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.


Pound’s Plummet Underlines Schoolboy Error by Kwasi Kwarteng

MarketMinder’s View: Please note, MarketMinder’s analysis is nonpartisan and doesn’t favor any politician or political party—whether in the US or abroad—as our commentary focuses strictly on a policy’s potential economic and market impact. Headlines today have highlighted the volatility in UK markets, extending last Friday’s selloff, which many blame on the UK government’s recently announced “Growth Plan.” This brief piece points to three reasons why the pound is falling, including momentum trading, fear that proposed tax cuts will worsen the government’s finances and the possibility the Bank of England (BoE) could intervene with more rate hikes in the near future. In our view, these attempts to pin two days of negative market volatility on the new UK government’s economic proposal speaks to today’s rampant pessimism. From a fundamental perspective, the UK’s financial situation isn’t in dire straits. Similarly, central bank rate hikes aren’t inherently negative for markets or the economy. But on a daily basis, sentiment can swamp fundamentals as emotions cloud investors’ viewpoints—which is why investor Ben Graham called stocks voting machines over shorter periods of time. We think that is the case today. Note, though most analyses treat the Truss government’s plan as a given, it is still just a proposal—it is entirely possible it doesn’t pass as-is if different factions of the Conservative Party push to water down some of the plans, or her government revises them. And, even if they don’t, we don’t see these measures as so tremendously huge. In our view, it is critical for investors to keep a stiff upper lip and refrain from acting on the fear of the possible—successful investing is based on what is probable. For more, see today’s commentary, “On the UK’s Controversial ‘Growth Plan.’

Likely Victory for Italian Right Portends Risks But No Lurch Into Extremism

MarketMinder’s View: Italy held a general election on Sunday, and based on the initial results, a right-wing coalition comprised of the Brothers of Italy, the League and Forza Italia won about 44% of the popular vote. That equates to about 59% of the lower house’s seats and 58% of the Senate seats—good for an absolute majority, though short of a supermajority needed to rewrite the country’s constitution easily. Giorgia Meloni of the Brothers of Italy will likely be the next prime minister, and already, many political experts are spilling pixels about what the new government will (and won’t) do from a policy perspective. Now, as always, we don’t favor any politician or political party over another—our focus is on politics’ market and economic impact only. So while much of this analysis speculates about a Meloni government’s future actions, from its approach to the EU to its appetite for reform, we think the back half offers some sensible reality to consider. “But no less obvious is the possibility that the rightwing parties—which hardly see eye to eye on all economic matters—will descend into internal squabbles that impede reform. The dismal record of [former premier Silvio] Berlusconi’s governments on economic reform serves as a reminder that even a healthy parliamentary majority for the right is no guarantee of progress in Italy.” As the concluding paragraph notes, Meloni “… will know that most Italian prime ministers since the second world war have never come close to serving a full five-year term, falling prey instead to political intrigues and loss of authority.” Instability is a constant in Italian politics, worth keeping in mind amid the heated discussion about what the new government will be able to do. Many people decry this, for its blocking of what they see as needed reforms. Yet this gridlock also prevents sweeping legislation that creates winners and losers and radically shifts the regulatory sands.

IPO Stocks Have Tumbled, Hobbling Demand for New Listings

MarketMinder’s View: As a reminder, MarketMinder doesn’t make individual security recommendations, and the companies mentioned here are merely coincident to two broader themes we wish to highlight. The first: We have long noted that IPO (initial public offering) really stands for “it’s probably overpriced,” and these data hammer home that point. “Roughly 87% of companies that went public in the U.S. last year are trading below their offering prices, down more than 49% on average as of Friday’s close, according to Dealogic. By rough comparison, the S&P 500 is down 23% this year, while the tech-heavy Nasdaq Composite has fallen 31%.” Companies tend to go public when prices are most favorable to the sellers, and buying when the hype is highest often isn’t a successful investing approach. The second theme: using IPO activity as a sentiment gauge. On that front, “The IPO market is having its slowest year in more than a decade, with just $7.2 billion raised in traditional new stock offerings in the U.S., as a volatile stock market, escalating fears of a recession and other factors take their toll. … Also chastened by the dismal market conditions are companies waiting in the wings to go public. For them, falling stock prices are contributing to significantly lower valuations, which damp the allure of a public debut. That has prompted some companies that had planned to go public this year to hold off, hoping conditions will improve in 2023, according to IPO advisers and lawyers.” In our view, the IPO market reflects the broader pessimism prevalent today—and, perhaps counterintuitively, we think that is a reason for optimism since stocks move most on the gap between expectations and reality.

German Ifo Business Confidence at 28-Month Low

MarketMinder’s View: For a glimpse at companies’ moods over in Europe’s largest economy, “German business confidence declined to the lowest level in more than two years in September signaling that the economy is slipping into a recession, survey results from the ifo Institute showed on Monday. The business confidence index fell sharply to 84.3 in September from 88.6 in August. This was the lowest since May 2020 and also below economists’ forecast of 87.0.” Sentiment fell across all major economic sectors, providing fuel for those forecasting a German recession in the near future. Now, sentiment doesn’t often predict economic activity, but we acknowledge that German GDP may indeed contract in the coming quarters tied largely to high energy costs and inflation. But from an investing perspective, we think stocks this year have behaved as if a shallow recession is in the offing, largely pre-pricing much of that weakness already. That doesn’t preclude further negative volatility, which can arise for any or no reason. But given the widespread discussions of a German—and broader eurozone—recession and super-low sentiment gauges like Ifo’s reflect, we don’t think that is likely to carry the negative surprise power capable of shocking global markets and triggering much more downside. For more, see last week’s commentary, “An End-of-Summer Sentiment Check-In.”

IRS Steps Up Efforts to Target U.S. Taxpayers Who Failed to Report and Pay Taxes on Cryptocurrency Transactions

MarketMinder’s View: “The IRS continues to chase U.S. taxpayers who failed to report and pay taxes on cryptocurrency transactions with a new court order allowing a summons for customer records. The agency will issue a so-called ‘John Doe summons’ requiring M.Y. Safra Bank to turn over crypto transaction data for SFOX, a digital currency prime broker that used the bank, with more than 175,000 users and over $12 billion in transactions since 2015, according to the U.S. Department of Justice. It’s not the first IRS summons for crypto records, but it’s unusual because the broker seems to be ‘quite small,’ signaling the possibility of more to come, said Andrew Gordon, tax attorney, CPA and president of Gordon Law Group in Skokie, Illinois.” Though the IRS has asked about virtual currencies on tax returns since 2019, there has been a lot of uncertainty in terms of the type of financial activity to track. So, as the experts here note, crypto investors should be proactive and consider consulting with a tax professional with digital currency expertise to ensure they are on the right side of the tax man.

SEC Set to Let Wall Street Keep Payment-for-Order-Flow Deals

MarketMinder’s View: According to “people familiar with the matter,” “The US Securities and Exchange Commission will stop short of banning payment for order flow, a controversial way to process retail stock trades, as it proposes new rules for the $48 trillion American equities market.” If this turns out to be the case, we see that as largely good news for American investors. Payment for order flow—the practice of routing client trades to execution firms versus markets like the NYSE for payment—has long been criticized for allowing the firms to see orders before they execute and potentially providing worse pricing as a result. The evidence of this is dodgy at best, but it is loosely possible. However, what is clear: Payment for order flow has crushed commissions and led to the rise of low- or no-cost trading. That is fundamentally important and very likely outweighs the possible negatives in pricing, which are themselves already regulated by the SEC.

Euro Zone Likely Entering Recession as Price Rises Hit Demand

MarketMinder’s View: S&P Global’s preliminary September purchasing managers’ index for eurozone manufacturing and services was below 50—in contraction—leading to yet more warnings of an impending recession. This composite gauge combining the two sectors has been contractionary for three straight months, with Germany hit harder than France (the only two nations included in this early read). Still, though, it is worth remembering: At 48.2, the composite eurozone PMI is barely contractionary. This gauge measures the breadth of growth, not the magnitude. Such narrowly contractionary readings can be at odds with output gauges, if the minority of firms grew faster than the slight majority contracted. We aren’t saying that will happen, but it could. Regardless, though, the implied contraction from such readings doesn’t support notions of a deep recession many fear coming true. With eurozone stocks in a bear market (typically prolonged and fundamentally driven decline exceeding -20%) and Germany down more than many of its neighbors, there is a high likelihood economic weakness is already reflected in stock prices. If there is a recession in Europe, it could be a counterintuitive relief if conditions aren’t as bad as feared.

Inflation May Save You Money on Your Taxes

MarketMinder’s View: This year’s high inflation certainly isn’t good. But there are some adjustments worth noting that aren’t all bad. This highlights one aspect—the fact that the IRS indexes several aspects of the tax code for inflation, including the standard tax deduction and income tax bracket thresholds. “This year, the middle federal tax rate of 24 percent applied to ordinary income up to $89,075 for a single filer and up to $178,150 for a couple filing jointly. Next year, the upper income thresholds for that bracket are projected to increase to about $95,375 for single taxpayers and $190,750 for couples. (The Internal Revenue Service usually announces official numbers in late fall.)” For those whose incomes haven’t kept up with inflation, that could spell a modest tax benefit. In addition, pending legislation would index retirement account contributions to inflation, which would permit greater contributions to tax-sheltered savings vehicles. Again, none of this offsets the pain from inflation this year. But it is worth noting.

US Is Inflating Its Debt Away After Unprecedented Spending Binge

MarketMinder’s View: This quick-hit article makes the point that rising inflation amid an overall growing economy in nominal terms—plus reductions in the deficit—will cut US debt as a percentage of GDP. That doesn’t mean it will fall in absolute terms, of course. But as a share of GDP, this projects it falling from 101.3% to 95.8%, a large drop in historical terms. But the “good” takeaway here—that it means debt will be easier to service—is flat wrong. You don’t repay debt with GDP, you repay it with tax revenue. Tax brackets are indexed for inflation, but to the extent nominal growth means higher tax revenue that could help service debt. Regardless, the US’s interest payments as a share of tax revenue were 8.7% of tax revenue in 2021, way below levels seen in the 1980s and 1990s, and well off 1991’s peak of 18.8%. (Data from the St. Louis Fed.) That larger share of tax revenue didn’t spur default and it didn’t forestall economic growth thereafter. The US doesn’t need to inflate away debt it doesn’t have a problem servicing.

Euro-Zone Consumer Sentiment Hits Record Low on Energy Woes

MarketMinder’s View: “A monthly gauge [of consumer sentiment] from the European Commission fell to -28.8 in September, according to data released on Thursday. That compared with analyst estimates for a decline to -25.5. Economists say it’s almost inevitable that the 19-nation currency bloc will enter a recession in the coming months, with Russia throttling gas supplies and prices soaring.” We don’t dismiss the possibility of recession—not to mention the associated hardships for households and businesses tied to high energy prices and the prospects of rationing. But from an investing perspective, we urge readers to remember that surprises move markets most. At this point, with so many seeing a downturn on the Continent as inevitable, we think it is highly likely forward-looking markets have already pre-priced that outcome to a large extent—sapping most of its negative surprise power and increasing the likelihood of positive surprise. For more, see this week’s commentary, “An End-of-Summer Sentiment Check-In.”

Explainer—Why the Weak Yen Isn’t a Big Boost for Japan Inc Anymore

MarketMinder’s View: One of the top headlines today: Japan’s Ministry of Finance intervened to support the yen for the first time since 1998, as the country’s currency is the worst performer among major economies this year. The weak yen—which has made imports more expensive, an issue for a country reliant on external energy sources—is tied to the Bank of Japan’s unorthodox monetary policy emphasizing ultra-low, even negative, interest rates while most of the world’s central banks hike. (Currencies generally tend to chase higher expected yields.) In our view, Japan’s intervention isn’t likely to be very effective over the longer term, as global currency moves (particularly the US dollar) matter most, and few single nations acting against the global tide could sway markets for long. However, we thought this concise article helpfully describes why the weak yen—which policymakers actively sought in the not-too-distant past in an effort to boost exports—isn’t some magic bullet for Japanese exporters. “Almost a quarter of Japanese manufacturers’ production is carried out overseas, according to the latest trade ministry data. That compares to around 17% a decade ago and less than 15% two decades ago. … The weakness in the yen has driven up the cost of fuel and other commodities for manufacturers at home. Critically, it is also hitting household spending and consumer confidence in the domestic market - adding to the pain for a creaking economy. The recent rapid declines - the currency has lost about 20% versus the dollar since the start of this year - also make it difficult for companies to plan for the future.” We won’t predict what the Bank of Japan will do next (monetary officials’ future actions are unknowable), but in our view, this is the latest evidence that central bankers’ “extraordinary” measures aren’t as economically stimulative as so many think. For more, see our June 23 commentary, “The Bank of Japan Keeps Swimming Upstream.”

UK in Recession, Says Bank of England as It Raises Interest Rates to 2.25%

MarketMinder’s View: Today the Bank of England’s (BoE) monetary policy committee (MPC) voted to raise its key interest rate by 0.5 percentage point to 2.25%, following the Fed, the Bank of Canada, the Reserve Bank of New Zealand and others in tightening monetary policy. The BoE’s move was unsurprising, though less than the 0.75 percentage point hike some market participants anticipated. More interesting, in our view, is the recession-related chatter. Most headlines we saw, this one included, make it seem like the BoE just declared the UK is in recession. However, in reviewing the meeting minutes, the MPC doesn’t use the term once. Rather, “recession” headlines seemed to be based on the BoE’s estimate of Q3 GDP contracting -0.1% q/q. Since Q2 GDP fell -0.1%, a Q3 dip would meet a popular definition of recession (two or more consecutive quarters of contracting GDP). While this is possible, it isn’t the official definition, nor is a Q3 contraction a lock (we won’t know either way until the Office for National Statistics releases its preliminary estimate of Q3 GDP on November 10). Heck, Q3 isn’t even over. In our view, the widespread desire to declare a UK recession reeks of the pessimism of disbelief, as dour sentiment feeds into the dominance of bad news. But, perhaps counterintuitively, confirmation of a Q3 GDP contraction may actually be a positive, as investors could then accept that the outcome they feared actually happened—allowing them to move on. Besides, if you wish to call two straight -0.1% quarters a recession, it is the shallowest possible—suggesting fears of a deep downturn remain a bit excessive.

America Has Lost Its Oil Buffer

MarketMinder’s View: The titular buffer refers to the Strategic Petroleum Reserve (SPR), America’s stockpile of emergency crude oil, established in the 1970s to reduce the impact from potential oil supply disruptions. Now, this discussion of the SPR wades into political and energy policy waters, and as a reminder, MarketMinder’s analysis is nonpartisan and focused on the potential economic and market impact only. In that vein, we think the concerns expressed here are overstated. Consider this from a supply perspective at both the global and domestic level. SPR developments generate headlines, but as the article notes, the Energy Department has released about 155 million barrels of crude since March 31. That implies a draw of around 900,000 a day—just 1% of global oil demand, not exactly a gamechanger. Moreover, while this credits recently falling US gasoline prices to SPR drawdowns, we think that ignores a bigger, global development: severe Russian oil production cuts tied to sanctions over its invasion of Ukraine never manifested. “The International Energy Agency initially thought Russia’s oil production would be cut by 3 million barrels a day after its invasion of Ukraine. … That turned out to be a wild overestimate. As of August, Russia’s exports were down just 400,000 to 450,000 barrels a day from prewar levels, according to the latest IEA report.” Regarding the second half of this piece, which worries this year’s SPR drawdowns leave the US in a compromised position should a big oil supply disruption occur, consider: Per the EIA, in the week ending September 16, US inventories of total crude oil and petroleum products stood at 1.2 billion barrels excluding the SPR. Furthermore, the US is now the world’s largest crude oil producer, suggesting it can replenish stockpiles much more easily today than in the 1970s or early 1980s. Sure, SPR news may have some short-term effects—primarily on the sentiment front—but the impact on global oil supply isn’t nearly as significant as many think. For more, see last year’s commentary, “Why the Strategic Petroleum Reserve Release Isn’t a Game Changer.”

Taiwan Export Orders Resume Growth in August, Outlook Mixed

MarketMinder’s View: Please note, MarketMinder doesn’t make individual security recommendations. Specific companies this article mentions are purely to illustrate a broader economic trend. Namely, Taiwan’s “Export orders, a bellwether for global technology demand, grew 2 per cent last month from a year earlier to US$54.59 billion, the Ministry of Economic Affairs [MOEA] said on Tuesday (Sep 20). Analysts had expected a drop of 2 per cent. August’s rise followed a 1.9 per cent annual contraction in July. Orders for telecommunications products rose 3.1 per cent in August from a year ago due mostly to cellphone orders ... Orders for electronic products jumped 15.4 per cent, driven by semiconductor demand for high-end computing, automobiles and stockpiling for new consumer electronics, the ministry said.” Notably, the rise in August orders—a record high for the month, per MOEA—came despite a -25.5% y/y decline from China, with export orders to the US and Europe accelerating to 7.5% y/y and 14.6%, respectively. As the article reports, MOEA expects “... new consumer electronics products from ‘various international brands,’ demand for high-end computing, 5G and automotive electronics would help export orders remain stable. But the ministry said high global inflation, increased geopolitical risks and the emergence of new COVID-19 strains were all uncertainties pressuring export order growth.” In our view, ongoing export order growth from a key Tech hub in the global supply chain highlights underlying demand and businesses’ resilience in the face of myriad fears this year—an underappreciated positive for stocks.

German Gas Storage 90% Full Ahead of Winter Despite Russian Cuts

MarketMinder’s View: With winter coming, Germany’s feared energy crunch may not be as harsh as initially projected. As the article states upfront, “Gas storage facilities in Germany are more than 90% full, according to data released by the Aggregated Gas Storage Inventory (AGSI), a European energy data platform. The German government has planned for 95% of storage capacity to be filled by November.” This is with pipeline gas from Russia—which provided about 40% of EU supply pre-Ukraine invasion—down to a trickle. Making up the difference in faster-than-expected fashion? Piped gas from Norway and liquefied natural gas (LNG) from around the world, including the US, the Middle East and China. Now, even with storage nearing full, Germany isn’t out of the woods. Looking ahead, as German Economy Minister Robert Habeck notes, “That means, however, that the storage facilities will be empty again at the end of the winter—in this case really empty, because we are going to use the gas.” However, with the construction of new LNG terminals starting this week and Berlin signing long-term contracts to keep them busy, it seems Germany (and Europe generally) is finding ways to fill energy shortfalls—increasing the likelihood of a better-than-feared outcome to Europe’s energy crisis.

Fed Raises Rates by Another Three-Quarters of a Percentage Point, Pledges More Hikes to Fight Inflation

MarketMinder’s View: Welp, surprising no one, the Fed “... took its federal funds rate up to a range of 3%-3.25%, the highest it has been since early 2008, following the third consecutive 0.75 percentage point move.” As we previewed last week, this brings overnight rates to what three-month T-bills have priced in for weeks. Most of the discussion now, as this article relates, concerns how much further the Fed will go, when it will stop, whether cuts may follow and all the alleged consequences—including a potential recession. While we don’t dismiss the possibility—and we are well aware the Fed is capable of making mistakes—we also don’t think anything its members say or forecast is worth agonizing over. They can, and often do, change their minds. The dot plot of Fed officials’ expected rates proves it, having swung wildly all year. Beyond that, nothing they are discussing is new here—markets have chewed it over for months now, in our view. That doesn’t mean hikes and associated chatter won’t stir sentiment and stoke volatility, as seemingly happened Wednesday. But we doubt such long-discussed factors have a lasting impact from here.

Inflation Is Best Explained by This Underrated Economic Theory

MarketMinder’s View: This piece gets a bit into the academic weeds, and we don’t agree with all of its arguments, but we found the discussion of the Quantity Theory of Money interesting and worthwhile. “In its simplest form, the quantity theory states that MV = PT. That is, the quantity of money multiplied by its velocity of circulation encapsulates all relevant transactions. (Money, velocity, prices and transactions are the respective terms in that equation.) More substantively, the quantity theory suggests that it is useful to think about the ‘M’ in this equation—the money supply—as an active causal variable for macro policy.” This theory is one explanation for this year’s hot inflation, which Nobel-laureate Milton Friedman described as always and everywhere a monetary phenomenon—the case of too much money chasing too few goods. While conceptually useful, the theory is often difficult to observe in practice because money definitions vary (e.g., does commercial paper companies use for working capital count?) and velocity measures, which Friedman thought quite static, seem to fluctuate more than economists thought and data capture. Besides, we think this article discounts some of the supply-side pressures impacting prices this year a little bit too much. However, regardless of what we think, the piece makes a powerful point Fisher Investments Executive Chairman and founder Ken Fisher made recently in a RealClearMarkets column: Even if you think money supply drove this inflation, its growth has slowed dramatically. As this article puts it, “A brighter sign is M2 [a broad money supply measure, including currency, checkable deposits, savings accounts and retail money market funds] growth, which was 5.3% year-over-year in July 2022. With 2% economic growth, that is consistent with inflation of a little more than 3%, assuming changes in monetary velocity do not intervene. Better yet, M2 growth rates have been falling consistently, from almost 14% in August 2021.” This seems to us like one of many signs that, almost no matter what you think drove inflation, evidence of nascent improvement is emerging.

August Housing Starts: Record Number of Housing Units Under Construction

MarketMinder’s View: Here is a good look around the housing market that concludes: “Homebuilders are reporting that demand is slowing, yet a large number of housing units will be delivered later this year and in early 2023 (with all these units under construction). Yesterday, the National Association of Home Builders (NAHB) reported that builder confidence declined in September, and we should expect starts to decline in coming months.” That is a recipe for lower home prices ahead, which builder and consumer surveys elsewhere confirm—and that a separate report today showing cooling rent increases for the third straight month also hint at. While this is nascent, it is a combination that suggests some improvement in shelter costs—a big contributor to recently rising core inflation—may not be far off. This is obviously mixed news in the sense that falling prices could dissuade investment in real estate construction. But shelter’s share of consumers’ costs is much greater than real estate investment’s share of GDP, so perhaps that trade is worth it, with prices running hot.

End of Sub-Zero: Europe Ditches Negative Rates as Inflation Surges

MarketMinder’s View: With the ECB hiking rates into positive territory and the Swiss National Bank seemingly set to follow suit this week, only the Bank of Japan would still have a negative policy rate, nearly winding down this foray into experimental (and bizarre) monetary policy. This article is something of a retrospective, offering a broad array of opinions—and criticisms. Central bankers say it worked: “The ECB has branded the experiment a success, estimating it caused an average 0.7 per cent of extra bank lending per year than there would otherwise have been, based on surveys of lenders. The ECB also said the policy produced an extra 0.4-0.5 percentage points of economic growth and found little evidence that big sums of money shifted into cash, lying dormant in bank vaults and safes — a key criticism levelled at the policy.” Yet critics note that: “German banks rushed to return a record €11bn of cash, mostly in €500 and €200 notes, to the ECB after its deposit rate rose to zero in July, suggesting the policy had caused some hoarding of hard currency.” Savers also noted their frustration with these policies, which penalize them. Other critiques seem like a stretch, arguing that negative rates inflated bubbles in Europe. Considering European stocks and risk assets didn’t outperform or sharply diverge from the world from 2014 through now, though, that case is a little tough to make. (The same holds true in Japan.) In our view, there is little evidence negative rates did all that much to aid growth and acted more as a minor tax on bank lending—and a bizarre one at that.

Britain’s Truss Doesn’t Expect UK-US Trade Deal Anytime Soon

MarketMinder’s View: On her first official visit to the US, Prime Minister Liz Truss poured cold water on the notion of a UK-US free-trade agreement, stating that her priorities on the trade front chiefly centered on joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership and striking deals with India and some Middle Eastern states. If that is the case, we would call it a modest disappointment, as a free-trade deal between the two nations would be a long-term plus and, “U.K.-U.S. trade talks were launched with fanfare soon after Britain left the EU in 2020, but negotiations faltered amid rising concern in the U.S. administration about the impact of Brexit, especially on Northern Ireland.” It could be that this is a negotiating ploy, trying to get America to stay out of EU-UK talks on revised Brexit terms. It could be that Truss is bluffing. You can’t know. But the reality is that for stocks in Britain and America, this isn’t make or break. Trade deals are overall positive—although they can entrench protectionism, ironically, via strict rules—but they are very long-term positives, not factors that would likely sway stocks for better or worse.