Daily Commentary

MarketMinder’s View: First, this touches on politics in the UK, so please keep in mind we favor no politician nor any political party, assessing matters solely for their potential effects on markets and the economy. At issue here: bank taxation. The latest trial balloon that the UK government and Chancellor John Healey seem to be floating is whether to implement a windfall profit tax on banks due to elevated long-term interest rates. The industry notes (correctly) that it pays outsized taxes tied to a bank surtax and larger firms’ balance sheet levy. The result, as the visual herein shows, is that UK banks face a far higher tax burden than peers elsewhere. That hurts the competitiveness of Britain’s mainstay industry. But for markets, it is very well known. The uncertainty over whether tax rates may rise (again) in the forthcoming budget isn’t great for stocks, but it likely evaporates soon. Even if rates rise again, as this notes, it probably won’t push rates above where they were before the fairly recent surtax cut. So this wouldn’t be unprecedented. It is also an if. While we doubt Healey cuts tax rates the way banks want, past UK governments frequently aired ideas that never came to fruition when blowback was significant—which is the case here.

MarketMinder’s View: This article touches on politics and makes policy prescriptions at the end. We don’t endorse those (or policies in general), and we favor no party nor any politician whatsoever. Our interest here is the highlighted disconnect between sentiment surveys and economic numbers—and how income growth illustrates this. We touched on this recently, but this is a good supplement. The article notes that recent years’ median income growth has been swift, even after accounting for inflation, which it largely pins on the absence of recession and overall steady growth with a tight labor market. That is the fundamental backdrop we have seen outside COVID lockdowns’ brief economic downturn in 2020—and this notes even that oddity led to a scramble to hire service workers, which caused “wage compression”—the lowest quartile of incomes grew faster than the top end. Why doesn’t this factoid get attention amid oceans of “K-shaped” economy narratives? “But there has been a disconnect between economic statistics and economic sentiment since the late 2010s, and especially since 2021, with the historic relationship between the two breaking down and sentiment consistently more negative than the data would suggest. Of the many possible explanations, one of the most convincing — and the only one that I personally can do anything about — is that media coverage of the economy has become consistently more negative relative to the statistics, which in turn has happened mostly because consumers of digital media reward negativity with easily measured clicks and engagement.”

MarketMinder’s View: “Today, G7 economies have about three working-age people for every person over 65. That ratio is expected to fall to around two by 2050, putting further pressure on growth and public finances, including healthcare systems, according to Moody’s.” In theory, fewer workers and more retirees could mean a smaller tax pool to service a larger beneficiary pool—hence the added titular “pressure.” But there are also ways this dour forecast ends up off base. First and foremost, these long-term projections assume today’s demographic trends and policy are unchanging, which is rarely true. Birth rates could recover. Immigration could replenish the ranks. Governments could shift tax policy or benefit programs. Any (or a combination) of these could change the outcome. Second, these timelines are beyond the 3 – 30 month window stocks care about most, so they have no investing implications today. Forecasts see Europe peaking in 2029, but the US Census Bureau estimates America’s population peaking in 2080 … over 50 years out! (Even under its “low-immigration” scenario, the Census Bureau doesn’t expect a population peak until 2043.) Too much can change between then and now, rendering these worries moot. Lastly, these projections put too much weight on human capital’s role in economic growth. As the article notes briefly, technological innovation, productivity gains and financial capital can also help drive economic expansion as populations shrink or age—see years of solid economic growth in aging Japan, South Korea, Italy and Germany. Don’t let fearful, long-term projections rule over your investing decisions today.