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.
In this Friday’s not-every-Friday roundup of fun financial news-related stories, we bring you a blast from the startup past, our working theory on Libra, some lessons from Sir Paul McCartney, a debut musing on simple words from our own Jamie Silva and what craft beer can teach us about seltzer and bubbles generally. Please enjoy responsibly!
Back to the Future, Start-Up Style
Last weekend, The Wall Street Journal ran an interesting piece on the rise and fall of VisiCalc, an early spreadsheet software program that basically minted money in the very early 1980s. It was on top of the world in 1983. By 1984, it was dead.
Have Japan and South Korea just opened a new front in the global trade war? Many seemingly think so, especially after Tokyo slapped Seoul with export restrictions impacting semiconductor production—a major South Korean industry. Some now fret the potential ramifications for two of Asia’s biggest economies as well as global Tech. While harsh rhetoric may stir headlines, the broader economic fallout is likely limited, in our view.
Some argue the row is rooted in Japan and South Korea’s tenuous historical relationship. Japan ruled Korea as a colony for most of the 20th century’s (tumultuous) first half. Today’s dispute revolves around two groups of Koreans, conscripted labor and “comfort women,” victimized in World War II atrocities—and whether Japan has paid adequate reparations for its actions. Japan argues the 1965 treaty with Korea that established diplomatic ties and provided monetary compensation settled the issue. South Korea disagrees and seeks more compensation.
Perhaps that seems like ancient history, but many think it is impacting Japanese export policy now. Last year, South Korea’s Supreme Court ruled a Japanese firm must pay South Koreans for forced labor during the war. Japan rejected this ruling, and when Tokyo announced recent export controls on photoresist, high-purity hydrogen fluoride and fluorinated polyimide,[i] many pundits—and Koreans—saw it as retaliation. Japan denies this, arguing the controls aim to ensure these materials don’t wind up in North Korean hands. The Japanese and South Korean governments are now squabbling, with both sides threatening harsher action to come (e.g., Japan removing South Korea from an export “white list” of countries with minimum trade restrictions). The dispute has enflamed passions among the citizenry as well. A majority of Japanese supports the restrictions while Koreans are organizing boycotts of all things Japanese.
American stocks have outperformed most other developed markets in this bull market. It seems to us many US investors combine this fact with a bit of home-country bias to conclude US stocks are inherently superior to those outside America. But in our view, this misses a couple things. One, sector composition—namely America’s big Tech sector—accounts for virtually all the nation’s outperformance in recent years. Strip this out, and returns basically match. Two, even including Tech, there hasn’t been material US leadership for most of the last year.
Major geographic regions—like Europe and the US—tend to be diversified across sectors, but there can be significant differences in their weights. Case in point: In America, Tech and the newly formed Communication Services sectors—which includes three of four FANG stocks previously included in Tech[i]—combine for over 30% of S&P 500 market capitalization. The MSCI Europe Index, by contrast, has only about 10% in these Tech-heavy sectors.
Exhibit 1: America Is Tech-heavy
Source: FactSet, as of 6/21/2019.
In this week’s edition of our not-weekly collection of quirky stories, Japan shows you the demographic bomb is likely a dud, our notes from another electric House Financial Services Committee hearing and a Venn diagram near and dear to our hearts. Please enjoy the read!
So Much for That Demographics Time Bomb
Sorry to go all serious(ish) here, but we didn’t have any other space to highlight a short observation about some actual data. You see, for eons now, people have feared shrinking populations in several “aging” nations will doom them to shrinking economies. Japan would be the first domino to fall, followed by most of Continental Europe and then the US.
Imagine you fell asleep, dear MarketMinder reader, on September 30, 2018 and pulled a Rip Van Winkle—waking up on June 30, 2019. Naturally, the first thing you do is check what global stocks did over this time.[i] You discover they returned 1.3%.[ii] Ok, but kind of meh. Must have been an uneventful stretch, right? Not much missed? Wrong! In our view, the past nine months illustrate the importance of not overreacting to past market movement. Whether down, up or flat—what stocks just did tells you nothing about what is coming next.
Here are a thousand words in picture form:
Exhibit 1: Global Stocks’ Wild Ride
Editors’ Note: Our political commentary is non-partisan by design. We favor no party or politician in any country and assess political developments solely for their potential economic or market impact.
Alex Tsipras officially became Greece’s ex-prime minister on Sunday, when his Syriza Party came a distant second to New Democracy. The former leftist firebrand and his comrades took just 31.5% of the vote, while their center-right competition got 39.7%—enough for a Parliamentary majority, according to Greece’s election rules. So out goes Tsipras and in comes Kyriakos Mitsotakis as the new prime minister. This election’s significance for investors doesn’t have much to do with Greek stocks. Rather, it is a sneak peek at populism coming full-circle—an example of why we think fears of a disruptive populist pandemic miss the mark.
Greece was the first eurozone nation to get a populist government. During the debt crisis’s first several years, the traditional center-left (PASOK) and center-right (New Democracy) parties traded leadership. As the country’s fortunes sank throughout two defaults and two bailouts, voters became disillusioned with both, as well as the “troika” of bailout authors and creditors: the IMF, ECB and European Commission. This gave populists an opening, which Tsipras seized to thrust his rag-tag far-left group—known by the Greek acronym for Coalition of the Radical Left—into the spotlight. He built a large following by agitating against the troika and mainstream politicians for years, and in an early 2015 election, Syriza won enough seats to form a coalition with the far-right Independent Greeks. Investors freaked, fearing this radical government would Grexit and splinter the eurozone.
In this Friday’s not-weekly roundup of news oddities, we bring you some suggestions for ECB-head-to-be Christine Lagarde, a lament on the missed opportunity for an all-star Fed Board and two missives from the gridlock file. Hope you enjoy the read!
Some Suggestions for the ECB President-in-Waiting
Late Wednesday, as part of a media frenzy following IMF head Christine Lagarde’s nomination to lead the ECB, Bloomberg published a piece highlighting her penchant for quoting historical figures, artists and philosophers in speeches concerning economic policy. Heck, she invoked Mozart’s Magic Flute in 2016 while discussing the euro crisis’s legacy. They posit this may bleed into her policy discussions and statements as ECB chief—complicating analysis by market participants.
Good news for those aiming for long life: Folks over 100 are the developed world’s fastest-growing demographic.[i] A phenomenal statement about human progress! But with longer life expectancy comes greater financial need.
A recent World Economic Forum (WEF)[ii] report highlights the issue. It estimates the average American 65 year old has enough savings to cover only about 10 years of retirement, despite a 20-year life expectancy (and rising),[iii] with similar shortfalls in other advanced countries. By 2050, the WEF warns, there will be a several hundred trillion dollar global retirement savings shortfall.
Now, we have a few quibbles with these visions of a global retirement crisis 31 years from now. For one, such long-term projections are inherently dodgy, regardless of their source. It is impossible to account for all the variables that could change during a decades-long window, likely in ways no one can imagine today. But also, we are only talking averages here. Everyone’s circumstances differ, which renders straight-line predictions about individual people’s situations even less certain the further forecasters extrapolate.
The central banking world got a jolt of excitement Tuesday, when EU leaders nominated IMF chief Christine Lagarde to head the ECB for the next eight years and President Trump announced (on Twitter, natch) he will nominate economists Judy Shelton and Christopher Waller to fill the two remaining Fed board seats. Because the world is oddly obsessed with central bankers these days, pundits have already started spilling many words and pixels speculating over what these appointments mean for global markets and economies. We recommend you tune it all out. Central bankers’ actions are unpredictable, and a few new faces probably won’t have much influence on these consensus-obsessed institutions.
We will concede that Lagarde is a curious choice to be ECB president, given she has no central banking experience—or any banking experience. However, to presume experience is important is to presume the ECB’s chief dictates monetary policy. In reality, the entire ECB policymaking cabal votes, and that group contains the ECB president, five board members and every eurozone nation’s central bank chief—a 25-person committee. As a result, the ECB president’s role is largely political. They present decisions to the world, handle the press and conduct diplomacy during a crisis. In that vein, Lagarde’s tenure at the IMF becomes très relevant, as she helped orchestrate several bailouts during the eurozone’s debt crisis. She is also widely respected among European leaders, which should help preserve strong diplomatic relations with other eurozone institutions.
This is a big reason why we think it is rather useless to speculate on what her appointment will mean for monetary policy. We wouldn’t bother parsing her past speeches for references to ECB decisions. Nor would we recommend pulling up the IMF’s recent World Economic Outlooks and searching for “stimulus.” Not only do central bankers have a way of forgetting past viewpoints once in office, but it seems reasonable to expect her to delegate much of the monetary policymaking to trusted deputies on the ECB board and then use her position to build consensus. It is the sort of thing a skilled political leader would do. We could be wrong! She could march in there and make fiery interest rate recommendations or refute all of history and decide the ECB won’t be the lender of last resort for the eurozone! But it would be a little bit weird.
Editors’ Note: The discussion of politics that follows is intentionally nonpartisan. We favor no politician nor any party and assess political and geopolitical developments solely for their potential market impact.
Well whaddaya know! After an 80-minute lunch on the sidelines of the G-20 summit on Saturday, President Trump announced tariff threats and the ban on transacting with Chinese telecom giant Huawei were off—and trade talks were back on! As if that weren’t enough, Trump met up with South Korean President Moon Jae-in and North Korean … umm … Leader Kim Jong-un in Korea on Sunday and ambled over the Military Demarcation Line to become the first US president to set foot in North Korea since, well, ever. Even the birds were so excited, they flew over the border and fooled South Korea into scrambling fighter jets! In happier reactions, stocks greeted the trade truce with fresh all-time highs on Monday. We don’t doubt a trade truce is a positive for investor sentiment. However, nothing here strikes us as a whopping surprise. We saw this movie just last year, and we think investors would benefit from understanding how tariffs seemingly fit into Trump’s geopolitical playbook.
Most tariff coverage presumes Trump’s new (and threatened) tariffs are permanent economic policy. Yet reality shows little evidence of this. With China, Mexico and the EU, trade spats have gone largely like this.