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.


Quick Hit: About the US Manufacturing PMI’s Contraction

Recession Watch 2019 continued this week, this time with pundits fixating on a manufacturing survey that indicated contraction. Headlines abounded claiming manufacturing is a leading indicator and it is only a matter of time until the mighty services sector falls, too—and with it, the economic expansion. However, we don’t see anything new here for stocks—or any evidence that this is anything more than a soft patch in one part of the US economy.

The reading in question was a purchasing managers’ index, or PMI. PMIs are surveys that aim to measure whether businesses overall are seeing more or less activity. Readings over 50 indicate expansion, and under 50 suggest contraction. But that isn’t airtight, as PMIs indicate only how many firms grew, not by how much. Two outfits produce national US PMIs: the Institute for Supply Management (ISM) and IHS Markit. Neither is inherently superior. ISM’s has the longest dataset, but IHS Markit’s covers more companies, and only it has an early “flash” reading. That is what garnered Thursday’s headlines.

August’s flash manufacturing PMI fell below 50—to 49.9—a slight contraction. The report also noted weakening new orders, which happen to be the survey’s most forward-looking input. The main drags, according to survey respondents: a “soft patch” in automotive industries and a weaker global economy.

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Random Musings on Markets 2019: Musings on the Run

The weekend is nearly here, and with it comes another honestly-it-isn’t-weekly look at the wacky side of financial headlines. This week’s potpourri includes an extreme hypothetical of companies serving “stakeholders,” the presidential administration’s fast stimulus U-turn, a certain land transaction that was never going to happen … and more!

What If Apple Served Multiple Stakeholders?

If you read Elisabeth’s column earlier this week, then you likely know she thinks the Business Roundtable’s new statement of corporate purpose is both window dressing and probably a sop to politicians who think companies ought to be accountable to other entities beyond shareholders. You might also think we said everything we have to say on the topic, considering it topped 1200 words. But, well, we aren’t done yet, because Elisabeth lives a stone’s throw away from the House That the Steves Built[i] and got to thinking: What would it look like if Apple had a fiduciary responsibility to her community?

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Quick Hit: July US and UK Retail Sales

After last week’s market turbulence, US and UK consumers seemed to provide a reprieve. July retail sales for both countries rose, and headlines heralded consumers as a bright spot in a stormy global economy—though pundits still fretted manufacturing weakness eventually spilling over. While retail sales don’t capture all of consumer spending, the latest numbers add further evidence that the non-industrial parts of the US and UK economies, which happen to represent the majority of GDP, are faring fine.  

Stateside, July retail sales grew 0.7% m/m (3.5% y/y). Across the pond, they rose 0.2% m/m (3.3% y/y). Both beat expectations (for 0.3% in the US, -0.3% in the UK). While headlines cheered the growthy July, these summertime figures aren’t out of line with retail sales’ expansionary 2019.

Exhibit 1: US Retail Sales

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Italy's Coalition Is Kaput

Welp, it is official: Italy no longer has a government. With a no-confidence vote—tabled by the junior coalition partner—looming over Prime Minister Giuseppe Conte, he resigned Tuesday, ending the alliance between the anti-establishment Five Star Movement (M5S) and nationalist League. League leader Matteo Salvini called for the no-confidence vote over a week ago, but lawmakers delayed it in an effort to buy time for alternative alliances to gel. In the coming days, we will find out whether they were successful—or whether the country will hold new elections, perhaps as soon as October. So for now, political uncertainty rules. Longer term, however, the likelihood of an Italian government—regardless of who leads it—passing major, market-disrupting change appears low.

By all accounts, Salvini pulled the plug on his own government because he wants new elections. While the League currently has 91 fewer seats in the lower house than M5S, its poll numbers have soared. The latest poll averages give the League 36% and its would-be coalition partners, Silvio Berlusconi’s Forza Italia and the far-right Brothers of Italy, 6% and 7%, respectively. M5S is down to 19%, and the PD has 23%.[i] Strike while the iron is hot appears to be Salvini’s strategy.

But he doesn’t have the say-so over new elections. That power rests with President Sergio Mattarella. Whether he calls them will likely depend on whether M5S and the center-left Democratic Party (PD) can form a stable government and convince Mattarella of their staying power. This isn’t outside the realm of possibility. Together, they have 327 seats in the 630-seat lower house, good enough for a small majority. Unlike M5S and the League, they are sort of aligned ideologically. But until last week, they were also bitter rivals. Their rapprochement is mostly a (potential) marriage of convenience to keep Salvini from getting his way. That was enough to get them to join forces to block his no-confidence vote when he first submitted it last week, but whether it gets them to agree on a governing program is another matter entirely.

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Pundits Care About CEOs' Virtue-Signaling, but Stocks Won't

If you went anywhere near financial news on Monday, chances are you saw the Business Roundtable—a cabal of nearly 200 CEOs—announced its members no longer viewed maximizing shareholder value as their core purpose. Instead, they believe decisions should consider all “stakeholders”—including employees, suppliers and communities. While Milton Friedman rolled over in his grave, pundits expounded on this “major philosophical shift” and what it could mean to corporate governance and profits in the future. Our guess: not much. Statements like this are mostly marketing fluff—in this case, probably aimed at winning over politicians and socially conscious millennials. If anything, this virtue-signaling may help keep more onerous regulation at bay—a long-term positive.

After getting past the breathless news coverage and actually reading the new “Statement on the Purpose of a Corporation,” I sort of had a hard time seeing what all the fuss was about. Basically, it summed up what any normal person would probably consider good business practices. After leading with a brief ode to free markets and a nice reminder that corporations are not soulless behemoths leeching off society, it offered a five-point commitment to “stakeholders”: providing value to customers; providing good training, pay and benefits for employees; not short-changing suppliers; respecting local communities and protecting the environment; and, of course, “generating long-term value for shareholders.”

Put yourself in a business owner’s shoes, and a lot of this probably sounds intuitive. If you don’t provide good value to customers, they will probably ditch your product or service and flock to your competitors, and you will go out of business. If you don’t pay your employees well, offer benefits and train them, you won’t be able to attract and retain top talent, and your products and services will go downhill as a result. If you don’t treat suppliers ethically, they won’t work with you, and you will have a hard time doing anything. If you put a moat around your factory and pollute your community instead of engaging with people, they will run you out of town or deny all your requests for permits, and your business will die. Lastly, if you don’t deliver good value for the shareholders that have invested the capital you need to keep growing, your business will die.

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Book Review: Firefighting? More Like Keystone Kops

On a recent plane flight, I took along a little light pleasure reading—Firefighting: The Financial Crisis and Its Lessons, by former Fed head Ben Bernanke along with former Treasury Secretaries Hank Paulson and Tim Geithner. This book follows each of their memoirs about their experiences leading the US government’s response to 2008’s financial crisis, explaining what they see as its causes, offering a (lot of) detailed justification for their moves—and imparting lessons for the future. Originally, this review was destined for the we-swear-it-isn’t-weekly “Random Musings on Markets.” But it ended up juuuuust a bit longer (though no less random) than our usual tidbits, so it is now a stand-alone piece. Consider it “Random Musings on Firefighting.”

Good news first: As with virtually any book, it has some positive aspects. Chief among them, it is short. Like 130 pages of actual commentary short.[i] The recommendations for the future in the book’s final chapter seem more or less sensible. MarketMinder largely agrees with the idea of consolidating bank regulators from the current morass. Financial firms are currently regulated by any or all of the following: The SEC, Fed, Office of Thrift Supervision, Comptroller of the Currency, state insurance regulators, state banking regulators, the FDIC and, post-crisis, the Financial Stability Oversight Council (FSOC), which tries to coordinate the various regulators’ efforts. There is now also the Consumer Financial Protection Bureau. We likewise agree banks hold vastly more capital today than pre-2008, adding some stability to the system. Finally, this triumvirate’s critique of legislation limiting the Fed’s ability to extend credit to solvent but illiquid banks via the discount window is sensible. The Fed was created in 1913 not to balance employment and inflation, but to serve as the lender of last resort. They failed to do so in 2008, but that doesn’t make the logic faulty.

Those pluses aside, this book looks like a very strange, haphazard attempt to justify the bizarre and schizophrenic actions these fellows took in office. It analogizes their actions to fighting a huge fire[ii]—one requiring unprecedented and extreme action to extinguish it. It is repetitive, which writers should never be. It is repetitive, which writers should never be.[iii]

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Random Musings on Markets 2019: The Musings Remain the Same

Happy Friday! In this week’s we-still-swear-it-isn’t-weekly roundup of financial news, we bring you a premature epitaph for stocks, an ETF that doesn’t quite live up to its billing, a wild theory on Italian politics and more.

40 Years Later, Equities Are Alive and Kicking

August 13 marked 40 years since BusinessWeek published what may be the most iconic stock market call ever: The Death of Equities: How Inflation Is Destroying the Stock Market. Its thesis: Persistently high inflation was eroding corporate profits and undermining investors’ confidence in stocks. Combined with shifting demographics and the end of Wall Street’s fixed commission schedule (which would mean brokers had less incentive to advertise stock investing), this meant the stock market’s days of booming were over. Kaput. Dead. This wasn’t merely a flashy cover and edgy title: The text literally argued a near-permanent end to the good times for US stocks loomed.

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Putting Germany's Q2 Contraction Into Perspective

-0.1%. 0.2%. 0.4%. -0.1%. These, in chronological order, are Germany’s real, quarter-over-quarter GDP growth rates in each of the past four quarters.[i] To hear headlines tell the tale, the most recent result—announced Wednesday—is a sign Germany’s “golden decade” is ending and recession is nigh. Never mind that when GDP shrank by the same percentage in Q3 2018, it snapped back and reached new heights in each of the next two quarters. That should be your first clue that Q2’s wee contraction is neither predictive nor automatically the end of the line—for Germany’s economy, the world or stocks.

The popular narrative claims Germany is collateral damage from Brexit dread and the US and China’s trade war. Pundits cite Germany’s export-heavy economy and claim these headwinds to trade are severe threats. Industry analysts see falling car demand in China, connect it to the trade spat, and pen laments for Germany’s vaunted car industry. Those who acknowledge Germany’s services sector is chugging along fine warn weak manufacturing is a bellwether and the entire country will soon catch the malaise. With Germany widely considered the eurozone’s pillar of strength, most presume it is only a matter of time before the broader eurozone economy gets sucked into the vortex.

Nothing is ever black and white, and there are kernels of truth in some of these claims. German exports to the UK stumbled hard in Q2, a sign of Brexit uncertainty’s international reach. When Brits thought Brexit would happen on March 29 and feared it could be a no-deal exit, they stockpiled goods—including finished goods and components from Germany and other eurozone trading partners. When Brexit got delayed, Brits had unnecessary stockpiles to work through, relieving them of the need to send German suppliers new orders. This isn’t a long-term headwind, as events like this usually just pull demand forward temporarily, but it probably was a factor in Q2.

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As Recession Fears Swirl, the Global Economy Grows

Amid a volatile market stretch, worries about the global economy are running amok—including the dreaded “r” word: recession. Some economists think the likelihood of a US recession is up. Others see weak German industrial numbers and presume recession looms for Europe’s economic powerhouse. A few even project worldwide trouble. In our view, those concerns are overwrought. Recent data show continued global growth—despite pockets of weakness.

Our evidence: July purchasing managers’ indexes (PMIs). PMIs are business surveys covering major economic sectors like manufacturing and services. Businesses report their activity in a given month, and PMI aggregators crunch the numbers on how many respondents grew. Readings above 50 indicate more firms expanded; those below 50 suggest more contracted. While these monthly reports are a timely snapshot of broad economic conditions, they don’t share the magnitude of growth—or provide the level of detail “hard data” reports like GDP illustrate. With that said, July’s PMIs were consistent with the general theme of this year’s economic data: Heavy industry data were soft, but services expanded.

Exhibit 1: Around the World in July PMIs

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Random Musings on Markets 2019: Highway to Musings

Hello again! This week, in our not-at-all-weekly, not-at-all-regular, not-at-all-planned roundup of quirky financial news, we bring you a bizarre theory on negative interest rates, a weird observation about currency war fears, a European politician’s odd beach tour—and more!

Negative Rates Aren’t Puzzling. But This Isn’t Why.

This week, Bloomberg ran an article arguing negative interest rates aren’t so strange—presuming you thought they were to begin with. The piece leans heavily on the “savings glut” theory, claiming the supply of savings (deposits at banks, etc.) far outstrips banks’ demand for short term funding, making it totally commonplace supply-and-demand logic that rates would be negative. Not that different from commodity markets like pork bellies or wheat. Hey, depositors demand a place to put money and if banks don’t need the money, they won’t pay. Boom. Pure and simple. Basic Econ 101. Except.

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