Daily Commentary

MarketMinder’s View: Nearly a year from announcing bans on Russian oil imports, Europe has found some supply from India, which buys much of its oil from … Russia? “[Europe’s] imports of diesel from India, one of the biggest buyers of Russian crude, are on course to soar to 305,000 barrels a day, the most since at least January 2017, data from market-intelligence firm Kpler show. While it’s not possible to say with certainty that the molecules originated in Russia — India also processes oil from elsewhere — Moscow’s deliveries have given Indian refineries an ability to produce abundant diesel and boost exports.” In our view, Europe’s purchasing oodles of Indian oil serves as a reminder that economic sanctions aren’t necessarily airtight—businesses can find ways around them. Oil import bans from Europe and much of the Western world didn’t take Russian supply completely off the market—rather, that oil found its way to other buyers (namely, India and China) as Europe found oil replacements elsewhere. So next time speculation about the impact of economic sanctions arises, remember today’s globalized trade network will probably find a solution.

MarketMinder’s View: This piece runs through a number of potential “fixes” for Britain’s alleged demographic problem, and as a reminder, MarketMinder isn’t for or against any particular policy. The impact there is largely sociological, which doesn’t materially affect the economic and political factors stocks care about. On that note, a new study from the UK’s Centre for Policy Studies (CPS) shows about one quarter of the British population will be age 65 or older by 2040—and there won’t be enough young people to replace them in the workforce. “This will bring with it unprecedented costs for pensions, medicine and care, with government spending on the elderly expected to quadruple from £225bn to £950bn by 2072, according to CPS estimates. More crucially, this expenditure is set to double as a share of GDP to 21pc over the period. That means more tax will be needed to pay for it, or other spending will have to fall – threatening a vicious cycle where a shrinking, younger workforce has to fork out ever-larger sums to support the elderly.” Forecasts like this are only ever as good as their inputs, and we find several problems with this thinking. First, it extrapolates today’s trends forward, as if they won’t ever change—yet birth rates or immigration policies aren’t set in stone. Second, this prediction overstates human capital’s role as an economic growth driver. Consider other drivers like financial capital, technological advancement and productivity—gains made here can boost economic growth even if the population gets older/shrinks. Perhaps most importantly, this prediction spans well beyond 30 months in the future, which we think is inherently unknowable. Trying to estimate any major societal trend’s broader economic impact that far down the road is little more than guesswork. Consider, too, demographics tend to move at a snail’s pace, too slow to pack much surprise power for stocks, in our view.

MarketMinder’s View: Gold prices hit six-month highs on Monday, which this piece attributes to two factors: a weaker dollar and expectations for future Fed rate cuts. On the latter, “Soft economic data in the US has also strengthened expectations that interest rates will not rise any further this year and will be cut next year … Gold does not pay any income and therefore looks relatively less attractive when rates are high, but more attractive when rates fall.” Also citing ongoing geopolitical conflict, the article claims the shiny metal could test its all-time highs by yearend. This is possible, though we think it reeks of reading way too much into recent short-term movement. Take a step back and consider some history. For one, Fed rate cuts don’t equal rising gold prices. Gold prices skyrocketed alongside 1970s rate hikes and fell during rate cuts in the early 1990s (per FactSet). In our view, the yellow metal is prone to big booms and busts—driven primarily by sentiment—like any other commodity. We would add, stocks have historically done fine during the vast majority of regional conflicts, so we doubt switching to gold is “safer.” Gold’s recent rise may catch eyeballs, but considering it is more volatile than stocks and has lower long-term historical returns, we don’t find it to be much of a safety net—no matter the external circumstances. For more on this, see last month’s commentary, “Not So Golden.”