Daily Commentary

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: As commentators worldwide consider the legacy of late Fed head Alan Greenspan, this piece zeroes in on one frequently miscast item: The “Greenspan put,” which morphed into the “Fed put”—the supposition that when markets fall, the Fed will step in and prevent further trouble. This article takes the view that this a) existed, b) is on ice because higher inflation prevents rate cuts and c) will probably return when the next downturn arrives. But we think the evidence that this was ever a thing is spotty, chiefly because it reads far much into the Fed doing its day job of setting monetary policy and serving as lender of last resort in a crisis. Yes, the Fed cut rates after 1987’s Black Monday, but the stock market wasn’t the only financial system ringing alarm bells that day. There was already abundant evidence that money markets globally were far too tight, which we think the volatility was in response to. (For more, revisit Fisher Investments founder and Executive Chairman Ken Fisher’s Forbes columns from 1987.) Calling banks that evening to ensure the Fed would backstop their emergency loans to brokerages and clearing houses sounds to us like normal lender-of-last-resort stuff. Orchestrating the purchase of failing hedge fund Long-Term Capital Management’s assets in 1998, another example cited here, always struck us as a sideshow more than a meaningful driver of stocks’ recovery from that year’s correction. As for the rate cuts, plenty of market corrections (sharp, sentiment-fueled drops of -10% to -20%) came and went without Fed action, and rate cuts in 2008 didn’t prevent that bear market from becoming one of history’s worst. People have always given the Fed far too much credit for whatever happens in the stock market, regardless of who is running the show. We think it remains best to keep things simple: Weigh monetary policy decisions as they are made to see if they could have unintended consequences people aren’t thinking through. This is vital at all points of the market cycle, not just when volatility strikes.

MarketMinder’s View: As always, we are politically agnostic, preferring no politician nor any party and assessing developments for their potential economic and market implications only. We bring you this article, which discusses comments from an economic advisor to presumptive new UK Prime Minister Andy Burnham, for the classic pitfall it falls into: trying to guess at a new leader’s economic policy based on things they or those close to them once said. In this case, Burnham’s advisor argued the UK can afford to borrow more to build infrastructure since the assets and liabilities on His Majesty’s balance sheet would cancel out, making it a wise investment to boost growth. Now, we have long been of the general view that supposedly overindebted countries like the UK and US have more borrowing bandwidth than presumed once you balance assets against liabilities and interest costs versus revenues. Not that we advocate endlessly piling on debt or think infrastructure is some big growth-producing endeavor, but the math is there. But none of this means these things will become policy. In a Parliamentary democracy, economic policy is pretty committee-driven. Burnham’s personal economic policy preferences (which remain unknown) don’t necessarily matter. Nor do his advisors’. They can argue and urge, but economic policy ultimately comes down to whatever the Chancellor of the Exchequer and their team at the Treasury come up with—and then what the rest of Parliament will actually pass. Chatter like this helps set expectations, which helps markets price in the possible scenarios (and reduce the likelihood of negative surprise), but it doesn’t tell you what will happen. The Labour Party remains divided over fiscal policy, making sweeping change of any sort unlikely. For more, see yesterday’s commentary, “Revolving Door Turns, Uncertainty Starts Falling.”