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Hello fellow Finimizer, this Weekly Review is for the week of Jul 11-15 and should take you 3:10 minutes to read.

Governments Need To Step Up Their Game

As central banks (arguably) run out of ammunition, it’s looking more likely that many governments around the world will ramp up their spending in an effort to boost economic growth (a.k.a. “fiscal stimulus”). That could be good for markets and, hopefully, the overall economy.

Recap

    • Over the past few years, the President of the European Central Bank has consistently pushed for more spending from governments to support the central bank’s actions. > Read our story

    • Six weeks ago, a major intergovernmental organization (the OECD) called on governments around the world to boost their spending to stimulate economic growth. > Read our story

    • This week, Japanese stocks performed well partly on expectations that big stimulus initiatives are coming soon. > Read our story

Connecting The Dots

For the past eight years, central banks have been using some extreme measures (like negative interest rates) to try to help their economies grow. But the result has been underwhelming: growth has trundled along at well below its long-term average. So the question is: what’s next?

For years, economists and central bankers have been pushing governments to spend more money to stimulate growth.1 Most obviously, the money could be spent building infrastructure (e.g. airports, high-speed railways) that can then be used to increase economic efficiency (a.k.a. “productivity”) in the future.2 For example, if hotel furniture can get from Portugal to London at a lower cost, then it’s more likely that a London hotel will order new furniture. Similarly, if someone in midtown Manhattan could get to an airport more quickly, they’re more likely to fly down to Florida for the weekend. The benefits are, in theory, two-fold: more jobs now and more economic activity in the future.

Take-Aways

  1. Stimulus would probably be good for stocks.
    Specific companies would benefit from getting, say, construction contracts.3 But also the immediate boost to the economy would likely benefit lots of different types of companies (for example, more employed people would mean more consumer spending).
  2. It’s called “stimulus” for a reason - it’s only meant to give the economy a kick-start.
    If you’re not a coffee drinker, you’d get a big caffeine buzz off of a single espresso. But if you drink lots of coffee everyday, the buzz is much less. Similarly, the effect of fiscal stimulus diminishes with time (just like the effect of low interest rates does).4 For long-term economic benefits to be realized, it’s likely that bigger reforms that make the economy more efficient will have to take place. These could include controversial measures like increased immigration (especially in Japan), lower taxes on businesses (especially in America) and making it easier to hire and fire workers (especially in Europe).

On Our Radar

More big US companies are raising wages for their workers. This week, both Starbucks and J.P. Morgan announced that they would be increasing hourly pay for their baristas and bank tellers, respectively (these are people making roughly $10-15/hour). A host of other big US companies have done this in the past year or so (including Walmart). Rising wages could start feeding through more aggressively into inflation - which could put pressure on the US Federal Reserve to raise interest rates more quickly that investors currently expect.

Further Reading

1. Economists, via Reuters, lay out the case for fiscal stimulus: Read More

2. South Korea could prove to be a good example of how a big fiscal stimulus push would work: Read More

3. Strategas Research Partners, via Business Insider, lay out the types of stocks that are likely to benefit from fiscal stimulus: Read More

4. Pimco’s Scott Mather questions the efficacy of low and negative interest rates: Read More

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