Daily Commentary

MarketMinder’s View: Lots of politics here, so please note MarketMinder is nonpartisan, assessing developments solely for their potential economic and/or market effects. After months of budget beef has ousted two prime ministers (PMs) already (and one of them reappointed days later), France’s parliament will decide this week whether it will pass an amended 2026 budget or send current PM Sebastien Lecornu packing. The primary sticking point for the center-left Socialists—whom Lecornu would require support from in a no-confidence vote—appears to be their proposed watered-down wealth tax, which they are attempting to tack onto the budget legislation. Their version “would force individuals with wealth exceeding €10 million ($11.6 million) to pay taxes corresponding to at least 3% of their fortune, but with exemptions for “innovative” and family-owned companies. The [initially proposed tax named after economist Gabriel Zucman], which is designed as a 2% levy on fortunes over €100 million, in theory has no exceptions.” The debate over this amendment happens late this week, and how it goes is anyone’s guess. The leftist France Unbowed party says the proposed tax is diluted into uselessness. Yet it isn’t clear the exemptions are enough to win support from Lecornu’s centrist party or the center-right Republicans, and the populist National Rally is a wildcard. Socialist leaders have said they won’t support a budget that doesn’t include higher contributions from wealthy folks or corporations, but they have also alluded to a no-confidence vote and snap elections if the budget fails, and polls say they wouldn’t fare well. Politics, as always, are impossible to predict. But from an investing standpoint, neither outcome would likely be make or break for French markets. If the budget passes, investors would get some long-awaited clarity and could move on from a long-running fear until it is time for the same song and dance next year. If it includes a wealth tax, we have oodles of examples of such taxes proving ineffective and unworkable, not poisoning economies. And if the budget flops and Lecornu is ousted, markets are pretty used to it at this point. Higher uncertainty could weigh on stocks in the short term. But Lecornu is France’s third PM in under a year. Surprise tends to move markets most, and there just isn’t much surprise power left in France’s revolving door or budget stalemates.

MarketMinder’s View: According to a new LegalShield survey, Americans are increasingly seeking legal help with their personal finances. “The report says that bankruptcy inquiries surged 17 percent in the third quarter of the year, continuing an upward trend that began in late 2021. This helped to push the Consumer Stress Legal Index up 4.4 percent between June and September, capping off seven consecutive months of increases and reaching its highest level since March 2020.” Supposedly, this means consumers—which generate 68% of US GDP (per Bureau of Economic Analysis data)—are increasingly under pressure and at risk of pulling back. So we did the logical thing and checked out the actual report and its history to see if it has any predictive power. And we found it claims to predict consumer confidence by three months, which sounds useful until you consider that consumer confidence doesn’t predict actual consumption. A look at the longer-term dataset shows bankruptcy inquiries remain well below levels seen pre-COVID. The rise since 2021 seems more about the withdrawal of COVID assistance and resumption of student loan payments than actual, fundamental consumer trouble. It is tempting to look at the fast rise beginning in 2007 as evidence this series predicts the economy and stocks, but when you consider that the housing bubble burst in 2006, it seems more like a lagging indicator of widely known real estate problems. Back then, as usual, the recession’s main swing factor was business investment, not consumer spending, which declined far less and rose intermittently for the recession’s first six months. Overall, we strongly suspect the only reason folks are looking at this is the dearth of data during the US government shutdown—people are hunting far and wide for hints at the economy’s health. That is a fine quest! But we think there are other, more telling measures, like those we reviewed last week.

MarketMinder’s View: It seems US banks’ stress tests are perhaps about to get a bit less stressful. Introduced in the wake of 2008’s global financial crisis, these “tests” seek to simulate banks’ ability to withstand an economic crash, with their performance determining their extra capital buffers and whether they can return cash to shareholders. Where before the particulars of each year’s simulation were a black box until the results published, if this rule change goes through, the Fed will have to release its models and the specific scenarios it will test ahead of time. Banks have asked this for years, saying having clearer guidance would improve their preparation and reduce the risk of capital requirements shifting wildly year to year, which could enable them to lend more, stoking economic growth, while opponents suggest they “enable banks to game the results in order to lower their capital requirements.” We will see, but we think both of these conclusions are a bit overstated. Getting the scenarios a few months in advance won’t let banks make huge changes to their balance sheets to game them, and it probably won’t free up massive amounts of capital. Rather, these changes simply add transparency to an already flawed, backward-looking process. Stress tests were useful in the global financial crisis’s immediate aftermath, helping restore investors’ and the public’s confidence after a rash of major failures. But that benefit has long since eroded. Investors figured out eons ago the test scenarios are based on past troubles and headline fears, not accurate predictors of the next downturn’s nature. Unknown and unforeseen conditions are typically where problems lurk, and no matter how transparent the Fed’s testing is, it likely can’t predict these.