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: “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.

MarketMinder’s View: We found this discussion of Treasury yields’ rise this year sensible. For months, pundits have stewed over Fed rate hikes and America’s allegedly deteriorating fiscal health. Some suggest bonds no longer serve a purpose for investors with higher cash flow needs and/or shorter time horizons. But as this piece correctly notes, long yields are returning to normal. Today’s levels reigned for decades before the Fed and other central banks artificially lowered interest rates via quantitative easing (QE). If anything, the 2010s are the anomaly. Consider: Per FactSet, from May 1953 (when weekly data begin) through November 2008, when the Fed announced QE, 10-year Treasury yields averaged about 6.4%—above today’s levels! Absent such monetary policy programs today, market forces are driving yields. Some perspective: “There is nothing remotely unusual about rates today. Bond markets have a keen eye for trouble. They ring the alarm by going to extremes, and there’s no mistaking it when it happens. Short-term Treasury yields bottomed when the market feared deflation leading up to the 2008 financial crisis and stayed there for several years. They soared to double digits when the market braced for runaway inflation in the late 1970s. Current yields should be comforting by comparison.” Now, today’s yields surely annoy borrowers. But for long-term investors, higher yields aren’t problematic, and we don’t expect them to climb materially for the foreseeable future. For more, see our August commentary, “Why Treasurys Aren’t in Trouble.”