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Daily Picks Tuesday: Venezuela's Inflation to Reach 1 Million Percent, IMF Forecasts

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Venezuela's Inflation to Reach 1 Million Percent, IMF Forecasts


  • Inflation will skyrocket to 1,000,000% by the end of this year as the government continues to print money to cover a growing budget hole.
  • The economy is forecast to shrink 18% in 2018 -- the third consecutive year of double-digit contractions -- as oil production falls significantly.
  • The dramatic economic collapse was caused as crude prices nosedived nearly four years ago and authorities have refused to enact economic adjustments.

Mortgage, Groupon and card debt: how the bottom half bolsters U.S. economy


  • The bottom 60% of income-earners have accounted for most of the rise in spending over the past two years even as the their finances worsened primarily fuelled by a run-down in savings .
  • In the past, rising incomes of the upper 40 percent of earners have driven most of the consumption growth.
  • Analysis reveals growing financial stress among lower-income households even as their contribution to consumption and the broad economy grows due to increasing costs.
  • That in turn could threaten the second-longest U.S. expansion given consumption makes up 70 percent of the U.S. economy’s output.
  • Over the past year signs of financial fragility have been multiplying, with credit card and auto loan delinquencies on the rise and savings plumbing their lowest since 2005.
  • The $815-billion credit card market is not big enough to rattle Wall Street, but could be an early sign of stress that might spread to other debt as the Fed continues its gradual policy tightening.
  • More borrowers have also been falling behind on auto loans, which helped bring leverage on non-mortgage household debt to a record high in the first quarter of this year.
  • With inflation factored in, average hourly earnings dropped by a penny in May from a year ago for 80% of the country’s private sector workers.
  • One in four adults surveyed by the Fed feared they could not cover an emergency $400 expense and one in five struggled with monthly bills.
  • This month the central bank reported to Congress that rising delinquencies among riskier borrowers represented “pockets of stress.”

Jamie Dimon on the trade war, infrastructure 'emergency' and Trump


  • "If you do another $200 billion of tariffs and this national security thing about cars, I think that you're getting pretty close to reversing some of the benefits you've seen in the economy,"
  • Trump has "raised serious issues that are pretty accurate." But his tactics pose risks, and have the potential to dial back gains from corporate tax cuts, he said.
  • Dimon said it's too early to know whether tariffs will undo the economy's gains, but that such a reversal is "possible."
  • Issues like Chinese intellectual property theft would have been better addressed by forming a "common front" with US allies such as Mexico, Canada, Europe and Japan.
  • The United States remains the best place in the world to do business, Dimon said. But he believes the country has lost its way on infrastructure and education.
  • Dimon said he doesn't agree with all the president's policies, but believes he has an obligation to engage. "You can't take yourself off the playing field," he said.

Trump Tariffs Hit Largest US Aluminium Company, ALCOA


  • Stock of ALCOA fell over 4% on a report from the company of it expecting to see a substantial decline in profits in the coming quarters due to the imposition of tariffs on aluminium.
  • The US is increasingly a net importer of unprocessed aluminium that is the main input for companies that process aluminium.
  • The US has never been a major producer of bauxite, the original source of most aluminium, only producing about 1% of global supplies of it.
  • The US imports $23.4 billion of aluminium products, with nearly half of that, 46.8 percent to be precise, being unprocessed aluminium.
  • Unlike American steel companies, whose main inputs of iron ore and coal are domestically produced, ALCOA is more like an automobile company that is hurt by the tariffs on steel, which raise its costs.
  • The top five nations from whom the US imports aluminium are Canada (36.3%), China (15.1%), Russia (7.0%), UAE (6.5%) and Mexico (4.3%).

China using Russian strategy in trade war with America


  • A deliberate devaluation of the yuan, with the aim of offsetting the impact of U.S. tariffs may be on its way.
  • This is the strategy Russia has used to combat sanctions due to the invasion of Ukraine.
  • The yuan has already fallen by 4.5% against the dollar over the last month, making Chinese goods cheaper in the U.S. and American products more expensive in China.
  • As of now, the drop in the yuan's value appears to reflect a sell-off by traders watching China's economy weakening.
  • If the trade war escalates, a devaluation may be one of China's strongest tools in the toolbox.
  • The problem with the Trump administration waiting for China to buckle under the pressure of tariffs and come back with a series of big unilateral concessions is that it's unlikely to happen which may set the stage for further escalation.

Two years after the vote, there is little certainty where the UK-EU relationship is heading


  • The “harder” the Brexit, the bigger the likely economic impact to both the UK and EU27, as a result of the loss of trade due to new physical, fiscal or regulatory barriers.
  • In the UK government’s report, a 'No Deal' outcome would reduce UK GDP by 8% over 15 years (relative to current trend growth), a free trade agreement along the lines of the EU-Canada agreement would reduce GDP by 5% over the same period, and the EEA option would lower GDP by 2%.
  • Analysis from the EU’s side suggests that an EEA outcome would only cost the EU27 approximately 0.1% of GDP by 2030, a basic FTA would mean a loss of 0.3-0.6% of GDP, and a No Deal outcome would cost 0.3-0.8% of GDP.
  • Both sides have an interest in securing a trade agreement, and any reduction in imports or exports will have negative implications for consumers and businesses in the UK and EU27.
  • The negotiations will also be shaped by politics, of course. As many commentators have noted, the referendum outcome on 23 June 2016 was driven more by cultural and ideological values than by economic interests.
  • From the UK’s side, on the assumption that political interests – and particularly the “red-lines” on sovereignty and ending the free movement of people – over-ride economic interests, the FTA+ and FTA options outweigh the EEA- and EEA options.
  • From the EU27’s side, the two most preferred outcomes, in terms of maintaining the integrity of the single market, are the EEA and a Basic FTA, whereas the EU is largely indifferent between the FTA+ and EEA- options, as either would involve a potentially dangerous precedent.
  • No Deal is the least-preferred option of both the UK or the EU27, which suggests that some sort of agreement will be reached.
  • For an FTA+ rather than a Basic FTA, the EU27 would need to compromise, to allow UK “cherry-picking”.
  • For the final outcome to be the EEA rather than a Basic FTA, UK domestic politics would have to shift, so that the “red lines” on ECJ jurisdiction, adhering to EU regulatory rules, and the continued free movement of people are removed.
  • This analysis suggests we are heading for a basic free trade agreement, which includes zero tariffs and quotas on goods and some special customs arrangements, but with not much on services trade.