Here we analyze a selection of third-party news articles—both those we agree and disagree with.
Please note: Though we make every effort to source articles from freely available sites, we will also regularly include articles on sites that have limited content for non-subscribers. Doing so is increasingly unavoidable, as more and more financial media is published behind paywalls.
MarketMinder’s View: If you have perused financial news at all this week, you have probably seen that numerous research outlets and experts anticipate a recession starting as soon as next year. This pithy piece illustrates GDP forecasts’ shortcomings—particularly in the long term—and we found this snippet telling: “The biggest errors occurred ahead of GDP contractions. … In part, this is because growth figures are ‘skewed’: economies usually expand slowly and steadily, but sometimes contract sharply. As a result, forecasters seeking to predict the most likely outcome expect growth. However, they adjust too slowly even once bad news arrives, says Prakash Loungani of the IMF. That suggests they are prone to ‘anchoring’—over-weighting previous expectations—or to ‘herding’ (keeping their predictions near the consensus).” That last sentence provides an important reminder: Human beings make forecasts, and many factors can influence their interpretations of imperfect data. We aren’t saying forecasts have no value—they can provide a snapshot of current expectations—but investors shouldn’t treat them like crystal balls.
MarketMinder’s View: In one of the biggest nonsurprises of the year, the ECB announced the end of its quantitative easing (QE) experiment on Thursday. ECB President Mario Draghi and friends also relayed the ECB will continue to reinvest the proceeds from maturing bonds for a year and has no plans to hike interest rates until next summer at the earliest. We think markets should benefit from the end of this counterproductive policy and expect the eurozone economy to fare just fine—just like the UK and US did when their QE programs ended. In our view, QE has hurt, not helped, growth (click here for our more detailed commentary on QE’s fecklessness). However, ours isn’t the consensus view—many believe central banks are responsible for today’s economic expansions. Indeed, as noted here, “he [Draghi] noted that some of the last four years QE had ‘been the only driver of this recovery’.” Yet if that were true, how was eurozone GDP expanding for two years before the ECB started QE? We believe central banks’ influence on economic growth is a wee bit overrated. However, with the QE mirage now put aside, investors can focus their attention elsewhere—like the eurozone’s better-than-appreciated economic fundamentals. For more, see our 11/8/2018 commentary, “The ECB’s QE End is Bullish.”
MarketMinder’s View: China is making good on its promise to buy more soybeans, at least according to the ever-mysterious unidentified industry sources: “The giant Asian commodity importer bought 1.5 million to 2 million metric tons of American supply over the past 24 hours, with shipments expected to occur sometime during the first quarter.” Considering direct soybean exports to China have plunged this year—see here for more—future data will likely reflect this rebound. While US soybean farmers may cheer one less point of friction in exchanging their product, we find the broader implication more interesting: US-China trade talks continue to progress, with the latter following through on its widely telegraphed plans. Though we aren’t predicting any outcome right now, the US and China have been following a widely used trade negotiation strategy: Talk big first, wait until the 11th hour and then find last-minute, can-kick compromises that allow both sides to claim victory in the immediate term. Other trade talks—like the USMCA, or “new NAFTA” —have proceeded in a similar fashion. Don’t let speculation and harsh public rhetoric spook you into thinking a damaging global trade war looms: Actions matter more than words.
MarketMinder’s View: Guess who said it: “We will maintain all the commitments made, from jobs to security, from healthcare to pensions, from compensating those who lost money in banking fraud to supporting businesses.” If you guessed the Italian populists, Luigi Di Maio of the antiestablishment Five Star Movement and Matteo Salvini of the far-right League, congratulations! As Rome and Brussels joust over Italy’s budget, the former continues to moderate and compromise—even on its flagship promises. “Italy’s industry minister, Dario Galli, said the bulk of the spending cuts needed to meet the lower deficit target would be most likely to hit the government’s proposed universal basic income, intended to give €780 (£700) a month to the unemployed, and the proposal to cut the retirement age.” Remember, populist politicians are still politicians—compromising and moderating after first refusing to do so is a tried and true negotiation tactic. For more, see yesterday’s commentary, “A Tour of European Politics.”
MarketMinder’s View: “After two hours of voting in Committee Room 14 in the House of Commons, Graham Brady, chairman of the 1922 Committee of Conservative backbenchers, said 200 Conservative lawmakers had voted in support of May as leader, and 117 against, indicating her party was bitterly divided over the direction of Brexit.” So Prime Minister Theresa May survives another day as the Brexit drama churns on. Other than that, though, the divisions within her party aren’t new or surprising. The confidence vote also doesn’t change anything about the Brexit process going forward. But it is perhaps one more step towards getting on with it and—whatever the outcome—the clarity that comes with Brexit finally happening should bring relief, in our view. For more on Britain’s path ahead, please see yesterday’s commentary, “11 Questions—and Answers—on Britain’s Backstop Brouhaha.”
MarketMinder’s View: October industrial production (IP) rose 0.2% m/m, rebounding from September’s -0.6%. Though IP tends to bounce around month to month and comprises only a small slice of eurozone economic activity, which is mainly services-based, the uptick is evidence all isn’t as bad as commonly portrayed. In particular, rising durable consumer goods production—which includes motor vehicle production—may reflect some recovery after new emissions testing standards temporarily stalled September output, weighing on Q3 GDP growth in Germany. For more, please see today’s commentary, “Why UK and Eurozone Recession Fears Seem Overblown.”
MarketMinder’s View: While generating gobs of headlines in January, government shutdowns don’t seem as compelling to financial media nowadays. Fears of the prospective fallout were always overblown, in our view, but this time around, the potential shutdown seems even more feckless. As this article describes, “Congress and Trump previously approved funding bills for three quarters of the $1.2 trillion in operating expenses for federal agencies. As a result, only some agencies would be closed when funding runs out after Dec. 21, and even in those essential employees would still report to work.” Even national parks would stay open! (A relief for the friendly MarketMinder staffer going to snowy Yosemite before Christmas.) Also, the government could easily kick the can and compromise on another short-term funding bill soon—like they have so often in the past. But if they don’t, and nonessential Homeland Security, SEC, IRS and EPA personnel don’t show up for work the last week of the year—and possibly spilling into next year—don’t fret. Shutdowns have never packed the punch to wallop the economy or markets—even more true for the latest partial shutdown threat.
MarketMinder’s View: Do Fed heads, past or current, have unique financial insight that markets lack? “[Former Fed head Janet] Yellen, though, warned Monday that companies are taking on too much debt and could be in trouble should some unexpected trouble hit the economy or markets.” Some bond investors don’t seem as fazed, and based on the data, we agree the titular corporate debt bubble concerns are overwrought. A big reason: default rates remain low—companies are by and large meeting their financial obligations and don’t appear to be straining to do so. Considering global capital markets—bond and stock alike—price in all widely known information, we doubt they are missing something former central bankers have been publicly discussing for a while now. For more, see our 9/17/2018 Market Insights video, “Market Insights: Corporate Debt Fears in Perspective.”
MarketMinder’s View: The Fed has been hiking rates for three years and unveiled plans to wind down its balance sheet in September 2017. Now, amid the latest volatility, some claim the Fed’s actions—“quantitative tightening” (QT), in which the Fed steadily shrinks its balance sheet—are upsetting markets. We don’t buy that argument. One, it presumes a widely known development is having a delayed impact, which amounts to saying markets aren’t at all efficient. Two, it presumes the Fed and other central banks are responsible for propping the global bull market up through quantitative easing (QE). We disagree: By buying long-term sovereign debt, the Fed caused the spread between long and short rates to narrow. That discouraged banks from lending, and having less capital moving around the economy weighs on growth. After the Fed began tapering QE, bank lending accelerated! In our view, QT chatter strikes us as an attempt to find meaning in volatile times. Markets can be bouncy in the short term, but we doubt monetary policy is the impetus behind it.
MarketMinder’s View: While CFOs have the inside scoop on their own companies, we bucket their broad economic forecasts with economists’ and other business leaders’: “Expert” predictions are far from perfect. Consider: When recession began in March 2001, CFOs expected 1.6% GDP growth for the year. Just a bit off! So when you hear: “Eighty-two percent of chief financial officers polled believe a recession will have hit by the start of 2020, and nearly 50 percent think the downturn will occur next year, according to the Duke University/CFO Global Business Outlook, released Wednesday,” we suggest taking that news with a few large salt grains. While this gives you a rough sense of how one group of people is feeling, it isn’t an unfailing guide to future economic activity. While recession next year is possible, reliable forward-looking indicators like the yield curve (properly measured) and The Conference Board’s Leading Economic Index suggest it isn’t probable.
MarketMinder’s View: This article nicely illustrates how volatile stock markets can be. However, investors can recoup short-term losses—even sharp ones—quickly. Consider this tidbit: “What’s interesting is that although 36 of the past 68 calendar year periods has experienced a double-digit drawdown [a -10% or more drop, followed by a recovery] at some point, only 14 of those instances ended the year in negative territory. That means more than 60% of the time when stocks fall 10% or more intra-year, they’ve still finished the year with gains.” Indeed, bouncy markets are more “normal” than many investors appreciate. Yet that bounciness doesn’t prevent bull markets from climbing. The challenge facing investors is to remain disciplined and invested when these volatile spells strike. As this article concludes, “the point is losses in the stock market are nothing new. And trying to guess their timing or magnitude in advance is a fool’s game.” Thus, steeling your nerves—and understanding short-term volatility is the price to pay for stocks’ long-term gains—is the best way to realize investment gains and meet your financial goals, in our view.
MarketMinder’s View: Looking to make a charitable donation this holiday season? Consider gifting shares. It can help your favored cause and potentially lighten your tax bill, too. Read on to see how!
MarketMinder’s View: Coverage of US-Chinese trade relations has fluctuated wildly over the past several weeks. After US President Donald Trump and his Chinese counterpart, Xi Jinping, agreed to talk further—putting frayed nerves at ease—the arrest of a Chinese corporate executive last week drove worries that the peace was in jeopardy. However, “China’s Vice Premier Liu He, U.S. Treasury Secretary Steven Mnuchin and U.S. Trade Representative Robert Lighthizer spoke by phone Tuesday morning Beijing time, according to a statement from China’s Ministry of Commerce. The two sides exchanged views on the timetable and road map of future trade talks, the ministry said, without providing further details.” Dissecting foreign relations isn’t our forte, but we find it telling that negotiators appear to be treating trade and the arrest as two separate issues rather than intertwined. Nothing is ever certain in geopolitics, where things could change overnight, but we recommend investors take a wait-and-see approach with US-Chinese trade talks—actions speak louder than speculation and bombastic rhetoric. For more, please see our 12/7/2018 commentary “Tariffs, Fed Hike and Tax Cuts: A Trio of Widely Known Factors.”