Daily Commentary

MarketMinder’s View: Remember when deflation was a long-lingering fear in China? Well, the producer price index (PPI) rose 4.1% y/y in June, its swiftest rate in four years, while the consumer price index (CPI) climbed 1.0% y/y. Now, as the article explains, recently rising prices haven’t put deflation worries completely to bed, though most of the experts interviewed here acknowledge “low positive inflation” is likelier than falling prices. “The faster growth in factory-gate prices owed partly to a low base of comparison a year earlier, though analysts said soft domestic demand meant deflationary pressures had yet to ease meaningfully. ‘The latest escalation in U.S.-Iran tensions could deliver some renewed upward pressure on inflation in the near term,’ said Julian Evans-Pritchard, head of China economics at Capital Economics. ‘But this will remain limited to a few narrow areas and inflation still looks set to return near zero once energy supply normalises.’” To us, this is yet another example of Chinese data proving to be better than anticipated. From real estate woes and slowing consumer spending to trade wars and deflation, experts have offered myriad reasons for why the world’s second-largest economy will stumble. Now policymakers are renewing their crackdown on manufacturers’ long-running practice of overproducing and cutting prices to seize market share—prudence and profits, it seems, are now Beijing’s goals. These efforts, if successful, would also help lift inflation measures. We aren’t saying all is super, but China’s deflationary data have long reflected weakness in select price categories (e.g., food and energy) and business decisions. Broad, systemic deflation (which erupts when money supply contracts) hasn’t actually been present in China now or in the recent past. It is a false fear—bullish for the global bull market.

MarketMinder’s View: As always, MarketMinder is nonpartisan and doesn’t prefer one politician or political party over another. Our interest here is with the discussion of German Chancellor Friedrich Merz’s recent economic reforms, which include modest income-tax reductions for lower-income workers, a slightly less rigid labor market for certain sectors and less red tape for businesses. We agree from a high level that parts of Merz’s plan could be beneficial, though, as this analysis argues, political realities may make implementation difficult and forestall further change. “The trouble is that Mr. Merz keeps hitting political opposition that makes it impossible to go far enough. The labor-market element of last week’s proposal is a case in point. Germany, like most of Europe, desperately needs laws that allow companies to hire and fire easily. Mr. Merz proposes removing legal protections for some workers so they can be fired at will with severance pay. But this is limited to employees earning more than about €175,000, and is aimed mainly at tech start-ups. The center-left Social Democrats, with whom Mr. Merz is trapped in a governing coalition, believe they paid too high a political price for labor reforms 20 years ago and are reluctant to touch the hot stove again.” That said, we caution investors against putting much stock into what Merz’s reforms can and can’t do for the economy. A government’s ability to drive sustainable growth in any private-sector-driven economy is limited. As the article notes, these proposed changes are small beans and symbolic. We can see a case in which reforms lead to longer-term benefits that encourage businesses and investors to take more risk, but that isn’t a market driver in the here and now. For more, see this week’s commentary, “Can Germany Engineer Faster Growth at Last?”

MarketMinder’s View: There is a big component missing from this retirement planning piece. It argues arbitrarily targeting a certain portfolio size at retirement is misguided, which we agree with, but then bizarrely claims everyone should target a portfolio income level. Not cash flow, which can come from a variety of sources, but income via bond interest or annuities. We think this is wrongheaded and short-sighted. It assumes your time horizon ends at retirement, ignoring (and even dismissing) the need to earn returns to guard against prematurely depleting your assets even if cash flow is your primary goal. Your time horizon is the entire length of time your money must work toward your goals, and includes the years you take cash flows. It also assumes cash flow comes only from portfolio income, which would force you into perpetually lower-returning assets, which can increase the risk of depletion (and don’t even get us started on deferred annuities, which are rotten to the core). The root error here, which is implied if not expressed outright, is that you can’t touch your principal in retirement. But that is what it is there for! If you allow yourself this, you open yourself to the magic of homegrown dividends, whereby you can fund living expenses by harvesting your returns on stocks. Those returns will help guard against inflation (a risk even to annuities one has turned into a stream of payments, since they often aren’t inflation-adjusted) and running down your savings too quickly. As your time horizon shortens or if you aren’t comfortable with the ups and downs of an all-stock portfolio, you may find it beneficial to blend in more fixed income to lower your portfolio’s expected volatility. But these avenues open to you only if you think big-picture, asking three simple questions: What are my goals? How long do these goals last? And, what returns will I need over time to reach them?