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The Organization for Economic Cooperation and Development (OECD) is out with a dire prediction, saying that America’s economy is facing down a $15 trillion hit.

The study out Tuesday by the intergovernmental economic organization, which includes 37 member countries sought, to evaluate the economic impact of school closures world-wide among member nations, and assumed that current students amid coronavirus shutdowns from last spring into this year would miss up to one-third of the school year total. 

The OECD said the economic impact will be long felt even assuming an immediate return of schools to pre-pandemic levels of performance. Specifically, the report projects that in the case of the United States— 

“if the student cohorts in school during the 2020 closures record a corona-induced loss of skills of one-tenth of a standard deviation and if all cohorts thereafter return to previous levels, the 1.5% loss of future GDP would be equivalent to a total economic loss of USD 15.3 trillion.”

More broadly the study pointed to the long-term productivity on a country’s GDP of lost time in the classroom due to the pandemic. 

“As a result, the total cost of missed schooling could amount to 69% of the current GDP for the typical country, the OECD said,” as summarized by CNBC.  

However, total economic growth losses stand to be “proportionately higher” should schools be slow to return to their optimum performance that existed before the pandemic.

The report also took into account the rise homeschooling and and other alternative, distance learning programs internationally. Various polls and media reports have strongly suggested homeschooling in the United States has exploded over the past half-year. 

On this, the OECD said that “there are evident benefits to students in expanding their learning time and opportunities beyond the school gate by being able to learn using a variety of distance learning approaches.”

One suggestion in the paper to limit further setbacks in education, in the absence of a widely available vaccine, was to continue to build on the infrastructure for remote learning.

After three days of furious declines in the market culminating with the worst 3-day stretch for the Nasdaq since the financial crisis which entered a correction, stocks rebounded on Tuesday on the back of oversold conditions which approached the March puke…

… as traders, algos and Gen-Z BTFDers ignored news that AstraZeneca had paused covid vaccine trials after a participant in the UK developed an unexplained illness potentially crippling the race for a vaccine, and causing a “ripple as markets question recent vaccine optimism,” according SVB Leerink analyst Andrew Berens said. Then again, with futures some 20 points higher from Tuesday’s close, it doesn’t seem like pessimism will be allowed today as a 4-day selloff would be catastrophic for market sentiment, and as such look for a green close with the blessings of the Fed.

And with all eyes on the Nasdaq, it was imperative to find some support which is what the 50DMA has conveniently provided.

The rebound was led by the same tech names that tumbled in the past three days, with Nasdaq futures bouncing 1.8% after tumbling another 4.1% on Tuesday, bringing total losses since Sept. 2 to 10%, with declines led by stocks such as Amazon.com, Facebook and Netflix after a rally dominated by the so-called “stay-at-home” winners on the back of SoftBank call buying. Tesla surged 7% in premarket trading after shedding about $80 billion of its market capitalization in the previous session. Lululemon dropped 4.9% after the yogawear maker forecast a drop in current-quarter adjusted profit due to higher marketing expenses.

“A setback like that seen in Nasdaq stocks over the past days has been overdue,” Commerzbank strategist Alexander Kraemer wrote citing excessive valuations. “Nonetheless, the underlying drivers of the recent rally remain in place. We believe that the recent setback will emerge as a buying opportunity for year-end performance.”

European equities also rallied led by telecoms, oil & gas and insurance names. The Eurostoxx rose more than 1%, with the FTSE 100 up 0.8%, but off best levels.

Earlier in the session, Asian stocks fell, led by health care and finance. All markets in the region were down, with Australia’s S&P/ASX 200 dropping 2.2% and Shanghai Composite falling 1.9%. The Topix declined 1%, with ARTNER and Fuji Pharma falling the most. The Shanghai Composite Index retreated 1.9%, with Ningxia Xinri Hengli Steel Wire and Zhejiang Tiantai Xianghe Industrial posting the biggest slides. Softbank once again reversed most of its losses, ending down 2.8% after earlier sliding as much as 7%.

Treasuries erased their increases as equity futures strengthened, paring Asian session gains over early European session, although yields remained slightly cheaper across front-end of the curve. Early risk-off supported a bull-flattening move but gains faded as S&P e-minis recovered and yields eased back higher. U.S. session highlight includes $35b 10-year note reopening, a $6b increase vs. prior reopening. Yields were higher by up to 1bp across long-end of the curve with front- and belly broadly unchanged; 10-year yields around 0.682%. The German curve bear steepens slightly, while peripheral spreads tighten to core. Gilts bear flatten.

In FX, the greenback traded mixed versus G-10 peers as risk sensitive currencies, such as the Australian and New Zealand dollars and the Swedish krona, saw a modest bounce. The pound was the worst performer, and fell for a sixth day, extending its losing streak to the longest since the start of the U.K.’s coronavirus lockdown in March; cable dropped as low as 1.2914 – on worries that talks could collapse over changes to the Brexit withdrawal deal.

In commodities, crude oil climbed back above $40 a barrel in London after tumbling to the lowest level since June, while front month WTI rose 2.25%, back on a $37-handle.

Spot gold drifted in the red below $1,930 as the dollar rose. Base metals grind lower, with LME nickel underperforming.

Looking at the day ahead, the main central bank highlight will be the Bank of Canada’s monetary policy decision later. In terms of data, there’s also Japan’s machine tool orders for August, Canada’s housing starts for August and the US JOLTS job openings for July.

Market Snapshot

• S&P 500 futures up 0.8% to 3,361.00
• STOXX Europe 600 up 0.8% to 366.64
• MXAP down 1% to 169.19
• MXAPJ down 1% to 556.57
• Nikkei down 1% to 23,032.54
• Topix down 1% to 1,605.40
• Hang Seng Index down 0.6% to 24,468.93
• Shanghai Composite down 1.9% to 3,254.63
• Sensex down 0.6% to 38,132.85
• Australia S&P/ASX 200 down 2.2% to 5,878.60
• Kospi down 1.1% to 2,375.81
• Brent Futures up 1.2% to $40.27/bbl
• Gold spot down 0.2% to $1,929.09
• German 10Y yield fell 0.2 bps to -0.497%
• Euro down 0.05% to $1.1772
• Brent Futures up 1.2% to $40.27/bbl
• Italian 10Y yield fell 1.8 bps to 0.902%
• Spanish 10Y yield fell 1.1 bps to 0.315%
• U.S. Dollar Index up 0.09% to 93.53

Top Overnight News from Bloomberg

• The euro’s rally to a two-year high is making European Central Bank officials nervous, and putting investors and economists on the lookout for some kind of intervention as soon as Thursday’s policy meeting
• All social gatherings of more than six people will be banned in England, under new limits to be announced by Boris Johnson on Wednesday, as coronavirus cases grow
• Johnson is facing a backlash from the European Union and from within his own ruling Conservative Party after the U.K. government said it plans to break international law over Brexit

Here is a quick look at global markets courtesy of NewsSquawk

Asian equity markets were lower across the board amid strong headwinds from Wall St where the tech rout intensified on return from the long weekend and the Nasdaq slipped into correction territory with Tesla shares crashing over 21% following the S&P 500 snub, while recent hefty losses in the energy complex and AstraZeneca’s vaccine trial halt due to an adverse reaction, added to the dejected mood and resulted in around a 10% drop in shares of its Indian listed subsidiary. ASX 200 (-2.1%) underperformed on a retreat from the 6,000 level with all sectors in negative territory and the substantial declines led by energy, tech and financials. Nikkei 225 (-1.0%) fell below 23,000 as exporters suffered the brunt of a firmer currency and as SoftBank continued its slump following the recent publicity regarding its large tech bets and amid news its Chief Compliance Officer has exited the Co. Hang Seng (-0.6%) and Shanghai Comp. (-1.9%) conformed to the widespread negative mood due to the tech rout and as tensions persisted with the US penalising Chinese companies accused of using forced labour in which it withheld orders for 3 companies, as well as threatened action on several others, while it was also reported that China is to sanction senior US officials that visit Taiwan and the American companies they have ties with. Finally, 10yr JGBs were higher following the bull flattening in US and with prices supported by the broad risk aversion, but with upside limited by resistance at the 152.00 level and amid the lack of BoJ buying in the market today.

Top Asian News

• New Zealand’s Three-Year Bond Yield Turns Negative for 1st Time
• CloudAlpha Capital Makes Long Call on China’s KE Holdings
• S.Korea Markets Dollar, Euro Bonds, Joining Global Deal Rush
• SoftBank Buybacks Raise Prospect of Management Buyout: Analyst

Sentiment has seen somewhat of a recovery (Euro Stoxx 50 +0.9%) since the downbeat APAC handover, albeit price action could just mark consolidation from yesterday’s move amidst quiet newsflow. US equity futures meanwhile eke mild gains as contracts drifted higher since the reopen of electronic trade – with the initial gap lower attributed to reports that AstraZeneca (-1.2%) pausing its COVID-19 vaccine trials with the University of Oxford due to an adverse reaction in a UK participant. Sources stated that the nature of the adverse reaction and when it happened were not immediately known, though the participant is expected to recover. It is worth keeping in mind that it is procedural to pause the trials when a patient gets ill from unknown causes, whilst one adverse effect does not deem the vaccine a “failure”. That being said, the safety of vaccines will garner more attention in the coming months as most candidates undergo Phase III trials. Nonetheless, the update has provided support for AstraZeneca’s competitors; with GSK (+2.3%), Sanofi (+2.1%), Diasorin (+3.5%), Merck (+1.7%), Moderna (+4.9% pre-mkt) and BioNTech (+3.5 pre-mkt) all firmer. Back to Europe, bourses see broad-based gains, whilst sectors are mostly higher, with telecoms and Oil & Gas leading the gains, whilst Banks, Autos and Travel & Leisure reside in the red, with the latter also weighed on by Ryanair (-2.5%) after cutting their FY passenger numbers – a move which mimic’s that of easyJet (-5.0%) for the Q4 announced yesterday. In terms of other individual movers, Airbus (-2.6%) is lower alongside the aviation sector, but with EU Trade Commissioner Dombrovskis said the EU will implement tariffs on US goods in response to illegal aid for Boeing (+0.8% pre-mkt) unless the US removes the trade duties imposed in response to Airbus subsidies. Meanwhile, Pandora (+4.2%) was bolstered by a broker upgrade at Citi

Top European News

• Zara Owner Inditex Faces Short Call by Anatole Investment
• Ryanair Hammers Government ‘Mismanagement’ of Covid Crisis

In FX, another day, but no real let up in the pressure on the Pound as a confirmed break of 1.3000 in Cable culminated in a breach of the 200 WMA (circa 1.2931) and a test of interim support ahead of 1.2900 in the form of a late July low (1.2912 from the 29th of that month). Meanwhile, Eur/Gbp extended its advance through 0.9100, but held below the next upside chart target (July 28’s 0.9135 peak) awaiting the next chapter in the Brexit saga as the UK prepares to present its Internal Market Bill with annulments to the Withdrawal Agreement (for a primer of the publication expected around 12.30BST check out the headline feed at 8.25BST).

• AUD/NZD – In contrast to Sterling’s ongoing demise, the Aussie and Kiwi have regained some composure alongside broad risk sentiment and a technical bounce off round number levels at 0.7200 and 0.6600 respectively. Improvements in Westpac consumer optimism, ANZ business confidence and the outlook for activity are also assisting the Antipodean Dollars as Aud/Nzd pivots 1.0900 despite more diplomatic strains between Australia and China.
• USD – The Buck is off best levels after the DXY extended gains just beyond Tuesday’s peak to 93.617 largely at the expense of the aforementioned ailing Pound, with the index acknowledging a partial recovery in risk appetite ahead of weekly MBA mortgage applications, Redbook sales and JOLTS.
• CAD/CHF/JPY/EUR – All narrowly mixed vs the Greenback, as the Loonie pares some declines in line with oil before the BoC policy meeting between 1.3259-16 parameters, the Franc holds just above 0.9200 following Swiss jobless rates matching consensus and the Yen ranging from 106.05 to 105.80 and also losing a little safe-haven premium. Similarly, the Euro is restrained in the run up to Thursday’s ECB within a 1.1787-58 range and wary of stops sitting around 1.1750 that would be exposed if the base from August 21 at 1.1754 gave way.
• SCANDI/EM – No major reaction to a rise in 12 month Swedish CPIF expectations as Eur/Sek continues to straddle 10.4000, but Eur/Nok has retreated from 10.8000 to sub-10.7500 on the back of the rebound in crude prices. Elsewhere, the Rub is also benefiting from Brent regaining a foothold above Usd 40/brl, albeit tentatively, but the Try remains on course if not destined to set a fresh record low at 7.5000.

In commodities, WTI and Brent front month futures eke mild gains, albeit more so a function of stock market action coupled with a waning of the Dollar. Fundamental news-flow for the complex has once again been light, with crude markets consolidating following yesterday’s slide. WTI Oct resides around USD 37.50/bbl (vs. low 36.16/bbl), whilst Brent Nov tested resistance at USD 40.50/bbl (vs. low 39.37/bbl). Note, the JMMC will be holding their next meeting on September 17th with delegates reportedly expressing concern over the lower oil prices. This comes after Russia Energy Minister Novak called on OPEC members to take into account the “demand recovery” just a week ago. ING suggests “If this downward pressure on the market continues, OPEC+ will become increasingly concerned, and there is always the potential that the group look to re-implement the deeper cuts that we saw between May and July” – but again, this will need the backing of Russia whom have historically been more resistant. Looking ahead, participants will be eyeing the EIA STEO later today ahead of the Private Inventory reports – a delayed release on account of US Labor Day. Elsewhere, spot gold and silver remain contained within relatively tight ranges as the precious metals trade in tandem with the Buck around USD 1930/oz and just below USD 26.75/oz. Meanwhile, base metals overnight saw a session of losses, with Shanghai copper closing some 1.3% lower and Dalian iron ore sliding over 3% amid the losses in stock markets coupled with the firmer USD.

US Event Calendar

• 7am: MBA Mortgage Applications, prior -2.0%
• 10am: JOLTS Job Openings, est. 6,000, prior 5,889

DB’s Jim Reid concludes the overnight wrap

I should be nice to readers today if I want votes but I must admit that a number of you are quite sneaky. We mentioned yesterday that there’s a competition to work out where in the world the front cover photo for our new Long-Term Study is from. Well, by the precise nature of many of your correct replies I can only suggest that many of you used some kind of google app to get the correct answer. If I’m being unfair I apologise! So congratulations to all the incorrect answers as I know there was no foul play. Or maybe I should castigate your lack of technology skills. Anyway having criticised most of the readers now please still vote for us.

The long term study is called “The Age of Disorder”. In it we split the world of the last 160 years into five eras and suggest we’re entering a new one characterised by amongst other things a deteriorating US/China relationship, reversing globalisation, a make or break decade for Europe, MMT, inequality getting higher first and then improving, Millennial policies likely to take over before the end of this decade (including on climate change) and tech being highly disruptive. We also wonder whether big cities will reduce in importance post peak globalisation and Covid. See the report for more here and there’s still time to guess where the front cover image is from. Up to you whether you use some fancy app algorithm to work it out.

There was a fair amount of disorder in markets yesterday as the US saw it’s first day back after last week’s tech rout. Once again it was US tech stocks that led the moves lower, with the NASDAQ down another -4.11% by the end of the session, which included a sizeable -21.1% decline from Tesla as last Friday evening’s news of the stock not being included in the S&P 500 at this time disappointed investors along with GM taking a stake in another EV competitor. Since last Wednesday’s record close, the NASDAQ is down -10.03%, losing c.$1.77tr of value. While not an apples-to-apples comparison, the Nasdaq has lost the equivalent of around 8.2% of 2019 US GDP over the last three session.

Other sectors weren’t immune to the downward moves, with the broader S&P 500 falling another -2.78% and the Dow Jones down -2.25%. Meanwhile energy stocks plummeted on both sides of the Atlantic as oil prices were another major victim of the risk-off mood. By the close yesterday, Brent Crude was down a further -5.31% to $39.78/bbl, while WTI saw an even larger -7.57% decline to $36.76/bbl, in its biggest move lower since April. The complex was under additional pressure as reports of stalling demand in Asia and further signals of increasing OPEC+ supply – namely Russian tax breaks to boost domestic oil-producers – gave crude a double shock on a day already bad for risk.

The key news overnight is that AstraZeneca has paused research on its coronavirus vaccine, which it has been working on with Oxford University, after a participant in its clinical trial became ill. A company spokesperson noted that, “This is a routine action which has to happen whenever there is a potentially unexplained illness in one of the trials.” While not stopping the trial, the company will have to review the incident in order to continue the trial, which could elongate the approval process. Meanwhile, Moncef Slaoui, the head of the US Warp Speed initiative, said in a statement that Data Safety Monitoring Boards in the US and UK are “conducting an in-depth review of the company’s vaccine candidate which is standard procedure when an adverse event occurs.” Given that this was seen by many as the leader in the vaccine race, this is a blow. It reminds us why the process is usually multiple times slower than what is occurring with the covid vaccine trials.

Asian markets are trading largely lower this morning. The Nikkei (-1.38%), Hang Seng (-0.97%), Shanghai Comp (-1.07%) and Kospi (-0.68%) are all down but futures on the S&P 500 and Nasdaq are trading up +0.13% and +0.70% respectively. Elsewhere, crude oil prices are down another -1% overnight. Datawise, China’s August CPI came in line with consensus at 2.4% yoy while PPI came in a touch lower than consensus at -2.0% yoy (-1.9% yoy expected).

In terms of other news this morning, geo-politics has dominated with China’s President Xi Jinping saying that the country will enhance cooperative ties with North Korea, a move which is likely to irk US President Trump. Meanwhile, the SCMP is carrying a story this morning citing Global Times Editor Hu Xijin that China is planning to sanction US officials who visit Taiwan. We feel that these tensions are only going to increase over the next few years as we highlight in “The Age of Disorder”.

Amidst the flight from risk, sovereign bonds rallied across the board yesterday as 10yr Treasury yields fell -3.9bps to 0.679% (a further -1bps this morning). It was a similar picture in Europe, where yields continued to fall throughout the day, with those on 10yr bunds (-3.2bps), OATs (-3.1bps) and BTPs (-1.8bps) all moving lower. Gilts were actually the big outperformer amidst the Brexit developments (more on which below), and 2-year gilt yields closed at a record low of -0.13%.

In terms of the latest on the coronavirus, here in the UK there was further concern after another 2,466 cases were reported yesterday, making the 3rd consecutive day in which more than 2,000 cases have been reported. The recent upward trend has led to speculation that further restrictions will be imposed, and overnight it’s been confirmed that the legal limit on gatherings is to be reduced to 6 from Monday. Elsewhere France’s Health minister is expecting hospitalizations and ICU admissions to rise in the coming weeks as daily cases are now hovering around 7000 mark for the first time during the pandemic. The US continues to go the other way with California, Arizona and Florida all seeing the lowest confirmed case count since the start of the summer, and in turn the US is registering its lowest daily case count (<28,000 per week) since the end of June. However, with children returning to school in certain districts in the Northeast and Midwest which have been relatively quiet may be a test over the next month or so. Interestingly, DB’s Robin Winkler updated his mobility map yesterday, which shows that after the summer lull, Europe is re-establishing its lead over the US in terms of reopening. You can see more on that here ( link here ).

There was a flurry of fiscal activity today. The first of which was that both leading Congressional Democrats – Speaker Pelosi and Senate Minority Leader Schumer – said the new Republican stimulus proposal is going in the wrong direction and that it contains ‘poison pills’ that they know Democrats would not support. This seems to be putting any real hope of additional stimulus at further risk with less than two months to the presidential election. The second note was a Bloomberg report that the skinny GOP bill would rescind the Fed’s unspent stimulus funds that were appropriated for lending purposes. Considering that those liquidity facilities were, and remain, a factor in the improvement of risk pricing, any alterations could have major impacts. Overnight reports suggest that the trimmed down bill which is expected to cost anywhere between $500bn to $700bn would be put to a senate vote on Thursday.

Meanwhile the CEOs of 9 companies with leading vaccine candidates signed a public letter in which they said that they would “always make the safety and well-being of vaccinated individuals our top priority” and specifically noted that the FDA “requires that scientific evidence for regulatory approval must come from large, high quality clinical trials that are randomized and observer-blinded”. Moderna, one of the leading candidates was down -13.2% on mix of this news and broad based selling of US biotech (-1.76%).

Sterling slumped another -1.40% against the US dollar yesterday as the negative headlines on Brexit continued to escalate. Following the FT’s report that the government’s Internal Market Bill would seek to override the Brexit Withdrawal Agreement, the UK’s Northern Ireland Secretary Brandon Lewis acknowledged in the House of Commons yesterday that “This does break international law, in a very specific and limited way”. So not something that’s likely to be received well by the EU, particularly given the statements made on Monday, including from the Commission President. We should get further details today when the government actually publish the bill, but yesterday it was announced that the head of the UK government’s legal department had quit, with the FT saying that this was because of the Brexit issue. Notably, even a number of Conservative MPs expressed disquiet with the plans to go against an international treaty, with former Prime Minister Theresa May asking in the House of Commons how the government would reassure future international partners that the UK would abide by its legal obligations.

Elsewhere in Europe, equity markets similarly fell ahead of the ECB’s decision tomorrow, with the STOXX 600 falling -1.15%. The FTSE 100 was the outperformer thanks to sterling’s decline, only losing -0.12%, though the DAX (-1.01%) and the CAC 40 (-1.59%) saw more serious losses. There also wasn’t a great deal of data to guide investors, though Euro Area’s Q2 GDP reading saw a modest upward revision to a -11.8% decline, as opposed to the previous estimate of -12.1%.

To the day ahead now, and the main central bank highlight will be the Bank of Canada’s monetary policy decision later. In terms of data, there’s also Japan’s machine tool orders for August, Canada’s housing starts for August and the US JOLTS job openings for July.

It’s a shame: Even the blessing of a legion of consolidation-obsessed Wall Street analysts, and the direct financial backing of the ECB – which came to the rescue of Bernard Arnault, the LVMH boss and France’s richest man, during the great fiscal unraveling back in February – wasn’t enough to make the Tiffany deal go.

Bloomberg reported Wednesday morning that the deal between the two luxury businesses simply wouldn’t happen. One analyst described the news as a “thunderbolt from the blue” as a handful of lonely skeptics have once again been justified.

“This is a like a sudden thunderbolt in a blue sky,” Bernstein analyst Luca Solca writes by email. “I wonder if this is move is a definitive decision or only a prelude to a renegotiation of some sort”

Tiffany shares slump 15% on news that the $16 billion merger wouldn’t happen. LVMH dropped 0.5%, erasing earlier gains in Paris. Though the consolidation narrative is certainly a powerful one, this isn’t exactly the first time we’ve heard of trouble in luxury paradise.

Meanwhile, in a world where hedge funds are badly underperforming not only the S&P500 but retail investors too, here is the latest set of losers: the merger arbs and other investors who were long TIF in hopes of collecting pennies in front of a steamroller. Well… the steamroller just arrived.

Submitted by Joseph Carson, former chief economist at AllianceBernstein

Federal Reserve has spent over a year conducting a review of its monetary policy strategy, tools, and communication process. The review was an academic re-assessment of an academic experiment called inflation targeting. The new framework of inflation averaging is an extension of the inflation-targeting regime, with a longer timeline. This decision on inflation targeting moves monetary policy closer to a rule-based framework. A rule-based framework creates the premise that there are no legitimate objectives besides the item being targeted. 

Inflation targeting was never supposed to become a rule-based framework. Proponents of the practice argued it would help increase the “transparency” of conventional monetary policy and emphasize the commitment toward maintaining a low and steady inflation environment.

Inflation targeting has never delivered the macroeconomic results that were promised. That’s because it has no practical foundation, focuses on a narrow set of prices that are not entirely market-determined, and creates an uneven playing field between the economy and finance. Inflation averaging will compound the errors. 

First, mandating an inflation rate of 2% has no theoretical justification. 

There is no such thing as an “ideal” or steady rate of inflation. Policymakers have never offered any empirical evidence to justify a 2% inflation target because none exists. Research and actual experiences show that an inflation rate too high or too low for an extended period can create imbalances and bad economic outcomes. But that range is very wide.

In the mid-to-late 1990s, reported core consumer price inflation averaged more than 100 basis points above the inflation rate of the last decade, and the macro performance in terms of growth, job creation, and wage gains was far superior. 

Policymakers have the freedom to change their operating framework. But any framework should be grounded with solid research and not made up with “alternative” facts to support its use as a policy tool.  

Second, inflation targeting falsely assumes there is absolute perfection in price measurement. 

Subtle changes in the prices and quality of goods and services make price measurement at times a “best guess”. Every year government statisticians face new products, changes in old products, shifts in demand, and company pricing strategies.  One of the most complex issues in price measurement is the pervasiveness of item replacements. Item replacement refers to a process whereby government statisticians must select and price a different product because the one previously included could not be found. Previous studies have found that some items are replaced more than once a year and annual replacement rates could be as high as 30% for products.

But item replacements are uneven year-to-year and therefore so too is the judgment component of reported inflation. As a result, price changes that are down or up a tenth or a quarter of a percent from year to the next should be considered nothing but statistical noise. But a rule-based inflation-targeting framework will compel policymakers to fiddle with the stance of policy to account for the noise in price measurement. 

How is it that policymakers nowadays have fallen in the trap of placing so much importance on a single statistic to conduct monetary policy?

Third, the Fed’s inflation-targeting regime mistakes indirect measures of inflation for direct ones.

A critical aspect of the design of price targeting is the selection of the price series. The price series must be timely and a direct measure of inflation. The consumer price index (CPI) is the only direct measure of consumer prices. But policymakers have opted to use the personal consumption deflator (PCE). The PCE deflator is not a direct measure of prices since 70% of the prices come from the CPI. The other 30% is based on non-market prices. 

Four of the past 5 years, the core CPI has exceeded the 2% target. The only year it missed was 2018 when it was 1.8%. That small undershoot from the 2% target is not statistically significant and certainty not large enough to trigger a change in the stance of monetary policy.

Over the same 5-year period, core PCE ran nearly 75 basis points below the core CPI rate. Almost all of that difference can be explained by the “invisible” prices, or prices for items that are in the PCE but not in CPI. 

Does it make sense to base policy decisions on “invisible” prices?  

Fourth, inflation targeting lacks balance in anchoring consumer inflation expectations with investor expectations. 

The announcement of an inflation target is intended to reduce uncertainty over the future course of inflation and anchor people’s inflation expectations. It is hard to prove that the formal announcement of inflation targeting has had any impact on people’s inflation expectations.

According to the University of Michigan’s consumer sentiment survey, people’s one-year inflation expectations have fluctuated between 2.5% and 3% for the past 20 years, moving above or below the range during an economic crisis or oil shocks. Perhaps people are unaware of the Fed’s 2% inflation target or that “experienced” inflation runs consistently higher than reported inflation. 

But investors are readily aware of the Fed’s inflation target. Every little tweak in the Fed’s policy statement on inflation and its impact on official rates triggers almost an instant reaction on the part of investors.  

One of the inherent weaknesses of inflation targeting is the inability to balance consumer and investor expectations. That is, as policymakers attempt to simultaneously hit an arbitrary price target and anchor inflation expectations they are inadvertently un-anchoring investor expectations as it eliminates the fear of higher interest rates, encouraging extreme speculation and risk-taking in the financial markets. 

Why do policymakers only focus on people’s inflation expectations and not people’s/investor’s asset price expectations as well since both have become unstable at times resulting in bad economic outcomes?

Informal and formal price targeting has been in the Fed’s tool kit for the past 25 years or so. The effects on income and portfolio flows are not similar to conventional monetary policy. At the end of 2019, the market value of equities in people’s portfolios’ stood 3X times workers income, up from 1X times in the mid-1990s. 

The shift to inflation averaging compounds the unevenness. That’s because inflation averaging will extend the period of low-interest rates, encouraging more speculation and risk, increasing gains in finance over the economy. 

A critical review of the pros and cons inflation targeting will have to wait for the next crisis. It usually takes three crises before policymakers realize something is fundamentally wrong with their framework. 

By then there will be several new academic papers that will highlight the flaws of inflation targeting/averaging, expanding on those that are listed in this article while adding others as well. 

On Sunday a high level Russian delegation arrived in Damascus to meet with Syrian President Bashar al-Assad, where the two sides discussed joint counter-terror efforts and the COVID-19 epidemic facing both countries. It’s being described in regional newspapers as “of special importance, given the political and economic files that will be discussed.”

Crucially the meeting comes after Syria’s already beleaguered war economy has been further smashed by far reaching US sanctions, and as American forces are still occupying oil and gas rich Deir Ezzor province. Foreign Minister Sergei Lavrov and Deputy Prime Minister Yuri Borisov discussed boosting trade ties as Assad called on urgent support from allies needed to shore up the failing economy.

An unnamed Western diplomat cited in Reuters on the critical timing of the high level meeting said, “Russia turned the tide for Assad and with the regime now facing its gravest challenges, Moscow is in a better position than any other time to further squeeze Assad” — meaning Russia can gain more concessions both militarily and in terms of badly needed investment in rebuilding Syria’s destroyed infrastructure, something China is said to be eyeing as well.

With Russian help, Assad emerged victorious in the nearly decade-long war, but now faces a long battle for the survival of the the economy and currency. Beginning in the summer, as Damascus began feeling the squeeze of Washington’s so-called Caesar Syria Civilian Protection Act, which many critics say is actually immensely increasing the suffering of civilians, the Syrian pound (or lira) began hitting record lows.

The pound lost 67% of its value in the period stretching from mid-May to mid-June. The Caesar Act came into effect on June 17, 2020 – at which point one dollar equaled over 2,000 pounds. Before the war (pre-2011), it was 1$=50SYP.

To underscore just how important Lavrov’s visit is, it should be remembered that it’s the top Russian diplomat’s first meeting in Damascus since February 2012, though Assad and Putin have personally met multiple times since then.

Geir Pedersen, the UN envoy for Syria, described these new talks as a possible “door-opener” to a final resolution of Syria’s nine-year long war.

Lavrov pledged in subsequent press statements later on Monday that Moscow would help the Syrian government successfully “break through” the fierce US-led sanctions.

However, it remains that Idlib province remains occupied by al-Qaeda, Turkish forces remain on sovereign Syrian soil in northern border areas, and hundreds of American forces are propping up Syrian Kurdish militias in the northeast.

Authored by Steve Watson via Summit News,

As the rest of Europe and the world remains under the grip of draconian rules and the threat of new lockdowns, Sweden, which allowed its citizens to remain free throughout the entire pandemic, has pretty much declared victory over the coronavirus.

The country now has one of the lowest infection rates on the planet, and it’s difficult not to admire how it has handled the past year, with no strict lockdown or compulsory face mask rules. All businesses, schools and public places remained open in Sweden for the duration.

“Sweden has gone from being the country with the most infections in Europe to the safest one,” Sweden’s senior epidemiologist Dr. Anders Tegnell commented to Italian newspaper Corriere della Sera.

“What we see now is that the sustainable policy might be slower in getting results, but it will get results eventually,” Tegnell clarified.

“And then we also hope that the result will be more stable,” he added.

Tegnell previously warned that encouraging people to wear face masks is “very dangerous” because it gives a false sense of security but does not effectively stem the spread of the virus.

“The findings that have been produced through face masks are astonishingly weak, even though so many people around the world wear them,” Tengell has urged.

Last week, the European Center for Disease Prevention and Control confirmed Sweden’s drop in infection rate, with only 12 cases per million, compared to 18 in neighbouring Denmark and 14 in nearby Norway.

Graphic: The Sun

At the peak of the Sweden’s outbreak, it was seeing 108 new infections per million people, as it pursued a “herd immunity” strategy.

The figures also show that out of 2500 randomly selected and tested people in Sweden, none tested positive, compared to 0.9 percent positive in April, and 0.3 percent in May.

“We interpret this as meaning there is not currently a widespread infection among people who do not have symptoms,” said Karin Tegmark, deputy head of the Public Health Agency of Sweden.

When compared to the rest of Europe, Sweden’s death rate sits somewhere in the middle. However, officials are confident that playing the long game will see this improve drastically.