Finance

Many expect a circumspect Fed Chair Jerome Powell when he makes a speech from Jackson Hole, Wyoming on Friday morning.
“I just think he’s going to play it about as down the middle as possible,” said Joseph LaVorgna, chief economist at SMBC Nikko Securities America. “He doesn’t want to get himself boxed into a corner one way or another.”
Markets Thursday braced for an unpleasant surprise, with stocks selling off and Treasury yields climbing.
While the temptation for the Fed now might be to signal it has largely won the inflation war, many market participants think that would be unwise.

Federal Reserve Chairman Jerome Powell testifies before the House Committee on Financial Services June 21, 2023 in Washington, DC. Powell testified on the Federal Reserve’s Semi-Annual Monetary Policy Report during the hearing. 
Win Mcnamee | Getty Images News | Getty Images

Since he took over the chair’s position at the Federal Reserve in 2018, Jerome Powell has used his annual addresses at the Jackson Hole retreat to push policy agendas that have run from one end of the policy playing field to the other.
In this year’s iteration, many expect the central bank leader to change his stance so that he hits the ball pretty much down the middle.

With inflation decelerating and the economy still on solid ground, Powell may feel less of a need to guide the public and financial markets and instead go for more of a call-’em-as-we-see-’em posture toward monetary policy.
“I just think he’s going to play it about as down the middle as possible,” said Joseph LaVorgna, chief economist at SMBC Nikko Securities America. “That just gives him more optionality. He doesn’t want to get himself boxed into a corner one way or another.”
If Powell does take a noncommittal strategy, that will put the speech in the middle of, for instance, 2022’s surprisingly aggressive — and terse — remarks warning of higher rates and economic “pain” ahead, and 2020’s announcing of a new framework in which the Fed would hold off on rate hikes until it had achieved “full and inclusive” employment.
The speech will start Friday about 10:05 a.m. ET.

Nervous markets

Despite the anticipation for a circumspect Powell, markets Thursday braced for an unpleasant surprise, with stocks selling off and Treasury yields climbing. Last year’s speech also featured downbeat anticipation and a sour reception, with the S&P 500 off 2% in the five trading days before the speech and down 5.5% in the five after, according to DataTrek Research.

A day’s wavering on Wall Street, though, is unlikely to sway Powell from delivering his intended message.
“I don’t know how hawkish he needs to be given the fact that the funds rate is clearly in restrictive territory by their definition, and the fact the market has finally bought into the Fed’s own forecast of rate cuts not happening until around the middle or second half of next year,” said LaVorgna, who was chief economist for the National Economic Council under former President Donald Trump.
“So it’s not as if the Fed has to push back against a market narrative that’s looking for imminent easing, which had been the case from essentially most of the past 12 months,” he added.

Indeed, the markets seem finally to have accepted the idea that the Fed has dug in its heels against inflation and won’t start backing off until it sees more convincing evidence that the recent spate of positive news on prices has legs.
Yet Powell will have a needle to thread — assuring the market that the Fed won’t repeat its past mistakes on inflation while not pressing the case too hard and tipping the economy into what looks now like an avoidable recession.
“He’s got to strike that chord that the Fed is going to finish the job. The fact is, it’s about their credibility. It’s about his legacy,” said Quincy Krosby, chief global strategist at LPL Financial. “He’s going to want to be a little more hawkish than neutral. But he’s not going to deliver what he delivered last year. The market has gotten the memo.”

Inflation’s not dead yet

That could be easier said than done. Inflation has drifted down into the 3%-4% range, but there are some signs that slowdown could be reversed.
Energy prices have risen through the summer, and some factors that helped bring down inflation figures, such as a statistical adjustment for health-care insurance costs, are fading. A Cleveland Fed inflation tracker anticipates August’s figures will show a noticeable jump. Bond yields have been surging lately, a response that at least partly could indicate an anticipated jump in inflation.
At the same time, consumers increasingly are feeling pain. Total credit card debt has surpassed $1 trillion for the first time, and the San Francisco Fed recently asserted that the excess savings consumers accumulated from government transfer payments will run out in a few months.
Even with worker wages rising in real terms, inflation is still a burden.
“When all is said and done, if we don’t quell inflation, how far are those wages going to go? With their credit cards, with food, with energy,” Krosby said. “That’s the dilemma for him. He has been put into a political trap.”
Powell presides over a Fed that is mostly leaning toward keeping rates elevated, though with cuts possible next year.

Still no ‘mission accomplished’

Philadelphia Fed President Patrick Harker is among those who think the Fed has done enough for now.
“What I heard loud and clear through my summer travels is, ‘Please, you’ve gone up very rapidly. We need to absorb that. We need to take some time to figure things out,'” Harker told CNBC’s Steve Liesman during an interview Thursday from Jackson Hole. “And you hear this from community banks loud and clear. But then we’re hearing it even from business leaders. Just let us absorb what you’ve already done before you do more.”

While the temptation for the Fed now might be to signal it has largely won the inflation war, many market participants think that would be unwise.
“You’d be nuts to you know, to put out the mission accomplished banner at this point, and he won’t, but I don’t see any need for him to surprise hawkish either,” said Krishna Guha, head of global policy and central bank strategy for Evercore ISI.
Some on Wall Street think Powell could address where he sees rates headed not over the next several months but in the longer run. Specifically, they are looking for guidance on the natural level of rates that are neither restrictive nor stimulative, the “r-star (r*)” value of which he spoke during his first Jackson Hole presentation in 2018.
However, the chances that Powell addresses r-star don’t seem strong.
“There was a sort of general concern that Powell might surprise hawkish. The anxiety was much more about what he might say around r-star and embracing, high new normal rates than it was about how he would characterize the near-term playbook,” Guha said. “There’s just no obvious upside for him in embracing the idea of a higher r-star at this point. I think he wants to avoid making a strong call on that.”
In fact, Powell is mostly expected to avoid making any major calls on anything.
At a time when the chair should “take a victory lap” at Jackson Hole, he instead is likely to be more somber in his assessment, said Michael Arone, chief investment strategist at State Street’s US SPDR Business.
“The Fed likely isn’t convinced inflation has been beaten,” Arone said in a note. “As a result, there won’t be any curtain calls at Jackson Hole. Instead, investors should expect more tough talk from Chairman Powell that the Fed is more committed than ever to defeating inflation.” More

Check out the companies making headlines in extended trading on Thursday.

Customers walk through a shopping mall along the Magnificent Mile in Chicago, March 15, 2023.
Scott Olson | Getty Images

Affirm Holdings —  The stock added 10.8% after its quarterly results came in better than expected. Affirm posted a loss of 69 cents per share on revenue of $446 million. Analysts polled by Refinitiv had estimated a loss of 85 cents per share on $406 million in revenue. The CEO cited sequentially improved credit results and accelerated growth.

Nordstrom — Shares fell nearly 4% after the company reported an earnings and revenue beat in the second quarter. To be sure, sales fell 8.3% from the year-ago quarter. 
Gap — Shares rose almost 2% in spite of a mixed quarterly report. Gap posted 34 cents per share, after adjustments, beating Refinitiv estimates of 9 cents per share. Revenue, however, missed expectations. The clothing retailer reported $3.55 billion in revenue, shy of the $3.57 million estimate. Management reported a significantly improved inventory position, but expects revenue in the third quarter to decline at a low double-digit pace year-over-year, compared with analyst forecasts of a 6.8% decline.
Marvell Tech —  Shares of the chipmaker tumbled more than 5% even as the company’s quarterly results topped Wall Street’s estimates. Earnings per share came in at 33 cents, excluding items, while analysts polled by Refinitiv had estimated 32 cents per share. Marvell posted $1.34 billion in revenue, compared with analyst estimates of $1.33 billion. 
Ulta Beauty — The beauty retailer’s shares gained more than 2% after its second-quarter results came in better than expected. Ulta earned $6.02 per share on $2.51 billion in revenue. Analysts had forecasted earnings of $5.85 per share on $2.51 billion in revenue, according to Refinitiv. The company also raised its full-year forecast.
Intuit — Shares fell more than 2% despite the company reporting fiscal fourth-quarter earnings that beat on both the top and bottom lines. Intuit’s revenue guidance for the current quarter came in below estimates. The company expects first-quarter revenue to rise between 10% and 11%, while analysts had estimated 13% growth.
Workday – The cloud-based enterprise management jumped 4% after posting a beat on the top and bottom lines in the second quarter. The company also raised its fiscal 2024 subscription revenue forecast. More

The S&P 500 is down more than 3% this month, on pace to snap a five-month advance.
The broad market index is also on track to post its worst monthly performance since December — when it lost 5.9%.
But this behavior at this time of the year isn’t out of character.

Traders work on the floor of the New York Stock Exchange, Aug. 15, 2023.
Brendan McDermid | Reuters

Wall Street is really suffering through the dog days of August.
The S&P 500 is down more than 3% this month, on pace to snap a five-month winning streak. The broader market index is also on track to post its worst monthly performance since December, when it lost 5.9%.

The Nasdaq Composite is also headed for its biggest one-month loss since December, falling 5.2%. The Dow Jones Industrial Average has declined 3% in August.
These pullbacks are a contrast to the market rally seen earlier this year. The Nasdaq Composite had its best first-half performance in 40 years in 2023. The S&P 500’s gains over the first six months of the year marked the index’s best start to a year since 2021.
There are several things pressuring Wall Street now, ranging from seasonal factors to concerns about the global economy and the Federal Reserve. Here’s a breakdown.

Stock chart icon

Tough month for the S&P 500

August — historically a tough month

This behavior at this time of the year isn’t out of character.
Over the past 10 years, the S&P 500 has averaged a gain of just 0.1% for August — making it the third-worst month for the index, CNBC Pro analysis of seasonal trends showed. Go back 20 years and the performance gets worse: The S&P 500 has averaged a monthly 0.1% loss in that time.

There are several reasons the market tends to see lackluster performances this month, including:

Lower trading volumes: Trading tends to decline in August as traders and investors go on vacation before the summer ends. This can lead to more volatile swings in prices.
Booking profits before September: While August is a tough month for Wall Street, it has nothing on September — historically the worst of all months for the market. The S&P 500 has averaged a 0.5% loss in September over the past 20 years. Over the past 10 years, the S&P 500 has fallen an average of 1% each September.

“The S&P 500 continues to track its seasonal tendency,” Oppenheimer technical strategist Ari Wald wrote earlier this month. “For S&P 500 levels, we see 4,400 as the start of support (50-day average) that extends down to 4,200 (Feb. peak).”

China’s struggles

Economic data out of China has been lackluster, to say the least. The world’s second-largest economy earlier this month reported much weaker-than-expected retail sales growth for July, while industrial production also rose less than expected.
A slowdown in China’s economy could spell trouble for markets around the world, including the U.S., given the sheer number of major corporations that rely on the country as a strong source of revenue.
Additionally, concerns over another real estate crisis in China are developing. Heavily indebted Country Garden Holdings fell to a record low and was removed from the Hang Seng stock index in Hong Kong. Evergrande, another Chinese real estate giant, filed for bankruptcy protection in the U.S. last week. All this led the Chinese central bank to cut interest rates this month.
“The country needs a good U.S.-style restructuring of its real estate market, where apartment prices are slashed, debt is restructured, and new equity investors are brought in as grave-dancers,” Ed Yardeni of Yardeni Research said in a note earlier in August. “Until then, we’re left watching the wreckage unfold.”

Higher Treasury yields

Another source of market pressure this month has been concern that the Fed will keep its benchmark lending rates higher for longer than anticipated. Earlier this week, that drove the 10-year Treasury note yield to its highest level since 2007.
In a summary from its July meeting, the Fed noted that central bank officials still see “upside risks” to inflation — which could lead to more rate hikes. Specifically, the central bank said: “With inflation still well above the Committee’s longer-run goal and the labor market remaining tight, most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy.”
This all comes as new data appears to show inflation is moving closer to the Fed’s 2% target. The consumer price index, a widely followed inflation gauge, rose 3.2% in July on a year-over-year basis. That rate is well below last year’s pace, when CPI peaked at 9.1%, the highest in 40 years.
Investors will get more clues on the potential for future Fed tightening on Friday, when Chair Jerome Powell delivers a speech at an annual economic symposium in Jackson Hole, Wyoming. More

Generative artificial intelligence is technology that uses algorithms to create new content. That can include financial advice, as well as things like essays, song lyrics and art.
31% of investors would be comfortable putting AI’s financial advice into practice without verifying it first, according to a CFP Board survey.
AI outputs aren’t necessarily reliable all the time. It may also be difficult to know what questions to ask an AI chatbot, especially for those with complex financial lives.

Jakub Porzycki/NurPhoto via Getty Images

Nearly 1 in 3 investors would use artificial intelligence as their financial advisor, a new survey suggests — and that has the potential to lead to flawed advice, experts said.  
Specifically, 31% of investors queried would be comfortable implementing financial advice from a generative AI program without first verifying those recommendations with another source, according to a poll by the Certified Financial Planner Board of Standards, the body that governs the CFP designation for financial advisors.

“It is a bit concerning,” said Kevin Keller, CEO of the CFP Board.
In simple terms, AI is technology that aims to simulate human intelligence. Generative AI uses algorithms to create new content like essays, song lyrics, art, photography and computer code — or, in this case, financial advice.
ChatGPT, a program that went viral after being debuted to the public late last year, is one example of generative AI.
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Would-be financial-advice recipients can use such programs to ask financial questions or prompts.

Consider this sample prompt from Keller: “Create an asset allocation for a 62-year-old male investor who is moderately risk tolerant.”
The algorithms that underpin generative AI compile data from sources like the internet to develop responses, and those data sources may not be reliable. The quality of the results depend on the quality of the model, according to McKinsey & Co.
“The outputs aren’t always accurate — or appropriate,” the consulting firm wrote of generative AI.
“For its part, ChatGPT seems to have trouble counting, or solving basic algebra problems — or, indeed, overcoming the sexist and racist bias that lurks in the undercurrents of the internet and society more broadly,” it added.
In short, financial advice outputs won’t necessarily be 100% trustworthy.

Of course, technology and algorithms aren’t new for investors — nor is the skepticism surrounding that technology.
So-called robo-advisors, which use algorithms to automate asset allocations for investors, began popping up around the time of the 2008 financial crisis. They’ve grown in popularity, inspiring questions as to whether they can deliver advice on par with human financial advisors.
Investors — especially those with relatively complicated financial lives — a face an additional hurdle with AI: Engaging with it becomes difficult if someone doesn’t know what questions to ask in the first place, wrote Michael Kitces, a CFP and head of planning strategy at Buckingham Wealth Partners.
“Have you tried logging into ChatGPT to ask it questions only to find yourself sitting there wondering, ‘What should I ask an AI chatbot?’ Kitces said. “Now imagine that feeling again, but this time you have to ask it the right question because your financial life savings are on the line.”

It’s the Wild West out there.

Kevin Keller
CEO of the CFP Board

Perhaps counterintuitively, young investors seem more wary about AI outputs than older investors: 62% of investors age 45 and older said they were “very satisfied” with getting financial advice from generative AI, versus 38% of investors under 45, according to the CFP Board poll.
Yet older investors — who may be in or near retirement — are generally the ones with more complex finances and in need of more tailored advice, experts said.
Ultimately, there have always been do-it-yourself investors, and there will continue to be, Keller said. Those who leverage AI for financial advice should “trust but verify,” he said.
“It’s the Wild West out there,” he added. More

Discover Financial Services (DFS) stock surged 1.82% Thursday morning following an upgrade from Wolfe Research, to trade around $90 apiece.
The firm raised its rating on the stock to outperform, or buy, from peer perform, citing Discover’s “underperformance fueled by internal control and risk management deficiencies that will ultimately…create a buying opportunity.”

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CNBC’s Jim Cramer took issue with Wolfe’s “very gutsy call,” citing reports of Discover overcharging merchants for more than a decade. 
“People can’t resist bargains. In this market, there’s always some analyst who says ‘I have to take advantage of it.’ In the meantime, if you want a bargain, take advantage of Nvidia (NVDA) if the stock is down.”
The artificial-intelligence chipmaker, an Investing Club stock, reported another blowout quarter on Wednesday.

Here’s a full list of the stocks in Jim’s Charitable Trust, the portfolio used by the CNBC Investing Club. More

Jen-Hsun Huang, CEO, Nvidia
David Paul Morris | Bloomberg | Getty Images

Check out the companies making headlines in the premarket.
Nvidia — The chipmaker popped 7% after reporting another blowout quarter that topped Wall Street’s estimates. Nvidia also offered optimistic guidance, saying that sales will jump 170% during the current period as demand for AI chips continues to gain steam. Adjusted earnings came in at $2.70 per share, ahead of the $2.09 estimate expected from analysts polled by Refinitiv. Nvidia reported revenues of $13.51 billion, topping the $11.22 billion expected by Wall Street.

Taiwan Semiconductor, AMD, Marvell Technology — Semiconductor stocks tied to artificial intelligence and Nvidia rose in the premarket on the back of another strong earnings report from the AI chip giant. Advanced Micro Devices, Marvell Technology and U.S.-listed shares of Taiwan Semiconductor rose 2.3%, 4.2% and 3.1%, respectively. Broadcom and Super Micro Computer added 3.4% and 8.5%, respectively.
Boeing — Shares lost about 2% before the bell after revealing a new manufacturing defect involving supplier Spirit AeroSystems that will delay 737 Max deliveries. The company said that fastener holes were improperly drilled on some of the model’s aft pressure bulkheads. Spirit AeroSystems shed more than 6%.
Splunk — The stock gained 13.6% after Splunk reported an earnings beat. The cloud services provider earned 71 cents per share, after adjustments, on $910.6 million in revenue for the second quarter. Analysts surveyed by FactSet had expected Splunk would earn 46 cents per share and $889.3 million in revenue. The company also raised its guidance.
Snowflake — Shares of the cloud company jumped 3.5% on the back of its earnings report. Snowflake posted 22 cents adjusted earnings per share on $674 million in revenue. Analysts polled by Refinitiv had estimated per-share earnings of 10 cents on $662 million in revenue.
Dollar Tree — The discount retailer’s stock dipped more than 6% in premarket trading after Dollar Tree’s third-quarter earnings guidance came in well below expectations. The company said it expected between 94 cents and $1.04 in earnings per share for the current quarter, while analysts were looking for $1.27 per share, according to Refinitiv. Dollar Tree’s second-quarter results did top estimates on the top and bottom lines.

Guess — Shares surged more than 16% after the apparel company on Wednesday reported adjusted earnings of 72 cents per share on revenue of $664.5 million in the second quarter. CEO Carlos Alberini said “Our international businesses continued to perform strongly with robust revenue growth,” and cited strong “strong gross margin” and “effective cost management” in the quarter.
AutoDesk — Shares rose more than 6% after the software company reported stronger-than-expected quarterly results and third-quarter guidance. AutoDesk reported adjusted earnings of $1.91 per share on $1.35 billion in revenue. That came in ahead of the EPS of $1.73 on revenues of $1.32 billion expected by analysts polled by Refinitiv.
Petco Health and Wellness — The pet care retailer tumbled more than 10% after reporting second-quarter earnings before the bell. Adjusted earnings per share of 6 cents was in line with expectations and revenue slightly beat, per StreetAccount. However, Petco’s full-year guidance for adjusted EPS and adjusted earnings before interest, taxes, depreciation and amortization fell short of consensus estimates.
— CNBC’s Hakyung Kim, Pia Singh, Sarah Min, Michelle Fox and Jesse Pound contributed reporting More

“Of fowls after their kind,” the Lord said to Noah, “and of cattle after their kind, of every creeping thing of the Earth after his kind, two of every sort shall come unto thee.” Co-operation from the animal kingdom helped make the biblical patriarch history’s greatest conservationist, saving every land-based animal, including humans, from a wave of divine extinction.Unlike Noah, contemporary conservationists face constraints: they cannot save everything. The patriarch was able to fit a breeding pair of each of the 5.6m or so terrestrial species onto his 300 cubits-long ark. If he was forced instead to ration his space, facing the traditional economic problem of scarce resources and unlimited wants, which animals should Noah have prioritised and kept safe from the flood for future generations?This was the dilemma Martin Weitzman, an economist, posed in a paper published in 1998, and it is one that carries enduring lessons. Weitzman’s goal, beyond biblical interpretation, was to create an economic theory of conservation, calculating a strategy that a rational conservationist could follow to maximise both human welfare and natural biodiversity. He wanted to come up with a way of ranking conservation projects; how to weigh what the Lord called creeping things of the Earth against one another given the limited amount of funding to keep them all alive.Animals have two sources of value in Weitzman’s model. The first is the utility they provide humanity: economists now call this “ecosystem services”. They vary from the delight that megafauna provide those visiting a safari park to the more prosaic: pollinators fertilising crops; earthworms keeping the soil healthy. A forthcoming paper by Eyal Frank of the University of Chicago and Anant Sudarshan of the University of Warwick looks at the economic benefits of “keystone species”. They find that the accidental poisoning of vultures in India led to a dramatic increase in human mortality, with more than 100,000 additional deaths in an average year, as the birds no longer devoured waterway-poisoning carrion (see Graphic detail). Despite their poor reputation, vultures might therefore earn a place on a resource-constrained ark.The second part of the calculation places a direct value on biodiversity. Imagine, now, that you are not Noah trying to save the natural world from a flood, but a scholar trying to save texts from the Library of Alexandria. All the scrolls might be valuable, but many have information on them that is in other libraries. The aim would be to save those with information not recorded elsewhere. Weitzman applies the same logic to animals: biodiversity has both an aesthetic value and an informational one, with content embedded in the genetics of animals. The selection for the ark should try to preserve as much of this information as possible, even if the animals themselves do not do much for human welfare.That led to what some conservationists might consider a repugnant conclusion: counterintuintively, the best way to preserve biodiversity is for the resource-constrained ark to pick a single species and squeeze in as many as possible. Preventing just one type of animal from going extinct preserves not only what is distinct about that animal, but everything it shares genetically with every other animal as well. Trying to keep two species alive, and failing, means losing everything. The real-world implication of this is that using conservation funds on highly endangered species risks throwing good money after bad. Pandas, for instance, are cute but require a lot of effort to keep alive. Noah might be best to fill the ark with resilient cockroaches instead, ensuring that at least one creature makes it through the flood.To reach that counterintuitive conclusion, Weitzman assumed that people ought to value biodiversity for its own sake. Some boatbuilders might instead want to focus only on the benefits animals provide to humans. Perhaps a few creatures provide a sufficiently low or even negative value as to be excluded altogether. Stinging wasps are one candidate, but the picnic irritants play a vital role, eating other pests and pollinating flowers. Mosquitoes, humans’ greatest natural killer, responsible for more than half a million deaths a year, are another. Some scientists have suggested releasing genetically modified, sterilised versions of the insects that would get rid of the species altogether; others warn that doing so could have unforeseen consequences by eradicating both a pollinator and a food source for other animals.Deliberate eradications are occasionally successful. Every week the us Department of Agriculture (usda) and Panamanian government drop sterilised screwworms, a parasitic flesh-eating fly larva that feeds on livestock, out of a plane on the Panama-Colombia border in order to stop the creatures from breeding. This helps maintain a biological barrier that prevents the creature from moving northward, and thus safeguards a programme spanning decades and countries that has got rid of the fly from North America. The usda estimates that the project produces economic benefits worth around $3.1bn a year.Be fruitful and multiplyThere is reason to be careful, though. Even when valuing animals solely on their benefits to humanity, biodiversity still has something to offer: insurance. Genetic range reduces the vulnerability of any individual part of an ecosystem to pests and diseases, helping avoid catastrophe if a species vital for human survival goes extinct. Were Noah to have filled his ark with cockroaches—or pandas, for that matter—a single virus could have wiped out the lot.Weitzmann himself applied such an approach to climate change, formulating his “dismal theorem”, which states that, in the presence of sufficiently big risks with a small chance of great harm, regular cost-benefit analysis is of little use. The same may be true of biodiversity. Deliberate extinctions are irreversible and reduce humanity’s options, so should be used sparingly. Playing at being Noah is one thing, playing at being God quite another. ■Read more from Free exchange, our column on economics:Democracy and the price of a vote (Aug 17th)Elon Musk’s plans could hinder Twitternomics (Aug 7th)Deflation is curbing China’s economic rise (Jul 27th) More

The Argentine economy hangs by a thread. So far this year, the peso’s black-market value has fallen by half against the dollar and annual inflation has hit 113%. The only foreign-currency reserves left are lent by China. Policymakers are torn between printing pesos to cover the government’s bills and the need to avoid hyperinflation. Ahead of presidential elections in October, much is riding on the candidates’ proposed fixes. Javier Milei, a libertarian economist who once smashed a model of the central bank on live tv, and who unexpectedly prevailed in recent electoral primaries, would scrap the peso and make the American dollar Argentina’s legal tender.Yet the economy may implode before any candidate gets to fix it. On August 23rd the government persuaded the imf to release a $7.5bn tranche of its bail-out programme, its only hope of meeting dollar-debt repayments and staving off default. The imf’s reluctance stemmed not from the fact Argentina is broke—lending to such countries is the fund’s purpose—but from the fact that most of the cash Argentina must repay this year is promised to the fund itself. Argentina is a rare country with the imf as its biggest creditor, owing the fund a cool $40bn, roughly a third of its external debt. By providing support, the imf has delayed disaster. It has also prolonged an increasingly absurd situation.The imf lends to the world’s unstable economies as a “preferred creditor”. If a country only has a little cash, it is the first to be repaid. It never takes a loss during debt restructuring. This lets it and other multilateral institutions, including the World Bank, hand out cheaper rescue packages. The approach has worked when packages are small enough that even troubled countries are able to repay them.Yet Argentina is pushing the model to its breaking point. In 2018 the imf took a gamble and offered the country a bail-out worth $57bn, the fund’s biggest ever. At the time, many observers thought it was too much for a country with Argentina’s patchy track record. It turned out also to be far too little to fix the country’s economy.Argentina cannot afford its bills; the imf cannot cut the debt it is owed without forfeiting its status as preferred creditor. The result is a stalemate. For now, an instrument approved by the imf last year provides a workaround. Every time the fund collects Argentine debts it deposits a roughly equal amount with Argentina’s government. This programme has an elongated repayment schedule, but also eye-watering interest bills of 8%. Argentina has just as much borrowing—and just as few ways to pay—as it did before.One escape for Argentina would be to find the cash to repay the imf. During 60 years of borrowing from the fund, however, the country’s politicians have shown little interest in taking its advice. Few reforms stipulated as part of the agreement in 2018 have been enacted. Even if the next president is disciplined, it will take years to get the economy on track. imf officials point to the country’s recent bad luck, including a drought that cost an estimated $20bn. But that would have barely covered repayments to the fund for the year.Another option is for the imf to admit that Argentina has too much debt and things will have to change. Although the fund reckons that Argentina is just about solvent, with a bit of luck, many outside economists think the country is already unable to repay its debts without restructuring. It is unlikely other creditors, mostly American financial institutions, will agree to take losses while the fund shelters behind its elevated status, since the more obligations Argentina racks up to multilateral institutions, the less its bondholders matter. Soon private-sector lenders could hold so little of the country’s external debt that they are irrelevant for its solvency.The imf’s preferred-creditor status ultimately rests on the expectation that borrowers will turn their fortunes around and on other creditors’ goodwill. Neither condition holds in Argentina. By doling out another wodge of cash, the fund will reassure markets, stopping sudden fluxes in the peso or bond prices. But the disbursement brings a tough question. When does the imf stop handing out money? Through their desperation to avoid default, the fund’s officials are putting up with naked disobedience from Argentina, which may set a bad example for other countries.Meanwhile, Argentina desperately needs a lasting fix. Each month without one deepens the country’s economic woes. Inflation worsens as imports become more expensive and monetary policy flirts with fiscal dominance, where the government borrows so much the central bank has no choice but to bail it out. The longer Argentina limps on without restructuring, the more damaging the process will be when it happens. In the past three months, Argentina has racked up short-term debts of $1.7bn from China, $1.3bn from caf, a regional lender, and $775m from Qatar.These are steep costs to protect the imf’s preferred-creditor status. The alternative would be for the fund to stop lending to Argentina, which would force the country to restructure its debts. In doing so, the fund would risk default and perhaps even a loss. Those in favour of such a move argue that the damage to the imf’s preferred-creditor status would not affect its dealings with other countries, so long as it did not make a habit of big bail-outs.With the next disbursement due in November, imf officials might even be able to use the threat of this action to squeeze real reforms from the outgoing government. If the move fails, the next government would at least receive a clean slate, rather than being dogged by negotiations during its first year in office. The cost of letting Argentina carrying on is high. In the coming months, the imf will have to figure out if the cost of cutting it off is higher. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More