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.


US Raises Tariffs on European-Built Aircraft in Ongoing Dispute Over Subsidies

MarketMinder’s View: “The U.S. government on Friday said it would increase tariffs on aircraft imported from the European Union to 15% from 10% ....” While this piece claims the move is part of a broader Trump administration push to overhaul the US’s trade relationship with the EU—and raises “the specter of another major trade war”—we think reality is more benign. As the article notes, this US-EU trade tiff stretches back several administrations as both sides sought WTO permission to impose tariffs on the other to offset alleged state support for major aircraft manufacturers. The US received that permission last October and applied tariffs on select EU imports, including aircraft. Friday’s change didn’t actually increase the value of EU imports subject to tariffs—rather, the US Trade Representative bumped up the tariff rate on aircraft and made changes elsewhere (e.g., dropping prune juice from its tariff list). Moreover, the total ($7.5 billion) is still just 1.1% of US imports from the EU (per the US Trade Representative, 2018 data). Whether the EU retaliates or negotiations resolve the spat, the broader economic impact is likely minimal.

Chinese Finance Minister Pledges Targeted Tax Cuts to Mitigate Coronavirus Impact

MarketMinder’s View: With data on the coronavirus’s economic effects still scarce—and speculation abundant—we think it is worth highlighting an underappreciated factor that may help mitigate the negative impact on China’s economy: the government’s fiscal response. According to the country’s Finance Minister, China is planning “‘targeted and phased’ measures to cut taxes such as VAT [the Value Added Tax] for firms providing essential goods or logistics, while also providing more funds to contain the disease.” This comes on the heels of interest rate cuts, insurance to cover virus-related business losses and special financing opportunities for affected sectors and companies. In our view, this is a reminder of China’s ability—and strong incentives, given the government’s need to preserve social stability—to cushion the fallout.

How Millennials Could Make the Fed’s Job Harder

MarketMinder’s View: While this piece is laced with examples of different retirement trends, we highlight it to debunk the primary argument: that the millennial generation’s low inflation expectations and “aggressive” saving habits will keep interest rates low, thereby depriving the Fed of a valuable stimulus tool (i.e., rate cuts) whenever the next downturn strikes. We see several issues. First, if inflation expectations drove inflation—a key interest rate input—the high inflation (and expectations) of the 1970s would never have ended. Money supply growth and velocity primarily drive inflation, and they are impossible to forecast years in advance. Likewise, predicting interest rates’ level when the next recession comes is also a futile effort—too much could change. As for concerns here that supersaver millennials could drag down growth by spending less and then retiring early—thereby shrinking the labor force—that seems like a dour take on one possible reality. What if those future older millennials end up spending more because of longer lifespans? What if they have to keep working because limited home supply in major coastal metropolises means they aren’t able to buy homes earlier in life and pay off the mortgage by the time they retire? In our view, the fears here illustrate how many still believe the Fed is responsible for propping economic growth—a big misperception, in our view.

Tax Scams Are in Full Swing. Here’s How to Protect Yourself

MarketMinder’s View: With tax season upon us, here is a solid roundup of common tax fraud types and how to avoid them. Beyond specific tips, we found this a useful warning: “‘Attackers will target people when they know there is a topic or some relevance they can attach to. That’s how they establish trust or credibility,’ said Tim Sadler, the CEO and co-founder of Tessian, an e-mail security company. ‘Everybody knows it’s tax-filing season now.’” This is also why retirees are targets of scams centered around retirement topics like Social Security or Medicare. Timely, plausible-sounding narratives plus threats if you don’t comply can be a potent combination. However, identifying crooks isn’t difficult if you know what to look for. For more scam-spotting tips, see our 1/24/2020 article, “New Year Brings New Scams to Watch Out For.”

German Economy Records Zero Growth in Fourth Quarter

MarketMinder’s View: On Friday, Germany released its long-awaited Q4 2019 GDP figures, revealing “the German economy posted zero growth in the final quarter of 2019.” With Q3 GDP growth revised upward to 0.2% q/q, full-year GDP grew 0.6%. Germany doesn’t release a detailed GDP breakdown in the first estimate, but commentary from the national statistics office said household spending “slowed down markedly” in Q4, with business investment mixed (machinery and equipment down, construction and other fixed assets up), and exports fell a bit as imports inched up. So, not a great report, but also not awful, and considering we are halfway through Q1 2020, stocks have likely long since moved on. Especially since lackluster German data aren’t new or surprising, considering manufacturing’s global soft patch began well over a year ago.

Your Broker and You: New Rules, Old Tricks

MarketMinder’s View: On June 30, the new rule mandating brokers act in their clients’ best interests takes effect, ushering in what some hope will be a radical transformation of the investment industry. Alas, while the rule is well-intended, as this piece shows, it won’t guarantee investors receive the best advice. Nor will they be free of conflicts of interest, which always exist in some form or fashion. “The rule may discourage some professionals from pushing private partnerships, real-estate funds or complex annuities, where costs can exceed 10%. But such pricey investments remain permissible, so long as the broker determines that they are otherwise appropriate for you. … brokers may still hawk the riskiest, costliest products—as long as they check all the new regulatory boxes first.” Thus, it remains vital to do your due diligence regardless of the rules. In our view, one simple question can help you weed out relationships or products that may be less beneficial and more expensive: Ask how your broker is compensated in general and what sort of compensation they will receive from any sale. That will help you assess where their personal interests lie and how that might be influencing their recommendation.

Fianna Fáil Rules Out Path to Power Along With Sinn Féin

MarketMinder’s View: The latest development out of Ireland: “Ireland’s largest party Fianna Fáil will not consider going into government with Sinn Féin, it said on Thursday, in a decision that is likely to prevent the left-wing nationalists from entering power for the first time.” This comes after Sinn Féin won the popular vote in Ireland’s general election last weekend, causing some jitters in Irish stocks due to the party’s historical alleged ties to sectarian violence before 1998’s peace agreement in Northern Ireland as well as its left-wing agenda. But now it looks highly unlikely the nationalists will enter government. Now talks center on a potential alliance between Fianna Fáil and the other mainstream center-right party, Fine Gael, which will take some time and might not come to pass. Ultimately, whether Ireland gets a repeat election, a weak coalition or minority government, the likely outcome is gridlock—another example of fringe parties’ ascendance resulting in not much legislative change. Stocks should be a-ok with that, as they have been. For more, please read our 2/11/2020 commentary, “A Common Thread Between Germany and Ireland.”

Industrial Output Slumps in January for Fourth Decline in Past Five Months

MarketMinder’s View: US January industrial production fell -0.3% m/m—the fourth decline in five months. However, as this piece notes, that drop came mostly from some one-offs: unseasonably warm weather denting utilities output (affecting demand for home heating) and slower aircraft production (related to a certain company whose names rhymes with ‘going’ suspending its 737 MAX production). “Excluding civilian aircraft, manufacturing rose 0.3% [m/m].” Time will tell whether green shoots are taking root in US manufacturing, which has slowed alongside global factories. Either way, US growth doesn’t depend on manufacturing, as most of America’s GDP comes from services, although a manufacturing recovery would likely help sentiment keep warming.

US Retail Sales Rise 0.3% in January, But Core Sales Unchanged

MarketMinder’s View: US retail sales started the year off positively, rising 0.3% m/m in January, matching estimates. Yet the titular “core” retail sales, “which exclude autos, gasoline, building materials and food services, were unchanged in January after rising by a downwardly revised 0.2 percent [m/m].” Note, the Census Bureau’s press release doesn’t include this as an “official” core metric, tempting us to point out that we, too, could probably back things out of any headline data release to spin good news as meh. We also think it is a little more interesting to just look at the categories. All rose except electronics and appliance stores, health and personal care stores, gasoline stations and clothing stores. General merchandise (e.g., department stores) and online shops grew nicely. So, it seems like a stretch to argue consumption is flagging overall, especially since retail sales is a smaller chunk of consumer spending than services, which this gauge mostly ignores. Overall, the data here seem right in line with the longer-term trend of occasionally choppy growth.

Sajid Javid’s Exit Leaves Boris Johnson in Control of Treasury

MarketMinder’s View: Across the pond, Sajid Javid stepped down as UK Chancellor of the Exchequer, an unexpected development that has spurred copious speculation about the power struggle between Prime Minister Boris Johnson and members of his cabinet. While the news strikes us as an excellent plotline for an episode of The Thick of It, some are echoing the titular claim that Johnson will now wield even greater influence over the country’s finances, as he is planning to consolidate Treasury and 10 Downing Street staffers. Yet for all the chatter, there is no way to know what this means for UK tax policy and other fiscal matters. Some unnamed sources say Javid was the brains behind the leaked plans to pursue a wealth tax and remove some pension tax relief, which roiled investors earlier this week, and they speculate his departure makes those endeavors less likely. Others, including those referenced in this article, suggest the opposite is true. We won’t know for sure until the Budget comes out in all its red-briefcase glory in three weeks. Until then, we don’t see any point in speculating. Regardless of what emerges in the Budget, presuming big proposals pass seems premature. For one, ongoing trade deal talks with the EU—along with sorting out other post-Brexit matters—command a lot of attention and time. Moreover, Conservative Members of Parliament represent a much broader geographic base than they did under Theresa May and David Cameron’s governments, injecting more competing interests—and probably some intraparty gridlock. UK political developments are worth monitoring, but as always, watch what politicians do, not what they say.

A Deeper Dive Into New Rules for Retirement Plans

MarketMinder’s View: Retirement plan rule changes aren’t exactly riveting reading, but they are important—especially since they may alter your financial plan. The tips here review new rules surrounding required minimum distributions (RMDs). These rules limiting non-spousal beneficiaries to a 10-year period to withdraw the funds—eliminating the so-called “stretch IRA” that allowed those who inherited an IRA to spread RMDs over their (potentially much longer) life expectancy. It also offers some suggestions for those impacted. A snippet here for those wondering what to do given the stretch IRA has, for most beneficiaries, gone the way of the dodo: “One solution is for the account owner to use the IRA for living expenses or charitable contributions and leave other assets to heirs, such as stocks, bonds, and real estate that receive a step-up in basis at death. (This raises the asset’s tax basis to the market value on the date of death, eliminating the capital-gains tax on the appreciation during the deceased person’s lifetime.) The IRA owner can also give the IRA to a spouse, who can stretch distributions over his or her lifespan. For example, a 70-year-old widow could take payouts over a 27-year life expectancy and then leave the account to younger heirs.” If you have questions about your personal situation, make sure to consult the appropriate people—e.g., your tax adviser. For some more high-level points, see our 12/19/2019 commentary, “The Basics of the Retirement Bill Congress Just Shoehorned Into a Spending Deal.”

China Coronavirus Adds to German Automakers’ Woes

MarketMinder’s View: As pundits await Germany’s Q4 GDP release tomorrow, the country’s automakers’ struggles don’t appear to be going away any time soon—with the Wuhan coronavirus the most recent headwind. “The virus is the latest headache for the German auto industry, already reeling from pollution concerns, exacerbated by the ‘Dieselgate’ emissions scandal, waning global demand amid weakening economic growth, higher tariffs caused by US-China trade tensions and a costly transition to electric and self-driving cars.” German carmakers have been stuck in a soft patch for the past couple years—part of heavy industry’s global slowdown. But don’t overestimate the impact. For all the attention Germany’s auto sector garners, it comprises about 14% of annual GDP—dwarfed by the services sector’s 69% (per the OECD). The latter has kept expanding despite industry’s stumbles, an overlooked positive. As for the potential impact of the Wuhan coronavirus, this point buried in the conclusion offers some perspective: “Auto analysts say some lost sales have only been postponed and that orders will rebound in the coming months. In fact, new car sales could even go up in the longer term as the experience of disrupted public transportation and ride-hailing services during the crisis may prompt more people to buy their own cars."

Inflation Could Heat Up With World’s Workshop Locked Down

MarketMinder’s View: This argues consumer goods prices will rise as Chinese factories remain offline due to the coronavirus, causing shortages—hence, we supposedly shouldn’t get used to mild inflation. While we appreciate the acknowledgement that supply and demand influence prices, we don’t think the thesis holds. Inflation is a broad rise in prices of goods and services across the entire economy. It takes more than a short factory closure in one country to cause the sort of major, lasting shortages that would drive prices higher—especially since such closures tend to delay production, not delete it outright. To us, this seems like an example of trying to wring every last drop out of a fresh story in an otherwise slow news cycle—headline fodder, not actionable information for investors.

Euro Zone Industrial Output Tumbles More Than Expected in December

MarketMinder’s View: December’s “industrial production fell 2.1% month-on-month in the 19-countries sharing the euro, the EU statistics agency Eurostat said, in a slump that was worse than the 1.6% fall predicted by economists polled by Reuters.” This may lead to a “possible downward revision of gross domestic product (GDP) growth for the last quarter. At the end of January, before the output data was [sic] known, Eurostat estimated the euro zone grew 0.1% in the last quarter.” But we don’t think this is anything for investors to fret. Markets generally look ahead to the next 3 – 30 months, not back to 2 – 5 months ago. They also move most on surprises, and manufacturing woes aren’t exactly shocking. Plus, more recent data show some green shoots forming and continued growth in the services sector, which is much larger than manufacturing. For more on the eurozone’s economic outlook, please see our 1/31/2020 commentary, “As January Ends, Global Economy Still Looks Healthy.”

New Credit-Loss Standard Could Benefit Lenders if Regulators Loosen Capital Requirements, Study Says

MarketMinder’s View: We recently examined a new FASB bank accounting rule called Current Expected Credit Losses (CECL), which forces banks to estimate—and provision for—expected losses when they make loans. Previously, they had to take losses only when there was evidence of loan impairment—actual failure to pay it back on its terms. We don’t think the new rule is a net benefit—it could exacerbate a downturn by discouraging new lending when it is needed most—but it isn’t surprising either, which is what matters for markets. Banks knew it was coming—and have prepared for it—since the FASB finalized the rule in 2016. Plus, a similar rule the eurozone implemented in January 2018 hasn’t damaged lending there. CECL is pretty much a known quantity. With all that said, this article highlights a study that suggests one potential benefit: CECL could enable the Fed to lower regulatory capital requirements, making credit more plentiful and offsetting one of the potential drawbacks. “CECL and capital requirements could serve as substitutes to control excessive risk-taking, the research suggests. As a result, looser capital requirements would spur lenders to provide more loans, thus strengthening their bottom line and aiding the economy, said Haresh Sapra, an accounting professor at the University of Chicago and one of the study’s authors.” Whether it does or doesn’t remains to be seen, depending in part on whether “banking regulators and accounting standard-setters coordinate on rule making.” The devil is in the details—and how it is applied—but if nothing else, continued attention helps ensure CECL isn’t flying under the radar and amassing surprise power.

GOP’s 21% Corporate Tax Rate Locked in by Congressional Gridlock

MarketMinder’s View: Before digging in, keep in mind MarketMinder is politically agnostic, and we assess political events solely for their potential market impact. One political football many think has market implications: the corporate tax code, a surefire talking point during election season. As this article notes, many Democratic presidential challengers favor raising marginal rates up to 35% from 21% now, and President Trump suggests slashing it further to 15%. But before cheering or jeering any forthcoming changes, corporate tax rates won’t rise “unless Democrats sweep control of Congress and the White House,” and they won’t fall “unless the GOP also wins back the House.” It is hard to form probabilities on head-to-head contests with end candidates still unknown, much less outcomes’ likelihoods. We suggest investors refrain from leaping to any policy conclusions just yet. Election uncertainty remains high, but as clarity increases that should fall, relieving sentiment if folks’ worst fears aren’t realized—typically a tailwind for stocks as November approaches. Plus, what matters most for businesses isn’t necessarily the tax rate, but rather how confident they can be that the rate will stand for a while. If gridlock reduces uncertainty on that front, so much the better.

Bitcoin Bounces Back Over $10,000 Amid Coronavirus Concerns

MarketMinder’s View: In a sign popular sentiment toward bitcoin remains a bit loony, people apparently see it as a “safe haven” asset. We have to ask: How can something that boomed to nearly $20,000 by late 2017—then busted to $3,196 in December 2018—be a safe haven? Generally speaking, if you are going to shelter your assets from global trauma, you would pick something liquid and stable with low expected volatility, like top-notch government bonds. They aren’t risk free, but they are much more reliable than digital securities that have proven to be wild speculative bets. If short-term riches are something you seek when stocks get volatile, we guess that is your prerogative, but nothing here even remotely resembles sound long-term portfolio management, in our opinion. Reacting to short-term volatility is bad enough. Piling into a speculative investment on top of it? We would suggest not.

UK GDP: British Economy Stalls Amid Political Uncertainty

MarketMinder’s View: While flat quarter-over-quarter Q4 UK GDP growth isn’t great news, it also isn’t surprising. Recent monthly data already showed “consumer spending slumped over the Christmas shopping period and manufacturing output nosedived in the run-up to the general election”—both likely related to households and businesses stockpiling ahead of the (missed) Halloween Brexit deadline. Moreover, economic activity appears to be stabilizing after the Conservative Party’s decisive win in December’s vote all but assured Brexit would occur on January 31—as it did. “The ONS said the economy grew by 0.3% in December from the previous month, faster than forecast by City economists. Closely watched surveys of the service sector – the cornerstone of the economy – also rebounded in January to post the strongest upturn in activity since mid-2018.” Uncertainty isn’t wholly gone, as UK/EU trade deal negotiations are ongoing. It wouldn’t shock us if no-deal Brexit fears resurfaced as the year-end deadline nears—this article may even be an early example. But companies now know the basics of the UK’s post-Brexit EU relationship, which may help end the stockpile-and-wait cycle. For more, check out our 1/31/2019 article, “As January Ends, Global Economy Still Looks Healthy.”

Household Debt Jumps the Most in 12 Years Fed Report Says

MarketMinder’s View: This article highlights some big numbers about US debt. “Total household debt balances rose by $601 billion last year, topping $14 trillion for the first time, according to a new report by the [New York Fed]. … The growth was driven mainly by a large increase in mortgage debt balances, which increased $433 billion and was also the largest gain since 2007.” Auto loans, student loans and credit card debt also rose. But affordability matters more than absolute levels, and rising disposable income—up 30.2% over the last decade, per FRED data—means US households have been able to meet their obligations, as the article handily shows: “… The level of household debt service as a percentage of disposable personal income is at all-time lows going back to 1980.” In our view, this shows US consumers’ finances are in fine shape. 

Indonesia and Australia Move to Implement Trade Deal

MarketMinder’s View: Headlines tend to focus on tariff tiffs and harsh trade rhetoric while progressing trade agreements get short shrift. In that spirit, we highlight this news out of the Asia Pacific region: Australia and Indonesia are planning to implement a long-awaited trade deal. “The agreement will eventually see the elimination of all Australian trade tariffs, while 94 percent of Indonesian duties will be gradually eliminated. Greater access to the Australian market is expected to spur Indonesia’s automotive and textile industries, and boost exports of timber, electronics and medicinal goods. The pact also includes improved access for Australia’s agriculture industry to Indonesia’s vast market of 260 million people.” This pact has been in the works since 2010, so it isn’t exactly breaking news. Moreover, the benefits of freer trade will manifest themselves in the mid- to long-term rather than immediately. Still, it is a counterpoint against worries protectionist trade policy is the new normal.