MarketMinder

Headlines

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.


China's Economy Slows Sharply, in Challenge for Xi Jinping

MarketMinder’s View: While this relies a little too much on anecdotal evidence writ large, it is an interesting look at China’s economic slowdown and some of the factors economic data don’t quite capture. With industrial production growing 5.4% y/y and retail sales up 8.1% in November, this isn’t an economic hard landing by any stretch. But it is enough of a slowdown to give officials some concerns about being able to maintain high employment and social stability, hence the recent stimulus push. Most of the measures highlighted in the article are new and haven’t had the chance to have much impact yet, so it isn’t surprising that the slowdown continues in the meantime. For instance, the government’s directions to banks to lend more to private companies came only in mid-November, so it is too early for a noticeable uptick in lending. Overall, it appears Chinese officials are still following their playbook of adding stimulus as needed to prevent a hard landing, which should help keep China contributing nicely to global economic growth—likely a positive surprise for global stocks, given widespread fear.

EU Leaders Give May Assurances on Brexit

MarketMinder’s View: Those assurances amount to reiterating prior pledges to find a permanent solution for the Irish border before December 2020, negating the need for the much-hated backstop—in which the UK would remain in the EU’s customs union and Northern Ireland alone would remain in the single market for goods—ever to take effect. This is all nice and well, but it remains to be seen whether verbal warm fuzzies will be enough to convince UK MPs to vote for the deal when it returns to Parliament next month. So the uncertainty continues for now. But however Brexit ultimately goes—current deal, no deal or something else—just getting on with it should give investors clarity and enable them to get over it. Even in the dreaded no-deal scenario. Businesses have largely prepared for that outcome, setting up the potential for positive surprise when the disaster everyone expects doesn’t happen. For more, see Tuesday’s commentary, “11 Questions—and Answers—on Britain’s Backstop Brouhaha.”

History Shows Forcing Companies to Put Workers on Boards Is a Bad Idea

MarketMinder’s View: The topic of forcing large companies to reserve board seats for workers’ representatives is rather sociological, and it is comes with a slice of partisan bias at times. So we ask you to set aside the issue of which political parties are mulling legislation for this, and consider instead the merits and potential unintended consequences in order to assess whether this change would be likelier to help or hurt companies’ long-term performance and business investment. The argument in favor says workers are longer-term stakeholders and less likely to support short-term decisions, like stock buybacks, that supposedly boost stock prices while adding no other value. We have always disagreed with this philosophy, as stock buybacks return capital to shareholders, who can then direct it to new, perhaps more innovative investments. This piece takes a different tack, exploring how adding workers to boards could discourage long-term investments. “And it’s easy to think why. Who represents workers under such legislation would be decided through some form of electoral process. At that stage, all the perverse incentives that arise using electoral politics as a means of decision making come into play. A major driver for self-interested worker representatives would be maximising their chances of re-election. That could bite when votes must be delivered on how cash flow is used. Employee-elected directors may opt to assure those worried about the solvency of the company pension plan that they will vote to shore it up, for example, rather than commit to investment in longer-term capital projects. They may choose to side with workers whose jobs are at risk should a plant be closed rather than commit to voting for broader pay rises elsewhere. Clearly, such decisions, though potentially bringing electoral support for the representative, may not be in the company’s long-term interest.” Now, none of these laws look likely to pass any time soon, given the amount of gridlock in the US and UK. But this is food for thought nonetheless and a lesson in how to assess well-intended legislation’s potential unintended consequences.

Companies Ramp Up Stock Buybacks as Market Swoon Continues

MarketMinder’s View: This piece argues companies are boosting stock buybacks now because they are iffy on long-term investments due to concerns about tariffs and the economy and need something else to do with cash instead, which risks choking business investment and storing up trouble. We think this rather misses the point. Generally, when businesses expect tough times ahead, they don’t sit there and think, “Gee, it’s going to get bad, and I have all this money, but I’m scared to invest it, so I’ll go blow it all at the stock mall instead.” Rather, they hoard cash and get lean and mean. We reckon the reason for more stock buybacks now, after an -11% peak-to-trough decline in global stocks, is much simpler: The correction made buybacks cheaper. People may have a natural inclination to run away from a bargain when stocks are on sale, so to speak, but for now, CFOs appear to be taking a more rational view. As for buybacks cannibalizing business investment, strong S&P 500 capital expenditures and rising US non-residential fixed investment disagree.

Cross US Consumers Off the Worry List

MarketMinder’s View: Disclosure: We are bullish and expect the US economy to do just fine, with consumer spending doing just fine. However, we also think it is important to base a thesis on sound evidence, not backward-looking data. This article errs by doing the latter. Retail sales, personal debt, savings rates, employment and wage growth are not forward-looking indicators. They say what already happened, not what will happen. Moreover, most recessions aren’t consumer-led. They usually start with sharp drops in business investment, which eventually ripples out to consumers. Most consumer spending is on non-discretionary services, rather than discretionary goods, so consumer spending usually doesn’t swing sharply in recessions. We point all of this out because this is the sort of commentary investors will have to sort through when this bull market eventually peaks. If articles use backward-looking data to argue the economy will be fine because consumers look fine, but other more leading indicators are going south while businesses are belt-tightening, then that could be a strong indication of a market rolling over.

UK Airport Travellers Receiving Less Than 1 Dollar for Every Pound Exchanged

MarketMinder’s View: The official exchange rate might say £1 buys $1.26, according to Bloomberg, but travelers are getting between 97 cents and $1.03. The lesson: Don’t change currency at airport kiosks, which charge big commissions—in this case, around 20%. Simply using the ATM when you reach your destination is much, much cheaper, giving you more money in your pocket for that expensive cocktail or Broadway show. Not investment advice, obviously, but we like giving friendly readers practical financial tips when possible.

GDP Predictions Are Reliable Only in the Short Term

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.

ECB Ends Asset Purchases, on Watch for Future Risks

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.”

Xi Makes Good on Pledge to Buy US Soybeans

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.

Italy Cuts Deficit Target for 2019 to 2.04% to Avoid EU Sanctions

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.”

British PM May Survives Party Confidence Vote but 117 Dissent

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.”

Eurozone Industrial Production Rebounds Signaling Growth Pick Up

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.”

Here’s What Would Happen If There’s a Government Shutdown in December

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.

Yellen and the Fed Are Afraid of a Corporate Debt Bubble, but Investors Still Aren’t

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.”

Why Stock-Market Bulls May Soon Be Complaining About the Fed’s Quantitative Tightening

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.

Most CFOs See a U.S. Recession Coming by 2020

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.

The One Constant in the Stock Market

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.

How to Donate Shares to Your Favorite Charity

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!

Britain Is in the Bargain Basement and Now Is the Time to Buy

MarketMinder’s View: While we don’t agree investors should pile into UK stocks on the basis of poor recent returns and low valuations—neither are predictive—this is an otherwise great analysis of why the Brexit stakes are likely lower than current handwringing suggests. For one, while EU membership facilitates trade a bit, it doesn’t make or break economies—especially ones that are already fundamentally solid like the UK. As noted here, “In the medium term, growth is determined by factors such as demographics, productivity, tax competitiveness, rates of innovation and entrepreneurship, and so on.” Prolonged Brexit uncertainty may affect businesses’ investment plans, but we agree no negotiation outcome likely has the power to inflict long-term economic harm. For more Brexit coverage, see today’s commentary, “11 Questions—and Answers—on Britain’s Backstop Brouhaha.”

China, US Officials Engage on Trade While Huawei Row Burns

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.”