targetted inflation level. However, the alluded remarks were deftly handled to avoid a panic in an already fragile road to recovery. The economic figures shed some light on the true nature of the US economy which baffled the Fed. The consumer expectations, as per Bloomberg’s data, show that prices are to inflate further by 4.8% over the course of the following 12 months. Moreover, the data shows that the investor sentiment gauged from the bond market rally is also up to 2.5% expected inflation over the corresponding period. Furthermore, a survey from the National Federation of Independent Business (NFIB) suggested that net 47 companies have raised their average prices since May by seven percentage points; the largest surge in four decades. It is all too much to overwhelm any reader that the data shows the economy is reeling with inflation – and the Fed is not clear whether it is transitionary or would outlast the pandemic itself.
Economists, however, have shown faith in the tools and nerves of the Federal Reserve. Even the IMF commended the Fed’s response and tactical strategies implemented to trestle the battered economy. However, much averse to the celebration of a win over the pandemic, the fight is still not through the trough. As the Delta variant continues to amass cases in the United States, the championed vaccinations are being questioned. While it is explicable that the surge is almost distinctly in the unvaccinated or low-vaccinated states, the threat is all that is enough to drive fear and speculation throughout the country. The effects are showing as, despite a lucrative economic rebound, over 9 million positions lay vacant for employment. The prices are billowing yet the growth is stagnating as supply is still lukewarm and people are still wary of returning to work. The job market casts a recession-like scenario while the demand is strong which in turn is driving the wages into the competitive territory. This wage-price spiral would fuel inflation, presumably for years as embedded expectations of employees would be hard to nudge lower. Remember prices and wages are always sticky downwards!
Now the paradox stands. As Congress is allegedly embarking on signing a $4 trillion economic plan, presented by president Joe Bidden, the matters are to turn all the more complex and difficult to follow. While the infrastructure bill would not be a hard press on short-term inflation, the iteration of tax credits and social spending programs would most likely fuel the inflation further. It is true that if the virus resurges, there won’t be any other option to keep the economy afloat. However, a bustling inflationary environment would eventually push the Fed to put the brakes on by either raising the interest rates or by gradually ceasing its Asset Purchase Program. Both the tools, however, would risk a premature contraction which could pull the United States into an economic spiral quite similar to that of the deflating Japanese economy. It is, therefore, a tough stance to take whether a whiff of stagflation today is merely provisional or are these some insidious early signs to be heeded in a deliberate fashion and rectified immediately.
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