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: As the Brexit vote approaches its fifth anniversary, the retrospectives are rolling in. This is a good one that handily shows how off-base the warnings of calamity proved: “Rewind five years, to the morning after a vote that took almost everyone by surprise, and the consensus was that the British had committed economic suicide. The pound dropped by the most on record, at one point getting close to parity with the euro and even the dollar. Investors fled from the London market. A new Prime Minister was desperately searching around for some kind of strategy for leaving the EU, and business was attempting to work out how it could cope with our departure. As we now know, the predictions of Project Fear turned out to be wildly over-blown. House prices haven’t collapsed, unemployment hasn’t soared, and although some jobs have been lost, factories have not relocated wholesale to France and Spain, nor has the City decamped en masse for Frankfurt and Paris even if Amsterdam has picked up some trading business.” It goes on to highlight the changes Brexit has brought, including an increase in trade with the non-EU nations, rising wages, a nascent shift to more advanced manufacturing and signs that at least some deregulation may be in the offing. Whatever your personal opinion of all this, in our view, it all points to a country poised to beat dismal expectations, which we think explains markets’ long-running resiliency to Brexit.
MarketMinder’s View: Due to a fresh Covid outbreak in Shenzhen, maritime trade faces yet another traffic jam: “The [Yantian] port’s capacity to handle containers plummeted early this month. It was still running at 30 percent below capacity last week, the port announced, and state-controlled media said on Monday that full recovery might require the rest of June. … Long lines of container ships awaiting cargo bound for North America, Europe and elsewhere have had to anchor off Shenzhen and Hong Kong as captains now wait as long as 16 days to dock at Yantian. Small vessels mounted with their own cranes have been ferrying many containers straight from riverfront factory docks in the Pearl River Delta to container ships near Hong Kong, as exporters try to bypass delays at Yantian.” Now, we have seen this movie before—a few times. Neither the Suez Canal blockage, Brexit teething problems nor similar traffic jams at US West Coast ports had a materially negative impact on global commerce this year. They have delayed trade, not destroyed it—a fact this coverage helpfully points out. It has elevated shipping costs, but that likely proves temporary. Mostly, this is just one more sign of supply struggling to keep up with robust demand. Eventually, these things even out.
MarketMinder's View: While most of the developed world has made decent progress on vaccinations and reopening, Canada is behind the curve. With just 18% of its population fully vaccinated, much of the country is locked down, and on Friday the government delayed a full border reopening until July 21. The Public Safety Minister added more color on that on Sunday, saying the US-Canada border won’t reopen fully until 75% of the population is vaccinated. Yet the government has announced a partial loosening of travel restrictions for vaccinated citizens and residents, and the country is set to receive enough vaccines to meet its goal by late July. So despite the delay, there are green shoots on the horizon. Mostly, we highlight this as one more example that reopening progress doesn’t correlate with returns. Canada, despite its reopening lag, is far ahead of the MSCI World Index this year. Sector composition matters much more right now, and Canada is heavy on two of the world’s top performers, Energy and Financials. Not that we expect those sectors to lead from here—both have benefited from sentiment-driven countertrends that appear likely to prove fleeting, in our view. But it does show how much markets globally have moved on from the pandemic.
MarketMinder's View: Summertime is the season for sequels, and not just on the cinematic front: Congress is once again staring down the debt ceiling, which returns August 1. That is the date the Trump administration’s temporarily suspending the debt ceiling expires, and the ceiling will be equal to the amount of debt outstanding at that date. Failing a deal before then, the Treasury will begin using its so-called extraordinary measures to continue servicing debt and meeting obligations without having to borrow anew. As noted herein, analysts expect that capability to expire in the autumn, making that the real deadline. Predictably, the article then goes into handwringing about potential default and the government being “unable to fully meet its obligations on time,” followed by an avalanche of partisan grandstanding. Considering how charged this commentary is, please note that MarketMinder doesn’t favor any politician or political party, and we assess political developments like this solely for their potential market or economic impact. On that front, a couple of points. One, all of the speculating about bipartisan compromise—and the risk of chaos without it—seemingly ignores that Democrats can use budget reconciliation to raise the debt ceiling. This piece pays some heed to that, but in focusing on the potential for the debt ceiling to be included in the infrastructure spending bill, omits that reconciliation rules allow for one pure debt ceiling bill per fiscal year. So, that is an option. Two, even if extraordinary measures run out, the US almost certainly won’t default—just as it didn’t the last time that happened in 2013. The Treasury can prioritize payments, and the Supreme Court long ago interpreted the 14th amendment as requiring the Treasury to pay its debts before all other obligations. With US tax revenue dwarfing debt service costs—and Congress still able to issue new debt to replace maturing Treasurys—there is plenty of bandwidth to avoid default. In our view, this goes a long way toward explaining why no prior debt-ceiling breach caused a bear market or debt crisis.
MarketMinder’s View: Echoing a similar trend in the US, UK retail sales fell -1.4% m/m in May—not because demand weakened, but because more services reopened, enabling people to switch their spending from physical goods to restaurants, pubs, salons and other simple joys. You can even see hints of this in the breakdown of how people spent at shops in May: “The 5.7pc slide in food sales offset pockets of strength elsewhere including a 9pc jump at furniture and hardware stores as Britons rushed to snap up garden furniture for outdoor entertaining.” Plus, a bit of a drop off after April’s 9.2% m/m rise isn’t shocking, as that was a one-time boom associated with shops reopening after the third lockdown. All of this looks consistent with the post-lockdown recovery stocks have been pricing in, in our view.
MarketMinder’s View: Using some sliced and diced Fed data, this piece argues retail investors’ buy the dips mentality is the reason why the S&P 500 hasn’t yet had a correction (a sharp, sentiment-driven drop of around -10% to -20%) during the upturn that began in March 2020. Nor has it fallen -5% for the past seven months. This, it implies, is unusual given an array of seemingly negative developments including high valuations, tax talk and rate hike warnings. And if retail demand fades, not to worry, stock buybacks will pick up the slack. We have a couple of thoughts about all of this. One, volatility (or lack thereof) comes and goes without warning, for any or no reason, so reading into the last few months’ calm—and trying to draw forward-looking implications from it—is futile, in our view. Two, it is indeed fair to say sentiment is quite optimistic. Early in bull markets, coverage of strong stock demand amid perceived negatives would be filled with bubble warnings. Three, while we think stock buybacks are a net positive for stocks, all buybacks announced thus far are by definition priced in, so we don’t see the $570 billion in buybacks announced this year as a reason to be super bullish from here. They are part of the positive backdrop stock prices have already incorporated.
MarketMinder’s View: As always, we aren’t inherently for or against bitcoin or any cryptocurrency—we just think investors should weigh all risks carefully for any security they are considering buying. So we bring you this piece, which highlights a risk that isn’t new but has moved into the spotlight lately: regulatory risk. Bitcoin has long been a favorite means of payment for criminals due to its reputation for being untraceable. That reputation got shattered when the feds were able to recover a big chunk of the ransom paid in bitcoin for the pipeline cyberattack several weeks back, but officials likely won’t rely on that alone to curb bad apples’ cryptocurrency use. Regulatory solutions are now gaining traction, which could raise costs for everyone buying and selling bitcoin and its cryptofriends. “One approach might be to make it harder to use or transfer cryptocurrency once stolen, much like suitcases filled with $1 million in cash are difficult to actually spend without getting noticed. The Biden administration is proposing to adopt the same requirement for crypto that all businesses have when they are paid more than $10,000 in cash—reporting it to the Internal Revenue Service. … Such measures could make a segment of crypto transactions even beyond bitcoin a little less anonymous and decentralized—a prospect that many advocates would be loath to see. Increased regulations could also make legitimate transactions more onerous, reducing cryptocurrencies’ appeal.” So, add that to your pro/con list if you are considering cryptos, and then think about your long-term financial goals and time horizon and what really has the highest likelihood of getting you there.
MarketMinder’s View: For those curious about the interest rates the Fed tweaked higher this week, this is a good explainer. In short, the aim was to keep rates in the open market from going negative. “The Fed said it was boosting the [Reverse Repurchase Program, or] RRP rate to 0.05 per cent from zero to support ‘the smooth functioning of short-term funding markets’, one of two technical adjustments it made on Wednesday. It also raised the interest it pays on excess reserves, which are deposited at the Fed by banks, from 0.1 per cent to 0.15 per cent. Partly as a result of monetary and fiscal stimulus for the US economy, cash has been pouring into money market funds that invest in short-term government securities. The surge in demand for those securities has at times pushed yields below zero this year and threatened the viability of the $4tn industry. The rate at which investors swap Treasuries and other high-quality collateral for cash in the repo market — another staple source of income for money market funds — has also dipped negative. Wednesday’s adjustments helped to lift those rates from their ultra-low levels.” Now and then, we see criticism of the Fed paying interest on excess reserves, as if it is a big handout to banks or siphons money out of the private economy. But this news shows why Nobel laureate Milton Friedman, among others, advocated for them many years ago: Without them, it is hard for the Fed to keep short-term interest rates in line with its target policy rate. Paying these small rates and keeping them in line with the Fed’s target helps money markets function more efficiently overall. Inside baseball, yes, but market plumbing is important.
MarketMinder’s View: Yesterday the Fed released its latest economic projections—and current Fed folks’ predictions about what will happen with future monetary policy—precipitating many (many!) takes like this one about potential policy changes. We suggest tuning it all out. Markets have no preset reactions to Fed actions, let alone talk about possible ones. Moreover, Fed forecasts are only opinions, which can change frequently and aren’t ironclad. For example: “The Fed has upped its 2021 inflation forecast by a whole percentage point to a brisk 3.4%, reflecting the increases in prices across the spectrum for both consumers and producers.” Will inflation conform to the Fed’s new projections this time—when it didn’t before—or vice versa? Who knows! The Fed’s (best) guess isn’t necessarily better than anyone else’s. The article also suggests faster-than-forecast inflation means more rate hikes ahead than anticipated—and that this is somehow bad for stocks. But even though the Fed has direct control over short-term rates, how it will respond to future inflation is unknowable today. By the time we get to the projected rate increases the Fed anticipates for 2023, there could be an entirely different cast of monetary policymakers saying—and voting—differently. Predicting the future fed-funds rate is a futile endeavor, in our view—and trying to do it successfully isn’t necessary for investors. A rate hike cycle didn’t end the last bull market—worth keeping in mind should concerns about future rate hikes pick up steam again.
MarketMinder’s View: Please note that in all political matters, MarketMinder is agnostic; we assess developments only for their market impact (or lack thereof). In this case, the Supreme Court today reversed a lower court’s ruling that struck down the Affordable Care Act’s (ACA, often referred to as “Obamacare”) individual mandate, which some thought might cause the whole ACA to implode—potentially roiling healthcare providers and insurers. As the article notes, “Defenders of Obamacare worried that the Supreme Court – with its 6-3 majority of Republican-appointed justices – would scrap the law which has become a crucial element of the nation’s health-care system.” Instead, the country’s top court voted 7 – 2 to reverse the appeals court’s ruling, with support coming from two judges appointed by former President Donald Trump—a timely reminder that predictions about how judges, politicians or policymakers will act once in office are often futile. This is now the third time the ACA has withstood a challenge before the Supreme Court. Health Care stocks potentially impacted by the decision showed little reaction, which makes sense, in our view. The status quo held and the case has been on the docket for months, allowing stocks to pre-price various scenarios. Taking a step back, we think the ACA—from its inception to its ongoing aftermath—shows how markets adapt to major legislation. While big new laws create winners and losers, they don’t necessarily doom impacted sectors, either—especially if reality turns out to be more benign than originally feared.
MarketMinder’s View: As always, MarketMinder is nonpartisan and doesn’t favor any party, politician or policy. We consider political developments solely for their potential economic and market effects. With bipartisan support growing for a trillion-dollar-plus infrastructure package—11 Republican senators appear to be on board, giving the nominal Democratic majority enough support to overcome a filibuster—is a deal more likely? Not so fast, in our view. As the article details, in gaining some Republicans’ pending acceptance, “A handful of liberals in the Senate have threatened to vote against the bipartisan deal, which they say does not do enough to fight climate change or income inequality. If any Democrats oppose the plan, more than 10 Republicans would need to back it for it to hit the 60-vote threshold to pass legislation in the Senate.” The article notes additional legislative routes infrastructure and other policies on Democrats’ agenda can wend their way through Washington, all of which could stall—or disintegrate—in the process. We would make two high-level points for investors. As the wrangling evident here shows, gridlock has significantly watered down the initial infrastructure proposal. Anything passed would probably be a shadow of that. Then too, the more drawn out the process, the less any of it will surprise—and surprises move stocks the most.
MarketMinder’s View: This is a helpful explainer of the ins and outs of the joint bond issuance by all 27 EU members, highlighting the purpose (i.e., funding COVID relief) and possible future implications for countries and investors alike. As this notes, there is plenty of demand for EU bonds, “judging by the inaugural 20 billion euros sale under the so-called NextGenerationEU (NGEU) program in June. The deal gathered more than 142 billion euros of investor demand and was the largest-ever institutional bond issuance in Europe as well as the most the EU has raised in a single transaction. In October 2020, the first bond sale for the emergency jobs program drew more than 233 billion euros of orders for the social bonds, likely to be the most for any debt deal. It was nearly 14 times subscribed.” That said, the enthusiasm about having a new long-term reserve asset seems a tad premature to us. As noted here, the EU could decide this is a temporary, emergency-driven development and revert back to its prior position when the four-year plan ends—throwing cold water on hopes of this nascent market growing long term. We also think it is worth keeping in mind that EU debt isn’t a panacea—it doesn’t suddenly erase individual countries’ sovereign credit risks. While we wouldn’t overrate its potential—European markets were largely fine before “coronabonds’” advent—a budding EU bond market is a global financial development worth watching, in our view.
MarketMinder’s View: Upon the release of May Chinese economic data, some economists worry the latest numbers suggest pre-pandemic problems are returning to the surface. This piece touches on two of them: slowing industrial exports (allegedly bad because heavy industry drives Chinese growth) and a fragile real estate industry (also allegedly bad because disruptions could have negative financial and social implications). Incidentally, these are two old Chinese ghost stories—and they remain false fears, in our view. However, we found this particular observation interesting: “It is best to compare the numbers released on Wednesday to their equivalents from 2019 for a clear picture, since those aren’t distorted by the extremely unusual economic conditions of early 2020. Industrial production is up 13.6% for the first five months of the year, compared with the same period in 2019. On the same basis, retail sales have risen by 9.3%, fixed-asset investment by 8.5%, and real-estate investment by 17.9%. If a recovery led by investment in real estate and industrial production, with consumption lagging behind, sounds familiar, it may be because the same could be said of the makeup of China’s growth before Covid-19.” Well, maybe, but retail sales don’t represent the entire services sector, which also attracts a great deal of consumer spending and happens to be China’s largest economic sector now. Plus, with localized lockdowns continuing to flare up in China, it isn’t hugely surprising that heavy industry is managing to grow a bit faster than services-related gauges. So we wouldn’t read too much into the divergence, although we do agree with the broader observation that post-pandemic growth resembles its pre-pandemic trend, which in China’s case amounts to a long-running slowdown as stability takes government precedence over rapid growth. We expect other major economies to follow a similar trajectory following reopening-related pops—worth keeping in mind for investors when setting expectations about future economic growth.
MarketMinder’s View: Please note, MarketMinder doesn’t support or oppose policy—our analysis focuses strictly on the potential economic and market implications. Moreover, this article discusses climate change—a hot-button topic that can elicit strong opinions. Regardless of your personal stance, climate change falls in the realm of sociology, which doesn’t materially affect stocks’ fundamental drivers—important for investors to keep in mind, in our view. Those disclaimers aside, we thought this article highlighted an important theme: why adding to central bankers’ responsibilities isn’t necessarily a positive. While many pundits seem to think monetary officials determine the fate of the economy, central banks just aren’t that powerful. Expanding their mandates to address environmental issues—when history shows their struggles to meet their existing inflation targets—may lead to a host of other unintended consequences. “It’s true the Bank [of England] is currently only considering making bigger allocations to greener companies in its corporate bond portfolio. But Lord King is worried this could be the start of a slippery slope and that the Bank will in time be forced to take positions that will undermine its independence. The counter to this is that climate change could pose a threat to financial stability, which is the Bank’s responsibility. But, as Sir Paul Tucker, a former deputy governor of the Bank of England, told a House of Lords select committee recently, wars are bad for financial stability too. Should central banks not buy the bonds of arms manufacturers?” Adding further complexity to an already complicated job doesn’t seem like a recipe for better monetary policy, in our view, particularly when central banks haven’t exactly acquitted themselves well throughout history when it comes to fulfilling their actual economic mandates.
MarketMinder’s View: In regards to scaling, we think this article does a fine job putting the UK-Australia free-trade deal into economic perspective. Yes, the savings from tariffs amount to a rounding error in the context of GDP; yes, details still need to be worked out; yes, given the slow phase-in, the economic benefits won’t fully arrive for years; yes, trade with the EU remains integral, and a free-trade pact with Australia—or even membership in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)—won’t change that. But we think the rather dour tone here misses a broader, symbolic point: Contrary to many post-Brexit fears, the UK hasn’t turned away from the global economy. They haven’t even turned away from the European Union—though London and Brussels are griping over their agreement deal now, returning to a no-deal scenario doesn’t mean commerce will cease between the UK and the Continent. While we do think markets prefer free trade, free-trade pacts don’t unleash new commerce, just as the lack of an agreement doesn’t block trade. In our view, the UK’s eagerness to strengthen ties with other countries illustrate a bigger point: Reality is turning out to be better than post-Brexit skeptics projected. For more, see last week’s commentary, “The UK Is Lining Up Trade Deals.”
MarketMinder’s View: Please note, MarketMinder is nonpartisan and favors no party nor any politician. We share this piece to highlight a broader theme: rampant gridlock in the Beltway. At the end of March, the Biden administration released its widely anticipated infrastructure plan. We are now halfway into June, and Congress remains in fierce debate about what should and shouldn’t be included in the bill. Moreover, that debate isn’t just between opposing parties—it is happening within the party in power. “Democrats are grappling with whether to pair a bipartisan infrastructure proposal with an expansive spending plan passed on party lines — and with how soon to push forward on either bill. There’s a problem though: The party and its reed-thin majorities are nowhere near agreement on how big that spending package should be and what should be in it, with a progressive wing threatening mutiny if certain demands are not met. And they need lock-step unity in the Senate and near unanimous agreement in the House to pass anything at all under budget reconciliation. Without it, President Joe Biden and congressional Democrats could have a key campaign promise stalled indefinitely.” The rest of the article dives into what different Democratic factions want, but the upshot for investors: Congressional gridlock appears to be strengthening—an underappreciated bullish positive for stocks this year, in our view.
MarketMinder’s View: A free-trade deal between the UK and Australia may not be the biggest economic driver in the world, but we think it is quite noteworthy for what it represents. This is the first trade deal the UK has negotiated soup to nuts since Brexit took effect last year, which is warp speed compared to how long trade deals normally take. In our view, that is a huge counterpoint to pundits’ repeated warnings that Brexit meant protectionism, or the UK didn’t have the manpower or expertise to negotiate its own deals, or or or. They also managed to overcome two sticking points that threatened to delay or torpedo the agreement outright: “Details of the agreement haven’t been published yet, but the government said it would include a cap on tariff-free imports for 15 years, a measure intended to appease British farmers concerned about a flood of beef and sheep imports from Australia. The deal will remove Australia’s 5 percent tariff on Scotch whisky exports.” Even with speedbumps like the spat with the EU over customs checks on goods traveling from Great Britain to Northern Ireland, Brexit reality is vastly exceeding dreary Brexit expectations, which we think has been a modest tailwind for UK stocks this year. For more, see our 6/7/2021 commentary, “The UK Is Lining Up Trade Deals.”
MarketMinder’s View: “China has approved record amounts of investment to flow out of the country through an official scheme as authorities liberalise the local financial system against a backdrop of a rallying renminbi. A cumulative $147bn of approvals have been added to the nation’s qualified domestic institutional investor scheme, which allows investors to access assets outside mainland China through banks and other institutions. In early June, Beijing approved $10bn in new QDII allocation, the highest single amount in the history of the scheme, which was launched in 2006 and is used mainly by China’s retail investors.” While China’s long-running effort to open its capital account has moved in fits and starts, we think the timing of this latest move is noteworthy. As the article points out, the stronger yuan and rising domestic stock markets have apparently stoked concerns about domestic stability, and allowing more capital outflows is a way to let some of the air out while opening up the economy at the same time—accomplishing the Chinese government’s twin goals of shoring up financial and economic stability while slowly liberalizing the economy overall. Consider this another sign of China’s return to normal post-pandemic.
MarketMinder’s View: We will spare you a deep dive into the accelerating Producer Price Index, whose acceleration shouldn’t be shocking considering that is where supply shortages will show up the most in prices, and which isn’t a leading indicator for actual inflation or anything else. More significant here is May’s retail sales report, which showed total sales falling -1.3% m/m. This piece has an overall decent take, highlighting that sales fell not because consumption is weakening, but because more services are finally reopening—and most services aren’t in the Census Bureau’s retail sales gauge. For example, it doesn’t include travel (e.g., airfare and hotels), which likely got a big boost as tourism began to return. Services account for over half of all consumer spending, so a return to normal on that front is overall good news, even if it is widely known by now. Mostly, this development shows the follies of relying on retail sales as an indicator of consumer spending—and the broader fallacy of presuming any one metric is all-telling.
MarketMinder’s View: Lumber prices are still elevated from last year and their longer-term average, but the spike that got heaps of attention a few weeks ago has subsided significantly. “The rapid decline suggests a bubble that has burst and the question now is how low lumber prices will fall. Even after tumbling, lumber futures remain nearly three times what is typical for this time of year. Lumber producers and traders expect that prices will remain relatively high due to the strong housing market, but that the supply bottlenecks and frenzied buying that characterized the economy’s reopening and sent prices to multiples of the old all-time highs are winding down.” Helping prices fall: Companies that hoarded lumber during the shortage are now unloading it, bringing supply closer to demand. Consider this a real-time lesson in how quickly short-term supply hiccups can resolve, muting their economic impact over time—despite what all those headlines a couple of months ago would have led you to believe.