Finance

The current inflation scenario is reminiscent of the 1970s and the Federal Reserve needs to take action to temper the rising prices, according to the “Bond King” Jeffrey Gundlach.The DoubleLine Capital CEO told CNBC’s “Halftime Report” on Thursday that with inflation rising and Treasury yields remaining so low, U.S. bonds are essentially negative yielding assets.”When you look at real interest rates on long-date Treasurys, it looks like Jimmy Carter area,” said Gundlach. “We’re talking about the CPI at 5.4%, and if we want to use the 10-year Treasury it’s not even at 1.4%, that’s a negative 4% interest rate. That’s Jimmy Carteresque.”Inflation readings have continued to roll in higher in recent months, as warned by the Federal Reserve, though the numbers lately have been higher than even the central bank may have anticipated. June’s consumer price index came in at 5.4% — its largest year-over-year increase since 2008 — and the producer price index for last month jumped 7.3% on a year-over-year basis.Gundlach compared the current period of rising prices to the 1970s, when inflation ballooned from 1% under President Lyndon Johnson in 1965 to a breakneck of near 15% in March 1980.”A lot of things remind me of the 1970s. We’re just pulling out of a failed war in Afghanistan where we basically fought to stalemate. It kind of reminds me of the ’70s in Vietnam and we had guns and butter that lead to inflation in the late ’60s and the ’70s and even the early ’80s and we certainly have guns, butter, student loan cancellation, free unemployment benefits and everything else,” Gundlach said.To combat the price rises in the Jimmy Carter era, then-Fed Chairman Paul Volcker hiked the federal funds rate and tightened the money supply. The rate, used by banks and credit unions for overnight loans to other depository institutions, reached a record 22.36% in July 1981. Meanwhile, the central bank is sticking with its unprecedented stimulus programs and interest rates near-zero, which Gundlach said is keeping the stock market elevated near record highs.Fed Chairman Jerome Powell has repeatedly signaled that the central bank believes rising inflation will be transitory, but Gundlach said a few more months of hot inflation readings are going to necessitate action from the Fed. More

[The stream is slated to start at 9:30 am ET. Please refresh the page if you do not see a player above at that time.]Federal Reserve Chairman Jerome Powell appears Thursday before the Senate Committee on Banking, Housing and Urban Affairs to conclude his two-day appearance on Capitol Hill to discuss the economy and the future of monetary policy.On Wednesday, when he appeared before the House Financial Services Committee, the central bank chief said the Fed will wait until the employment picture gets better before changing its approach.He faced grilling from several members on the surge in inflation, which Powell believes to be temporary and caused by factors related to the pandemic that eventually will fade.Read morePowell says the Fed is still a ways off from altering policy, expects inflation to moderateInflation climbs higher than expected in June as price index rises 5.4%Fed officials kept a patient tone in terms of tightening monetary policy, minutes showSubscribe to CNBC on YouTube.  More

CONSUMER PRICES rose by 5.4% in the year to June in America, and by 2.5% in Britain—both well above economists’ expectations. Speaking to Congress on July 14th Jerome Powell, chairman of the Federal Reserve, argued that America’s inflation surge is temporary. A small number of huge price rises, such as those for used cars, are dragging up the headline average rate. By contrast, the median price change is far lower.This article appeared in the Finance & economics section of the print edition under the headline “Inflation in America and Britain rises by much more than expected” More

FOR MOST of its 23 years of life the European Central Bank (ECB) had the fuzzy inflation target of “below, but close to, 2%”. No one knew what precisely that meant, but the consensus among economists was that the bank was aiming for inflation in the region of 1.7-1.9%. In any case stubbornly low inflation rendered the question almost academic. Average annual inflation in the euro area since 2013 has been just 0.9% compared with 1.9% in America, even though interest rates are below zero and the ECB has hoovered up government and corporate bonds for years in an attempt to gin up the economy.The bank’s struggle to attain its target has prompted some soul-searching. Last year Christine Lagarde, its president, launched a review of its strategy, which held “listening” events and pored over academic papers. Its conclusions were announced on July 8th. The bank plans eventually to incorporate the impact of climate change in its models and, potentially, to reflect climate considerations in its asset purchases. It also intends to pay attention to the cost of owning a house when it studies inflation (in contrast to practice in other rich countries, this is not included in the euro area’s measure of consumer prices). And it unveiled a new symmetric inflation target, of 2%.The greater clarity around the target is welcome, and might ward off concerns that the ECB will raise interest rates before an economic recovery takes firm hold, as it did in 2008 and 2011. Ms Lagarde noted on July 8th that the change won unanimous support from the bank’s 25-strong governing council. But working out what it means for the ECB’s monetary policy may prove more contentious.For a start, the strategy seems to mean different things to different ratesetters. Jens Weidmann, the hawkish head of the Bundesbank and a member of the ECB’s governing council, took pains to point out that although inflation might deviate from the target temporarily, the ECB would not aim to exceed it. That is in contrast to America’s Federal Reserve, which also recently revised its target. It plans to aim for inflation of 2% on average, tolerating a period of overshooting in order to make up for past shortfalls. But Olli Rehn, the doveish governor of Finland’s central bank, said on July 9th that he expected the ECB’s response to a shock to be quite similar to that of the Fed.The different views might explain why, although Ms Lagarde promised that the bank’s next monetary-policy meeting on July 22nd would clarify what the new target means for policy, few analysts are expecting big changes. (The ECB is currently buying €80bn, or $95bn, in government and corporate bonds a month.) Economists at Barclays, a bank, reckon that the review should have no effect on the near-term path for monetary policy, and that the ECB would continue to support the euro area by buying bonds. Analysts at Morgan Stanley, another bank, predict that the ECB might bring forward an announcement to phase out its pandemic-related asset-purchase scheme, but beef up an older purchase programme instead.Without big changes, it is hard to see how the ECB can do a better job of hitting its target. In June a range of economic forecasters, including those at the central bank, projected inflation to be in the region of 1.4-1.5% in 2023. If it is to successfully convince investors and households that it means business, then the bank will have to explain why, when it does not expect even to meet its old target, it should suddenly be able to hit its new one. ■This article appeared in the Finance & economics section of the print edition under the headline “Promises, promises” More

I T IS MID-JULY, so the football season in England will start soon. You probably hadn’t noticed it had ended. The earnings season, when listed companies in America reveal their quarterly results, comes round with similarly tedious frequency and also never seems to stop. The second-quarter season that kicks off this week ought to stand out, though. Public companies in aggregate are expected to reveal the largest increase in profits since the bounce-back from the Great Recession of 2008-09.Optimism about earnings has driven share prices higher in the past year. But financial markets are relentlessly forward-looking. And with bumper earnings already in the bag, they now have less to look forward to. A rally in bond prices since March and a sell-off in some cyclical stocks point to concerns about slower GDP growth. A plausible case can be made that the earnings outlook might worsen as quickly as it improved.Start with the bottom-up forecasts for profits by company analysts. They expect earnings per share for the MSCI world index of stocks to rise by 40% in 2021, according to FactSet, a data provider. That is a good deal higher than at the start of the year, when the forecast was around 25%. A slowdown to a growth rate of 10% is expected in 2022. Then again forecasts tend to start out at 10%, a nice round number, before being revised upwards (as in, say, 2017) or downwards (as in 2019) as news comes in.Profits swing around a lot. For big businesses, a lot of costs are either fixed or do not vary much with production. Firms could in principle fire workers in a recession and hire them back in a boom so that costs go up and down with revenues. But this is not a great way to run a business. A consequence of a mostly stable cost base is that, when sales rise or fall, profits rise and fall by a lot more. This “operating leverage” is especially powerful for companies in cyclical businesses, such as oil, mining and heavy industry. Indeed, changes in earnings forecasts are largely driven by cyclical stocks.If global GDP growth falls, then profits will fall faster. There is already some evidence of a slowdown. The output and orders readings in the global manufacturing purchasing managers’ index (PMI), a closely watched marker of activity, fell in June. Global retail sales surged in March, but have gone sideways since. The evident slowdown in China’s economy may be a portent, writes Michael Hartnett of Bank of America. China emerged from lockdown sooner; its PMI peaked earlier; and its bond yields started falling four months before Treasury yields did.Slower economic growth is one part of a classic profit squeeze. The other is rising costs. A variety of bottlenecks have pushed up the prices of key inputs, such as semiconductors. Too much is made of this, says Robert Buckland of Citigroup, a bank. Input prices typically go up a lot in the early stages of a global recovery. Big listed companies usually absorb them without much damage to profits. Rapid sales growth trumps the input-cost effect. The real swing factor is wages, which are the bulk of firms’ costs. The recovery is barely a year old, but there is already evidence of a tight labour market.In America the ratio of vacancies to new hires, a measure of the difficulty firms have in filling jobs, reached a record in May. Businesses that were forced to close during lockdowns have lost some workers to other industries. Others are dropping out of the labour force altogether. Thanks to the recent surge in the prices of assets, including homes, some people are choosing to retire early, says Michael Wilson of Morgan Stanley.An obvious remedy for rising costs would be to raise prices. Though inflation is surging in America, that reflects price rises for a small number of items. Many businesses tend not to raise prices straight away. They are mindful of losing customers to rivals who don’t raise prices. And there are administrative costs to changing prices frequently. A study publishedin 2008 by Emi Nakamura and Jon Steinsson, two academics, found that the median duration of prices is between eight and 11 months. Prices of food and petrol change monthly but those of a lot of services only change once a year.A profits squeeze is not certain. Any number of influences could give fresh impetus to global GDP growth: a bumper infrastructure bill in America; more policy stimulus in China; or some concrete signs that supply bottlenecks are easing. Still, while the earnings season now under way ought to be a sunny one, margins look vulnerable.This article appeared in the Finance & economics section of the print edition under the headline “Margin call” More

THE IMF has not exactly stood on the sidelines during the covid-19 pandemic. Since the onset of the crisis, it has extended loans worth about $130bn to 85 countries and provided debt-service relief to some poor economies. Yet given the severity of the pandemic and the IMF’s ample balance-sheet—its lending capacity was boosted to a cool $1trn after the global financial crisis—you might have expected more. On July 8th the fund took what looks like a big step in the right direction, by deciding to create $650bn in new foreign-exchange reserves. How generous is it really?The plan does not involve direct lending to countries, nor draw on the IMF’s balance-sheet. It instead entails the creation and allocation of “special drawing rights” (SDRs), a quasi-currency created in the 1960s in an effort to boost the supply of high-quality reserve assets such as dollars and gold. SDRs are valued against a basket of several major currencies and can be swapped for those currencies if the need arises. There are no conditions attached to the use of such funds, and the associated interest rate is minimal. Governments pay 0.05% on the SDRs they use, with no deadline by which the funds must be repaid.Such allocations are a familiar crisis-fighting tool; in 2009 the IMF agreed on a distribution of $250bn. An allocation during the pandemic might have come sooner were it not for early opposition from America, which wields sufficient voting power to block such measures. President Joe Biden’s administration, however, now backs an allocation. (The $650bn, conveniently, is just shy of the amount that requires approval from America’s fractious legislature.) The fund’s board of governors will vote on the disbursement on August 2nd. If, as expected, it is approved, the SDRs will be doled out later that month.Whether countries draw on it or not, the extra reserve cushion should lift market confidence and reduce the risk that a draining away of foreign exchange leads to balance-of-payments crises. (The fund estimates that over the next five years, the global economy is likely to face a shortage of reserve assets of $1.1trn-1.9trn.) Additional reserves may come in especially handy if a rip-roaring economic recovery leads to higher interest rates in America. That could precipitate an outflow of money and weaken currencies across poor countries, leading to straitened financial circumstances and higher import prices. The new allocation will give governments more room to use their hard-currency reserves to import food or vaccines.Yet the huge headline figure sounds more generous than it really is. The new SDRs will be distributed broadly in proportion to the funding countries provide to the IMF—meaning that the rich world will receive more than half the allotment. Low-income countries will receive a mere 3.2% of the total, equivalent to $21bn, or roughly 4% of their combined output before the pandemic. That does not seem enough, considering that these places face new variants without ample vaccines and cannot borrow as easily as richer ones.In order to redress the imbalance between allocation and need, rich countries with little use for more reserves are working out ways to donate some of their new SDRs. Contributions of about $15bn in existing SDR holdings have already helped expand an IMF facility offering no-interest loans to poor countries over the past year. A larger facility, funded by SDR donations of as much as $100bn, may be announced in August. This is intended to boost poor countries’ health systems, support economic recovery and help them prepare for climate change.The financial contortions behind SDRs invite criticism. Republicans in America’s Congress, for instance, fret that the allocation offers little help to poor nations while giving a windfall to rivals like China and Russia. In fact such places are unlikely to make much use of their SDRs. More targeted aid would probably face political hurdles of its own. A roundabout, opaque means of support may not be ideal; but it is probably the best the fund can do. ■This article appeared in the Finance & economics section of the print edition under the headline “Every little helps” More

AS AMERICA REOPENS for business, labour shortages continue to worsen. Firms are advertising over 9m vacancies, the highest on record. Bosses complain they are unable to find people to serve drinks, staff tills or drive trucks. So in an attempt to eliminate the shortages, half of states are ending a $300 weekly top-up to unemployment insurance (UI), in place since January, as well as other pandemic-related UI programmes. Is this change having the desired effect?It depends whom you ask. On June 27th the Wall Street Journal ran an article on Missouri, a state that abolished the supplement on June 12th, claiming that people were flying off the unemployment rolls. The very same day the New York Times ran an article also on Missouri, which drew almost exactly the opposite conclusion. The reality is somewhere in between these polarised extremes. Making benefits less generous may help America’s jobs market a little—but other factors do more to explain labour shortages.Removing the $300 weekly top-up certainly makes living off welfare less comfortable. At that level 40% of people are earning more than they were in their previous jobs. It is hard to say right now, however, whether imposing tougher conditions translates into more vigorous job searches. The first four states to abolish the supplement did so too late for the effect, if any, to show up in the latest jobs report, released on July 2nd. In the meantime economists must use high-frequency data, such as online job postings and weekly figures on claims for UI, which are less reliable.These suggest that a stingier UI makes a difference. Both analysts at Morgan Stanley, a bank, and economists at the St Louis Federal Reserve find that continuous claims for UI have fallen the most in “early-ending” states. Other research finds similar trends in new claims for UI. But there is enough going on to muddy the picture: Daniel Zhao of Glassdoor, a job-search website, adds a note of caution, pointing out that new claims were already dropping faster in reforming states.It will not be until the August jobs report, released in September, that wonks will have a better idea of what is really going on at the state level. It seems likely, though, that overall employment in America will by then be somewhat higher than it would have been without the cut to UI. A survey from Indeed, a job-search website, suggests that a tenth of unemployed people “not urgently” looking for work feel this way because of UI payments.What is clear, however, is that there are other important reasons why so many workers seem job-shy. Across America the growth in the number of vacancies continued to rise in June and early July, according to Indeed. That suggests that workers are unlikely to be battering down the door to get an interview just because their benefit top-ups have ended.People’s care responsibilities are one big impediment to returning to work (in-person schooling is only set to resume in the autumn). A pile of “excess” household savings accumulated during the pandemic, amounting to more than $2trn in total, has made it easier for many Americans to withstand a spell of unemployment, say until they find the perfect job. Others are depending on the salary of a spouse or partner. Moreover, fear of catching covid-19 is still apparently holding many people back. Who would choose to be a chef, when research suggests that practically no other occupation poses a higher risk of dying from covid-19? Until that threat abates, expect labour shortages to continue. ■This article appeared in the Finance & economics section of the print edition under the headline “Make it pay” More

In this articleBTC.CM=In this photo illustration, the Bitcoin logo is seen on a mobile device with People’s Republic of China flag in the background. (Photo Illustration by t/SOPA Images/LightRocket via Getty Images)Budrul Chukrut | SOPA Images | LightRocket | Getty ImagesLONDON — China’s share of global bitcoin mining plunged this year while Kazakhstan rose to become the world’s third-largest player in the industry, according to research from Cambridge University.The research, published on Thursday by the Cambridge Centre for Alternative Finance, shows China accounted for less than half (46%) of the power used for bitcoin mining in April, down sharply from 75.5% in September 2019. That’s before authorities ordered a crackdown on the mining of cryptocurrencies.Kazakhstan saw an almost sixfold increase in its share of global bitcoin mining in the same period, climbing to 8.2% from 1.4%. The U.S., meanwhile, rose to 16.8% from 4.1% to take the second-top spot, while Russia and Iran were the fourth and fifth-largest countries for bitcoin mining respectively.Bitcoin mining, where transactions are validated and new units produced, is a highly energy-intensive process. Computers around the world race to solve complex math puzzles in order to make a transaction go through. Whoever wins this race is rewarded in bitcoin.The rising price of bitcoin over the years has incentivized more people to mine the cryptocurrency, leading to the creation of an entire industry focused on manufacturing and selling crypto mining equipment. The more people mining bitcoin, the more energy gets consumed.That has led to concerns over bitcoin’s potential impact on the environment, especially as most mining was done in China, which is heavily reliant on coal power. Authorities in several prominent Chinese regions, including Sichuan, Xinjiang and Inner Mongolia, have clamped down on crypto mining in recent months.But Cambridge researcher Michel Rauchs says bitcoin’s energy mix is difficult to determine. In the rainy season, Chinese miners would often flock to Sichuan, a hydropower-rich province in the southwest.Rauchs’ data shows Sichuan’s share of total bitcoin mining power in China increased to 61.1% from 14.9% at the beginning of the wet season to the peak, while Xinjiang’s share decreased to 9.6% to from 55.1% over the same period.It also suggests many bitcoin miners had fled China for neighboring Kazakhstan, a former Soviet republic, prior to its crypto crackdown in June. According to Bloomberg, Kazakhstan has more than 22 gigawatts of electric power capacity, most of which comes from coal and gas stations.Rauchs, who is digital assets lead at the Cambridge Centre for Alternative Finance, created an index in 2019 to show how much energy bitcoin consumes. The academic said he is working on a new model that illustrates the environmental impact of bitcoin mining.Bitcoin’s poor environmental credentials have made it a controversial asset at a time when social and environmental responsibility have become top of mind for investors. In May, Tesla CEO Elon Musk said he would stop accepting bitcoin for vehicle purchases unless mining transitions to more sustainable energy. More