Daily Commentary

Providing succinct, entertaining and savvy thinking on global capital markets. Our goal is to provide discerning investors the most essential information and commentary to stay in tune with what's happening in the markets, while providing unique perspectives on essential financial issues. And just as important, Fisher Investments MarketMinder aims to help investors discern between useful information and potentially misleading hype.


What MidCycle Slowdowns Mean for Investors

The global economy isn’t firing on all cylinders right now. In recent months, economic data out of the eurozone, UK, Japan, China and (less so) the US have weakened and even occasionally contracted. To investors wondering whether worse is to come, we have a message: Weak patches aren’t necessarily self-fulfilling prophecies. Mid-cycle slowdowns—short stretches of slower growth during a longer period of economic expansion—happen regularly and often precede reacceleration and more bull market. In our view, that is where we are today.

Setting aside US industrial production, which jumped and beat analysts’ estimates in August, headlines today allege myriad troubling trends: China’s factories and consumers are floundering as industrial production and retail sales slow; Brexit is weighing on Britain’s economy; Germany teeters on the edge of recession as its manufacturing juggernaut stumbles; the eurozone is slowing overall; and an upcoming consumption tax hike is about to add another headwind to Japan’s weak domestic demand. All this raises a question: Is this a mere soft patch or the early stages of a global recession?

In our view, the former is far more likely. Recent weakness shares several features with the slowdowns earlier in this expansion—2011 – 2012’s and 2015 – 2016’s. All three have featured global recession worries, due first to the eurozone crisis, then trouble in oil-reliant economies, and now tariffs and Brexit. Like today, 2011 – 2012 featured GDP contractions in select major economies, including Germany, Spain, France, Italy, the US, UK and Japan. Some, including the eurozone, endured recessions. Also like today, 2015 – 2016 featured contracting manufacturing across much of the globe. All three slowdowns have featured a decelerating US Leading Economic Index (LEI) and global stock market corrections—sentiment-driven declines of around -10% to -20%.

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Oil's Big Jump in Perspective

Oil prices endured one of their biggest jumps in recent memory on Monday, following drone strikes on one of Saudi Arabia’s largest oil fields and a crude oil processing facility. As a result of the attacks, around half of the country’s oil output went offline Sunday, and it is unclear when it will be back at 100%. As we finalized this commentary at 1:25 PM Pacific Time Monday, US benchmark crude oil prices (West Texas Intermediate, or WTI) were up 12.9% to $61.93 per barrel on the day, while the global benchmark (Brent) rose 14.6% to $68.02 per barrel.[i] Headlines pounced on the sudden increase, speculating about the potential economic impact if it were to last. However, this all appears rather too hasty, and the evidence suggests an oil spike—even if it lingers—isn’t capable of walloping the global expansion or bull market.

Assessing Monday’s spike requires putting it into proper context. Yes, the jump is big, but it is a jump off a rather low base. Monday’s closing oil prices were the highest since—wait for it—the end of May 2019. Exhibit 1 shows oil over the past year. For a longer perspective, Exhibit 2 shows oil over the past 15 years. Today’s prices pale in comparison to what we saw even five years ago, never mind the prior peak in 2018.

Exhibit 1: A Year’s Worth of Oil Prices

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Random Musings on Markets 2019: Two Musings to Paradise*

This week, our not-weekly look at strange financial news brings you volfefe, the perils of model inputs, California’s struggles with the law of unintended consequences, lessons from video-game hyperdeflation, yet another look at Libra and creative capitalists profiting by launching veggies. We hope you enjoy the read!

Volfefe

Monday, analysts over at a big New York bank that rhymes with FlayPea Shorgan unveiled a new index which they dubbed Volfefe—a play on President Donald Trump’s puzzling and mysterious “covfefe” tweet from May 2017. This gauge is an effort to measure the impact of Trump tweets on bond market volatility—hence, the name. It is a portmanteau mashing together covfefe and volatility.

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No Silver Bullet

Silver is up 17.5% year to date,[i] nearly matching gold and leading some pundits to suggest the lesser precious metal makes a better investment due to its supposed relative value and safe haven characteristics. We touched recently on why gold isn’t great as a long-term investment (or short-term portfolio hedge), but with silver squeaking into the spotlight, we should note it isn’t either.

As Exhibit 1 shows, silver has its (occasional) moments, but they are few and far between. The last time silver seemingly garnered so much attention was in 2011, but it was a flash in the pan. Prior to that, silver spiked in 1979. Yes, there was double-digit inflation then (notably absent now), which precious metals allegedly hedge against. (Spoiler alert: They don’t actually do so, at least not reliably.) But the Hunt Brothers were also trying to “corner” the silver market at the time—that is, buy up so much silver that they would control supply—and the price. Which, it didn’t work.[ii]

Exhibit 1: Quick, Silver!?


Source: FactSet, as of 9/12/2019. Dollars per troy ounce of silver, 1/1/1970 – 9/11/2019.

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Breaking Down the ECB’s Wrongheaded ‘Stimulus,’ Q&A Style

Well, there you have it. Early Thursday morning Pacific Time, ECB head Mario Draghi announced the bank’s Monetary Policy Committee had determined a -0.4% short-term policy rate and 10-year German bunds at -0.59% weren’t low enough to entice borrowers and goad banks to lend.[i] So with the eurozone economy slowing some, they announced new “stimulus.” That stimulus? Cutting short-term rates more and resuming quantitative easing (QE) bond purchases. In our view, these moves are unnecessary and counterproductive, but they are also unlikely to derail the bull market. Let us break this down for you, Q&A style.

Q: What in the world did the ECB do?

A: As noted, the bank cut the interest it “pays” banks to hold excess reserves by 10 basis points to -0.5%. Because this rate is negative, it amounts to the ECB charging banks a fee on excess reserves—an effort to prod them to lend (thus converting excess reserves to required reserves, which aren’t charged the negative interest rate). At a more granular level, they announced they would enact a two-tiered system that exempted a portion of banks’ excess reserves from negative rates and lowered interest rates on a program offering super cheap funding to banks, providing they lend the money. In addition, the ECB restarted its QE program of buying sovereign and corporate bonds at a €20 billion monthly rate, an effort to lower long-term interest rates and thereby stimulate loan demand.

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What the August Jobs Report Does and Doesn’t Tell Investors

Last week’s release of the US August Employment Situation Report—aka, the jobs report—triggered myriad reactions. While most commentary acknowledged the numbers were largely positive, some experts still sounded summertime sirens. Either way, in our view, folks are reading much too much into backward-looking jobs data—they tell you what the economy has done, not what will happen next.

Per the BLS, employers added 130,000 nonfarm jobs, more growth following July’s revised gain of 159,000. The widely watched unemployment rate stayed near a 50-year low at 3.7%—same as June and July’s rate. The labor force participation rate—the ratio of the civilian labor force to the total civilian population[i] was 63.2%, around where it has been for the past several years. Overall, August’s numbers are pretty much par for the course. No head-scratching outliers to see here: The US expansion has been chugging along for a decade, and these data confirm that growth.

Yet some pundits used August’s jobs as evidence for their preferred dour narrative—a sign of widespread pessimism. Those worried about a slowing expansion noted nonfarm jobs’ current three-month average gain is 156,000—weaker than 2018’s 241,000 average over the same period.[ii] Others added that the government’s hiring of 25,000 temporary Census Bureau workers “propped up” August’s number. The global manufacturing soft patch colored coverage, too, as some pointed out how the US manufacturing sector added 3,000 jobs in August and just 27,000 for the year—much weaker than 2017’s 91,000 and 2018’s 154,000 through August.[iii] All these concerns added fuel for those forecasting an interest rate cut at the Fed’s September meeting, with some analysts convinced August’s jobs report shows more easing is needed.

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About That Other Supposed Political Risk for UK Stocks

Editors’ Note: We favor no political party or politician in any country and assess political developments solely for their potential market or economic impact.

For those following all the twists and turns in UK politics over the past week, Tuesday offered welcome respite: Parliament was closed—and will be for five weeks. No more live-blogging of votes. No more midnight debates. No more Members of Parliament (MPs) shouting over each other or holding up protest signs for the cameras. No more constant checking to see if Jacob Rees-Mogg is sitting up straight. No more waking up every morning to see if anything radical happened overnight. For the next five weeks, we have stasis. But that doesn’t mean investors won’t have political chatter to filter through. Pundits will surely slice and dice Prime Minister (PM) Boris Johnson’s ongoing Brexit negotiations. Plus, while the opposition parties shot down a general election for the second time last night, that was solely due to their preference to delay the contest until late November.[i] Because an election is a foregone conclusion, pundits are already churning out commentary alleging a victory by Labour leader Jeremy Corbyn—an avowed leftist—will be toxic for UK stocks. Don’t be so sure. Stocks care about policies, not personalities, and the likelihood a Corbyn administration could accomplish all the things people fear looks exceedingly low.

Corbyn’s policy wish-list does look like a socialist’s dream. It includes nationalizing major swaths of the UK economy, naming and shaming high earners, banning companies from awarding large bonuses and undertaking a massive redistribution of income. We think it is fair to presume stocks might frown on some of these, as they would interfere with the free market and corporate profits. However, what matters most is whether any of this stuff could actually happen. If investors fear the worst and a Corbyn administration doesn’t accomplish much, then that raises the risk of positive surprise—much like when a new US president elected on anti-market campaign pledges doesn’t do as much as feared.

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Market Insights Podcast: September 2019 – Yield Curve Changes and the Current Lending Environment

In this episode, Client Communications Group Vice President Naj Srinivas speaks with Research Analyst Christo Barker about changes to the short and long end of the yield curve in recent months, the effect on the lending environment, and other considerations and drivers for the Financials sector. Recorded August 30

Time Stamps

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Random Musings on Markets 2019: Random and Hum

This week’s not-weekly selection of curious financial news includes a look at what consumer confidence doesn’t tell you (spoiler alert: It is what consumers may actually do), great humor from British politics, a look at niche economic indicators and the Loch Ness Unagi. We hope you enjoy the read!

Feelings Aren’t Self-Fulfilling Prophecies

Over the last couple of weeks, we have seen a lot of handwringing along the lines of “Oh no, consumer confidence is tanking, what if households’ fear of recession starts a recession because everyone stops shopping?” There are a few problems with this line of thinking, not least the historical tendency for consumer spending to be more stable during recessions than most presume, as most spending goes toward services, not discretionary things like eating out, tchotchkes and tourism.

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Today in Brexit, Day 1,168

Editors’ Note: We favor no political party or politician in any country and assess political developments solely for their potential market or economic impact.

Wednesday was a whirlwind day for the British Parliament and Prime Minister (PM) Boris Johnson. But, for all the activity, politicians really didn’t resolve anything noteworthy, and the only thing certain is that uncertainty remains off the charts.

First, following MPs’ successful motion to hand the day’s agenda to themselves, 20-plus rebels from Johnson’s Conservative Party joined with Labour, the pro-Europe Liberal Democrats and the Scottish National Party (SNP) to pass a bill sponsored by Labour MP Hilary Benn. Benn’s bill requires the government to request a Brexit delay if they haven’t secured a new deal with the EU by the end of October’s summit. Johnson first responded by booting the rebels (including former Chancellor of the Exchequer Philip Hammond) from the Conservative party. Then he followed through on earlier threats and tabled a motion to dissolve Parliament and hold a snap election on October 15. Labour leader Jeremy Corbyn, who up until about 15 minutes ago repeatedly agitated for a vote, told his MPs to abstain, guaranteeing the measure would fail as it would require an Aye from two-thirds of the House of Commons. But Corbyn’s stated reasoning—that he wanted to wait until Benn’s bill had passed the House of Lords and received royal assent, officially binding the government’s hands—suggests Johnson might try again for a snap election next week.

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