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US Stocks, Dollar Are 'Safe Havens' Amid Virus Scare

US Stocks, Dollar Are 'Safe Havens' Amid Virus Scare

By    |   Monday, 10 February 2020 01:08 PM

President Donald Trump’s budget proposals are due today and are apparently assuming that the U.S. economy will be growing at +3 percent this year.

To me, this seems to be a relatively unlikely assumption. Trend growth for the United States is probably around 2.25 to 2.50 percent. U.S. growth a little below trend seems a perfectly reasonable assumption this year.

The U.S. consumer is fine, but the damage of the trade tariffs to corporate investment is both significant and longer lasting. The problem is not the tariffs themselves, but trust in the global trade system and repairing trust is going to need a lot more than a phase one U.S.-China trade deal.

Does this matter? In one sense, NO.

Budget proposals are many times in many places some kind of a “polite fiction” and there is always a desire to do whatever is needed to get the numbers to look like they might add up. However, the fact that unrealistic growth expectations are needed at a time when the budget deficit is significant does underscore a structural problem that the United States has with budget deficits at the moment.

In the just released Monthly Budget Review (MBR) for January 2020, the Congressional Budget Office (CBO) estimates that in the first four months of Fiscal Year 2020 total receipts were up by 6 percent and total outlays were up by 10 percent, which are both higher than in the corresponding first 4 months of fiscal year 2019.

The CBO estimates that after topping $1 trillion in fiscal 2020, federal deficits will average $1.3 trillion per year between 2021 and 2030, which is a level that some economists and policymakers warn is unsustainable. Under the current system, budget deficits will push overall U.S. federal debt held by the public to $31.4 trillion by the end of 2030, which would be 98 percent of GDP. That’s a higher rate than at any point since just after World War II and more than double what it has averaged over the past 50 years.

The CBO estimates that U.S. federal spending will grow more than revenues through 2050, Reuters informs.

Now, investors could do well recalling that budget deficits are not a bad thing as such if used to build productive capacity for the future. The current U.S. deficit owes much to tax cuts which have not generally gone into enhance productive capacity for the future and which have indeed tended to leak outside the United States.

In the meantime, today, China has started (timidly) to return to work after the extended Lunar New Year holiday. How quickly China will resume “normal” production will be important to global supply chains.

Today, many workplaces remained closed and many people worked from home. Few commuters have been seen during the morning rush-hour on one of Beijing’s busiest subway lines. All were wearing masks.

Hubei, the province of 60 million people that is the hardest hit by the outbreak, remains in virtual lockdown, with its train stations and airports shut and its roads sealed.

China’s central bank, the People’s Bank of China (PBOC) has taken a series of steps to support the economy, including reducing interest rates and flushing the market with liquidity. From today, it will provide special funds for banks to re-lend to businesses.

Taiwan’s Foxconn has received Chinese government approval to resume production at a plant in the north China city of Zhengzhou, a source with direct knowledge of the situation told Reuters today. But the southern city of Shenzhen rejected a company request to resume work at a plant there.

Chinese inflation data for January showed a jump in consumer prices. The cost of food in China surged 20.6 percent year-on-year (Y/Y), the most since April 2008, following a 17.4 percent advance in December, with pork prices rising for the eleventh month in a row and at a steeper rate (116 percent vs. 97 percent in December). Nevertheless, this was food price related and Chinese food prices are of little concern for the rest of the world.

Producer price inflation barely moved, up 0.1 percent in January. Producer prices matter slightly more to the rest of the world, but even there, relationship between Chinese producer prices and global consumer price inflation is very limited.

During these times of widespread “uncertainties” I still consider the U.S. and the U.S. dollar as real safe havens.

The World Health Organization said the number of coronavirus cases outside China could be just “the tip of the iceberg,” Reuters reported.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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During these times of widespread “uncertainties” I still consider the U.S. and the U.S. dollar as real safe havens.
us, stocks, dollar, safe, havens, fed, trump
Monday, 10 February 2020 01:08 PM
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