Daily Commentary

MarketMinder’s View: Some political and sociological themes at play here, so please note MarketMinder focuses solely on developments’ potential market and/or economic effects—or lack thereof. The back half also names a number of individual companies and funds, and as a reminder, we don’t make individual security recommendations—they are coincident to the broader theme we wish to highlight. Let us start with the article’s claim: “El Niño might make the [war’s] global inflationary pulse even stronger and hit global growth outside the US. One study by academics at Dartmouth College in New Hampshire estimated that events like this have resulted in losses in the order of trillions of dollars, affecting global productivity.” From that premise, the article speculates what this could look like in practice: plummeting production for foodstuffs ranging from wheat to coffee, which could then lead to higher global inflation and possible stagflation. This is off base for a couple of reasons. Economically, this doomsday scenario rests on the economic theory of “cost-push” inflation, i.e., rising production prices drive prices economywide higher. Thing is, the data don’t support this theory—one category of prices doesn’t drive another. Rather, inflation is a monetary phenomenon, the case of too much money chasing too few goods and services. Extreme weather may affect some agricultural goods prices, but scarce coffee or wheat doesn’t necessarily affect demand for gasoline, medical services or housing. Price changes in narrow categories prompt substitution, not inflation. Businesses today broadly lack pricing power. As for El Niño’s economic fallout, we don’t dismiss natural disasters’ potential damage, especially for less-developed economies. But for investors, natural disasters aren’t market drivers, as they lack the scale to derail the global economy. For more on why, see Elisabeth Dellinger’s 2017 column, “We Need to Talk About Harvey.” 

MarketMinder’s View: Moods are thawing in Europe’s largest economy, according to the Ifo Institute’s latest survey of around 9,000 German businesses. The think tank’s business-climate index ticked up from May’s 85.0 to 85.6 in June, beating analysts’ expectations and rising for a second straight month. That is all fine and dandy, but note this simply extends May’s crawl off April’s multi-year lows following the Iran war’s start. Ifo’s gauge remains markedly below its roughly 100.0 long-term average, so fears that higher energy prices may knock German industry are still present. Still, June’s warming suggests some improvement in moods. “‘Firms perceive the business environment as less uncertain. German companies are hoping for geopolitical tensions to ease,’ Ifo President Clemens Fuest said. Companies saw their current business situation more positively, while firms’ expectations especially in manufacturing and retail trade for the next six months were also somewhat less skeptical, he added.” Surveys don’t predict economic activity, but they can provide a rough sentiment snapshot. So in this case, it seems businesses in Germany are recognizing the war’s proverbial dark clouds aren’t as threatening as initially feared.

MarketMinder’s View: While this anecdote-heavy article illustrates how consumers adapt to higher prices—one reason why energy prices don’t remain perpetually elevated—our interest is with a separate theme. Namely, the titular notion that a paradigm shift is underway and that US gas consumption could be in a permanent decline. Maybe! But though “gasoline use has fallen faster than usual since the war,” citing year-over-year gasoline sales, this isn’t a historical anomaly. Consider, after Russia invaded Ukraine in early 2022—driving oil shortage fears then, too—gas sales also fell for stretches throughout 2022 and 2023 (per FactSet). But that change wasn’t permanent. More broadly, we think this piece falls into the trap of extrapolating short-term trends into longer ones. For example, amid 2008’s higher gas prices, we saw plenty of pundits suggest Smart Cars and other non-gas vehicles would soon dominate American freeways. Instead, the shale boom cheapened oil and gas, fueling (sorry) a boom in ever-larger pick-up trucks and SUVs. Whenever headlines warn a permanent change is underway, proceed with caution.