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.


Boomers and Millennials, Unite and Save the World!

The Internet turned 50 last month, and from covfefe to LOLcats, it has given us much to be thankful for. Yet it has also brought a lot of um, angst, and its 50th birthday coincided with yet another social media-fueled culture war—this time of the generational sort. You might have seen “Ok, boomer” popping up on t-shirts, Twitter feeds and wherever else people get their online kicks these days.[i] From what I gather as a typical out-of-touch Gen X-er, it is a thing Millennials say in jest to respond to Baby Boomers who seem to merely patronize their concerns about climate change and the environment. It got even more popular when a member of New Zealand’s parliament used it as a rejoinder to a heckler who interrupted her in a climate change debate. And then it turned to full-on generational class war when people took the following quote from AARP Media’s editorial director out of context: “Ok, Millennials. But we’re the people that actually have the money.” This article isn’t about any of the social media backlash. Nor will you find a stock market takeaway until the end, which, sorry. Rather, it is about how a certain Baby Boomer and whip-smart Millennials are sort of proving her point and, in the process, using free markets to improve the environment. Consider it a Thanksgiving feel-good story.

The Boomer in question is one James Dyson—creator of the eponymous vacuum cleaner, fan and hair dryer. I owe my clean carpets and shiny hair to him.[ii] His bagless vacuums and HEPA filters have improved quality of life for many and helped reduce waste in landfills. In the process of making many of our lives better through capitalism, he has also become loaded, with a net worth of about $13.9 billion according to the Sunday Times Rich List. Yes, that makes him a Boomer with the money. Lots of it. So much so that some politicians would tell you this status shouldn’t exist, that it amounts to a lopsided distribution of capital that starves the economy of growth and innovation. The problem with this theory is that it is demonstrably false.

For, you see, James Dyson does not keep his riches locked away in a vault. From what I have read, he does not have an indoor pool full of gold coins in which he takes a morning swim, Scrooge McDuck-style. Much of his net worth is invested, supporting job creation and new technologies. But he also likes to have some fun and do some good, so he created a charitable trust, the James Dyson Foundation, that sponsors an annual James Dyson Award. As The Guardian reports: “It challenges young people to ‘design something that solves a problem’ and is open to students and recent graduates in product design, industrial design and engineering.” The winner gets £30,000. Consider it seed money voluntarily redistributed from a moneyed Boomer to a Millennial (or I guess Gen Z-er) with big ideas.

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Why Low Productivity Shouldn’t Trouble Stocks

Last week, the Labor Department reported US labor force productivity slipped -0.3% y/y in Q3, its first contraction in almost four years. The dip returned a long-running worry to the spotlight: Weak productivity holding back the economy and stocks. In our view, however, measured productivity is overrated as an economic driver and basically irrelevant as a near-term market driver.

Now, we aren’t talking about productivity in the general sense of the term. We are referring to the economic metric, as tabulated by government stat wonks. To calculate productivity, they divide total output by total hours worked. Since hours worked grew more than output in Q3, productivity fell. To many, this is ominous. Conventional wisdom argues economic growth requires more workers, more efficiency from existing workers or a combination of the two. As Baby Boomers age out of the workforce, many worry the US will stay stuck in a slow-growth rut absent productivity gains. But in our view, this narrative paints an incomplete and inaccurate picture.

For starters, a demographic decline isn’t a foregone conclusion. Not only are life expectancies rising, but people are much healthier in their 60s, 70s and even 80s than prior generations were a few decades ago. Older folks’ increased activity, plus the prevalence of less physically demanding jobs, undercuts the notion of a retirement tidal wave. According to the Pew Research Center, the majority of Boomers (those born from 1946 – 1964) were still in the labor force last year.[i] Further, the oldest contingent (ages 65 – 72) were working at higher rates than the preceding two generations did in the same age range.[ii] Not that this is an economic boon—just as a flat or falling population doesn’t spell doom. Demographics aren’t destiny.

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An Underappreciated Lesson From 1929’s Crash for Investors in 2019

Late last month, financial headlines “celebrated” an infamous anniversary: the 90th anniversary of Black Thursday, the 1929 Crash. Some used the date to muse on how markets today compare to those from nearly a century ago —and whether a crash looms. In our view, the better lesson to draw from such a distant milestone: It is a reminder of stocks’ resiliency—and why we think they should likely be a core part of long-term, growth-oriented investors’ financial plans. 

Because of its severity and magnitude, the 1929 – 1932 bear looms large in market history—and the October crash seems like an obvious inflection point (though US markets’ actual pre-Great Depression peak came a month earlier). To capture the mood immediately post-Crash, here is a snippet from The New York Times’ coverage:

Wall Street was a street of vanished hopes, of curiously silent apprehension and of a sort of paralyzed hypnosis yesterday. Men and women crowded the brokerage offices, even those who have been long since wiped out, and followed the figures on the tape. Little groups gathered here and there to discuss the falling prices in hushed and awed tones. They were participating in the making of financial history. It was the consensus of bankers and brokers alike that no such scenes ever again will be witnessed by this generation. To most of those who have been in the market it is all the more awe-inspiring because their financial history is limited to bull markets.[i]

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Regional Comprehensive Economic Protectionism?

Earlier this week, headlines touted some seemingly good news on the trade front: Fifteen Asian nations had agreed in principle on key portions of a new trade deal, likely clearing the way for them to sign it next year. Even India’s decision to opt out couldn’t shake some pundits’ enthusiasm over a potential positive to offset all the new tariffs accompanying the Trump administration’s various trade spats. Far be it from us to pooh-pooh good news, but we think a little perspective is in order. One, big trade deals are seldom near-term economic drivers since they usually take effect gradually, over many years. Two, the deal in question—dubbed the Regional Comprehensive Economic Partnership (RCEP)—isn’t even a free-trade deal. We see many reasons for investors to be bullish today, but this isn’t one of them.

Generally speaking, RCEP will be a trade deal among China, Japan, South Korea, Australia, New Zealand and countries in the Association of Southeast Asian Nations (ASEAN)—Indonesia, Thailand, Singapore, Philippines, Malaysia, Vietnam, Brunei, Cambodia, Myanmar and Laos. Coverage eagerly pointed out that, if finalized, it will be the world’s largest trade deal, covering almost one-third of global GDP and nearly half the world’s population. This is bigger than the artist formerly known as the Trans-Pacific Partnership (now the CPTPP), which includes seven of these nations (notably, not China) as well as some North and South American countries (notably, not the US). But unlike CPTPP, RCEP isn’t a sweeping reduction of tariffs and non-tariff barriers. Nor does it foster freer markets—unlike CPTPP, which made liberalization of certain markets a requirement. CPTPP also sought to protect intellectual property rights—RCEP doesn’t. It also doesn’t take on thorny issues like state-owned enterprises. That last point is critical, considering some of the participants are still somewhat communist.

Instead, it aims to replace ASEAN’s bilateral trade agreements with the other participating nations, “harmonizing” market access among all. One omnibus deal to replace many small ones. The National Bureau of Asian Research sums it up as “a consensus on the lowest common denominator in standards for goods, services, investment and intellectual property rights,” which is not flattering. It essentially means RCEP isn’t trying to make trade freer, but rather ensuring all the countries have the same rules and barriers so they can reduce paperwork. Which helps! But it also codifies protectionism. Most believe it will also reduce RCEP participants’ trade with other nations, as the application of Chinese standards across the board amounts to creating new regulatory barriers around the bloc.

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October’s Less Gloomy Business Surveys

When last we looked at US and eurozone purchasing managers’ indexes (PMIs) in August, US manufacturing was in slight contraction and Europe was also facing industrial headwinds. Many saw—and still see—this as a sign of impending recession. Now October’s PMIs indicate a pickup in overall business activity despite continued global manufacturing weakness. In our view, this cuts against widespread fears of a manufacturing slump spreading to the broader economy—potentially a bullish surprise for investors.

PMIs are surveys gauging how many businesses in a given sector—typically manufacturing and services—are expanding or contracting, with 50 the dividing line between the two. The below snapshot of four major developed-world PMIs shows all improved from September.

Exhibit 1: October’s PMIs Are Up

Sources: IHS Markit and the Institute for Supply Management, as of 11/6/2019.

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Today in Brexit, Day 1,224

Editors’ Note: Our political commentary is intentionally non-partisan. We favor no political party, candidate, policy or program. We assess political developments solely for their potential economic and market impact and believe political bias invites investing errors.

Trick or treat! Today is Halloween, and the UK is still in the EU. Yes, three days ago, EU leaders agreed to give the UK a Brexit “flextension,” delaying departure until January 31 or Parliament’s passage of Prime Minister Boris Johnson’s Brexit deal, whichever comes first. We are happy to report Johnson is not dead in a ditch, contrary to his hyperbolic statement about where he would rather be than in the EU after today. Instead, he is campaigning for an election! That contest will happen on December 12, and it presents a shiny opportunity for Brexit-related uncertainty to finally begin fading—potentially a nice tailwind for UK stocks.

It isn’t really worth recapping how the election ended up in the books. Suffice it to say there were debates and votes and attempted amendments that almost derailed the whole thing at the last minute. But in the end, Labour Party leader Jeremy Corbyn determined the three-month Brexit delay more or less took a no-deal Brexit off the table, so he no longer saw a need for his party to block a general election. Hence, with the Conservatives, Labour and some smaller parties in agreement, the motion to dissolve Parliament and hold a contest passed by a wide margin. Lawmakers’ agenda for the next few days will include debates on the inquest into the Grenfell Tower tragedy and the election of a new Speaker to succeed John Bercow, and then, that will be it! Parliament will dissolve on November 6, and the candidates will be off to the races.

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Quick Hit: US Business Investment's Sad Q3

US GDP growth slowed to 1.9% annualized in Q3, the second straight deceleration.[i] Gaining most eyeballs? Business investment’s -3.0% decline, its second drop in a row.[ii] This prompted a slew of headlines arguing American consumers are the only entities propping up growth—which didn’t inspire much confidence, considering consumer spending growth slowed from Q2’s 4.6% to 2.9%.[iii] We think all the handwringing is a bit overdone. While business investment does tend to be a key swing factor for America’s economy, the occasional drop isn’t unusual. Nor are business investment’s wobbles predictive, so we think investors are best off not reacting to the news.

For some perspective, Exhibit 1 shows business investment’s growth rates since this expansion began in Q3 2009. You will see this isn’t the first time it has fallen. It isn’t even the first sequential drop—that honor goes to the drops in Q4 2015 and Q1 2016. That is also when the US and global economies were in a mid-cycle slowdown much like the present. Recession didn’t strike then. Rather, the US and global economy reaccelerated, and stocks busted out of a frustrating flat stretch. Not that the past is predictive! But, you know, interesting.

Exhibit 1: Business Investment Sometimes Wobbles

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Yield Curve Flips Positive, Sentiment Doesn’t

The US yield curve has been back in positive territory for two weeks, and pundits are starting to notice. Yet, in a fascinating sign of sentiment, they aren’t cheerful. Some warn the curve could re-invert. Others point out that the curve often turns positive again before a recession, supposedly putting us that much closer to doomsday now. But to us, these viewpoints read way too much into the yield curve’s alleged timing signals while ignoring what it means in the first place.

The yield curve, which shows the difference between long- and short-term interest rates, is a good forward-looking indicator. For one, an inverted curve—with short rates above long—has preceded nearly every US recession since WWII. However, inversion isn’t a timing tool. Rather, it is a signal of credit markets’ health. Banks borrow at short rates, lend at long and profit from the spread. Hence, a positively sloped curve—long rates above short—means lending is profitable, creating incentive for banks to lend to a wide swath of borrowers. A flat or inverted curve implies lending is less profitable—or unprofitable—which can tighten credit, starving the economy of capital. If inversion is sufficiently deep, widespread and lasting, it can lead to recession as a lack of credit forces businesses to cut back.

After a brief blip into inversion in March, on May 24 the US yield curve inverted and stayed that way for most of the next four-and-a-half months. Several curves in Europe followed suit, even inverting the global yield curve for a spell. But on September 5, long-term interest rates began rising. On October 14, the US curve officially un-inverted (or, if you prefer, unverted).

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Why Slowing Chinese Growth Shouldn’t Spook Investors

Last Friday, China reported Q3 GDP grew 6.0% y/y, decelerating from Q2’s 6.2% pace.[i] Headlines bemoaned the figure as the “slowest growth in nearly three decades,” which, technically, it was. But this doesn’t mean China’s economy or the global expansion is on the rocks, in our view. Rather, we think it (alongside other recent data) shows China’s economy is slowing, but not slumping—a long-running trend that needn’t sink global stocks.

In Q3, services growth set the pace at 7.0% y/y, while agricultural output rose 2.9% and manufacturing 5.6%.[ii] Services’ leadership exemplifies the trend of heavy industry and exports gradually giving way to services and consumption as the Chinese economy’s primary drivers. Through 2019’s first three quarters, consumption accounted for 60.5% of GDP.[iii] In 2010, it was 49.5%.[iv] Consumption’s gaining primacy is normal as developing economies mature. It is also normal for rapidly developing countries’ growth rates to slow over time. This doesn’t inherently reflect fundamental weakening, but rather, math. The larger the base, the harder it is to maintain super-high growth rates. Chinese nominal GDP was $5.1 trillion in 2009.[v] Last year, it was $13.6 trillion.[vi] A double-digit growth rate off the latter strikes us as unrealistic.

Many blame the US/China trade tiff for Chinese economic weakness this year, pointing to flagging exports. While it is fair to say tariffs have had an impact—either directly, or by discouraging some foreign investment in China—we think a little context might help investors assess whether headlines are too dour. Chinese shipments to the US fell -21.9% y/y in September and -15.1% in Q3.[vii] But exports to the US represented just 3.5% of Chinese GDP in 2018.[viii] Presuming 25% tariffs on the full amount—and perfect enforcement—the cost would be about $120 billion, or 0.9% of Chinese GDP. But the true figure is likely much smaller. Surging shipments to many Asian nations—particularly Vietnam, Taiwan and the Philippines—alongside rapidly growing US imports from those countries suggest many companies are rerouting shipments to avoid tariffs. Rerouted trade has helped keep overall Chinese exports from cratering. Rather, they fell just -0.8% y/y in Q3.[ix]

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What Canada’s Election Means for Global Investors

After a contentious campaign, incumbent Canadian Prime Minister Justin Trudeau won reelection in Monday’s vote, though his Liberal Party lost some ground and fell far short of a majority. Trudeau is now likely to head a minority government, perhaps with the lukewarm voting support of the left-leaning New Democratic Party. The likely upshot is gridlock—typically bullish, especially for developed economies. Yet Canadian stocks still face other country-specific headwinds that mitigate this positive political development.

The Liberals won 157 seats in the 338-seat House of Commons—down from their 177 entering the election and below the 170 needed for a majority.[i] The Conservatives will be the main opposition with 121 seats. Bloc Québécois—Quebec’s separatist party—and the New Democrats round out the top four with 32 seats and 24 seats, respectively.[ii] Despite maintaining control, the Liberals’ showing was the weakest for a victorious party in Canadian history—their 33% share of the national popular vote actually trailed the Conservatives’ 34%.[iii] (Canada votes by constituency, much like the US House of Representatives and British Parliament, with the candidate who wins the most votes in each “riding” winning the seat.) In many parliamentary systems like Britain’s or Germany’s, this would mean coalition talks to form some kind of unity government that combines to a majority of seats. But coalitions are rare in Canada—and one looks unlikely to form right now. Instead, Trudeau seems likely to lead a Liberal minority government with the tacit voting support of the New Democrats (and perhaps other parties) on select issues. 

As is the case for many incumbents, Trudeau’s support has waned over the past four years—especially with a handful of recent scandals stealing headlines. Now entering his second term as Canadian premier, Trudeau doesn’t enjoy the same mandate he did in 2015, when he was a popular young newcomer—forcing him to work with other parties. The New Democrats have some ideological overlap with the Liberals, but the two parties have big differences, too. One example: disagreements over economic policy, particularly in regards to energy. The New Democrats have taken a tough stance on environmental issues, and they campaigned on stopping pipeline expansion, ending federal subsidies for fossil fuels and providing incentives for alternative energy sources. The Liberals’ approach has been squishier. Despite promoting itself as environmentally friendly, Trudeau’s government nationalized and advanced a trans-mountain pipeline to support Alberta’s big oil industry, which has struggled to ship crude to refineries and ports, particularly in British Columbia. While such disagreements aren’t likely to lead the New Democrats to block the Liberals from forming a minority government, passing major legislation will require a lot of horse trading and compromise—likely leading to watered-down results.

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