Daily Commentary

MarketMinder’s View: As always, MarketMinder doesn’t make individual security recommendations, and any funds or firms mentioned here are coincident to a broader theme we wish to highlight. We are also not inherently for or against most asset classes—all have their benefits and risks. One of our critiques with private assets is that headlines frequently focus on the supposedly higher returns and allegedly lower volatility while downplaying their many limitations (e.g., lack of liquidity). The sector historically targeted institutional investors, but as they pulled back, private equity started clamoring for retail investors, arguing they were democratizing access to this supposedly superior category. That is a marketing pitch, not a noble claim. Problem is, those higher returns have asterisks, and the low volatility is just illiquidity—you can’t buy or sell, so you don’t get real-time price points. Just the firm’s valuations, which are generally mark-to-hope. So as much as we agree the current restrictions on retail participation risk infantilizing smart individual investors, we think the cons deserve at least as much attention as the pros. Yes, redemption gates are disclosed and fund owners should account for them. But people tend to underestimate the risk of needing their money in a hurry and their mental ability to hold on when markets get tough. Illiquidity is a big deal, and we think this piece errs in dismissing it glibly. But it does at least highlight another barrier worth considering for investors: price. Managers charge relatively high fees for their private credit funds, which take a bite out of investors’ returns. All these variables are worth considering before entering a new investment, whether public or private. Don’t get caught up with the marketing or headline return numbers or wild claims about stability alone and think through why all these private equity firms want retail clients. For more, see last year’s commentary, “Investing Isn’t Collecting, Private Equity Edition.”

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?”