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U.S. and Global recoveries and a counter-intuitive puzzle

The U.S. is seeing parts of the economy achieve a pre-Covid level of activity due to record-high federal stimulus plus vaccine optimism. Globally, however, there remains a lot of work to do on vaccinations and re-opening the global economy. 

Inflation Update: This week’s inflation report showed that headline inflation rose 5% compared to this same time last year. Higher prices can be seen in cars, trucks, airfare, energy, food, furniture, and apparel. 

The headlines are highlighting a “13 year high” inflation rate, but it is important to remember that it is compared to last year when prices had plummeted due to Covid, which is called a low base year. The key with inflation is that if it really is temporary, as the Federal Reserve suggests, then the outlook for equities remains positive. However, if inflation proves not to be temporary, or it spikes higher and gains momentum, the Federal Reserve will need to react by raising interest rates, leading to greater market volatility. We continue to read and listen carefully to the Fed minutes, and their meetings next week and in August at Jackson Hole should provide helpful data. (Read more: WSJ)

Core Consumer Price Increases (Excluding Food & Energy) 

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U.S. Economic Recovery: The domestic economy is booming, with higher manufacturing and service than existed prior to the pandemic, as you can see in the chart below. Orange is service industry activity, and purple is manufacturing output.

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Global Economic Recovery: The global economy is expected to expand 5.6% in 2021, the fastest post-recession pace in 80 years. Strong rebounds from a few major economies, such as the U.S. and China, make up the majority of that growth. However, many emerging market and developing economies continue to struggle with the pandemic and its aftermath, even with a boost from higher commodity prices.

The countries listed below lead the world in vaccination rates, while all the rest of the world is far behind. The United States is fifth in the world with 42% fully vaccinated as of June 10. “Vaccine optimism” is growing faster in Europe now compared to the rest of the world, as vaccines become more available there.   (Read more: U.S. News & World Report)

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Infrastructure Bill Update: A bipartisan group of senators proposed an infrastructure bill that would spend $974 billion over five years, and $1.2 billion if extended over eight years. As expected, the biggest issue is how to fund this proposal. The bipartisan group suggested it would be funded by indexing the gasoline tax to inflation. The gas tax has not increased since 1993. Opponents argue that gasoline taxes have a disproportionate impact on lower-income households. President Biden had proposed paying for infrastructure with an increased in corporate tax rates. (Read More: WSJ)

 

Bitcoin Regulation News: Cryptocurrencies joined other mainstream financial assets this week by getting an official classification by international banking regulators, ironically by getting classified as the riskiest of assets. The decision would also make it extremely costly for banks to hold digital tokens on their balance sheets, potentially delaying crypto’s wider adoption. The Basel Committee on Banking Supervision proposed that a 1,250% risk weight be applied to a bank’s exposure to Bitcoin and certain other cryptocurrencies. (Learn more: Yahoo News video)

Weekend Riddle: Suppose you’re on a game show, and you are given the choice of three doors. Behind one door is a car. Behind each of the others is a goat. You pick a door. The host, who knows what is behind each door and always opens a losing door, opens one of the two remaining doors to reveal a goat. He then gives you the option to stick with your first choice or switch. Will you have better odds of winning the car if you switch or stay? The answer is...

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...you should switch. You won’t win every time (the one-third of the time you chose the door with the car first, you’d lose by switching) but your overall odds of winning actually double when you switch in this scenario. The math is that you begin with a 1 in 3 probability of winning, or 33%, and then it increases to a probability of 2 out of 3, or 66% (not 50/50). Does that seem counterintuitive? This riddle often stumps even very intelligent people because probabilities don’t always work out the way we imagine. (Read more: WSJ