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: Not a big shocker here to us. The much-ballyhooed global minimum corporate tax deal, which 137 nations signed onto last year, has run into a delay, as OECD Secretary-General Mathias Cormann acknowledged an agreement wouldn’t go into force by next year as many had hoped. One of the reasons: politics. “Pillar 1 is facing opposition in the US Congress from Republican senators, and analysts have suggested the deal could fall if the Democrats lose control of the House of Representatives in November’s midterm elections.” It isn’t just in the US, either: “Poland has been holding back support for the EU’s directive to implement Pillar 2, but French finance minister, Bruno Le Maire, said on Tuesday he was confident an agreement would be reached.” As always, MarketMinder doesn’t favor any politician or political party—or any specific tax policy—so we share this update as a reminder that huge, globally focused agreements are difficult to implement for the exact reasons playing out now. We don’t know what the end result of this years-long process will be—a deal, a watered-down deal or no deal—but considering how slow moving it is, stocks will have plenty of time to assess the latest information and move on accordingly. For more, see our 3/17/2022 commentary, “It Still Isn’t Easy to Pass a Global Minimum Tax."
MarketMinder’s View: Both major US and global stock indexes have flirted with -20% from their early-January highs, often considered the divide between a correction and a bear market. They haven’t closed in bear market territory, but it is possible they do. In the event that happens, though, we found many of the behavioral tips here helpful food for thought for investors seeking some clear-eyed perspective and realism. For example, “During a bear market, it is hard to see anything ahead but unremitting negativity. Our tendency will be to believe that things will keep getting worse—prices will be lower again tomorrow.” Also, emotions tend to be overwhelming during these stretches: “Our ability to make good, long-term decisions during a bear market is severely compromised. Rational thought will be overcome by the emotional strains we are likely to feel—what happens if things keep getting worse and I didn’t do anything about it?” We understand and empathize with the challenges of today’s market environment, but this is a time for patience—and while it may be difficult to fathom now, we believe that patience will eventually be rewarded.
MarketMinder’s View: On Monday President Joe Biden and leaders from a dozen nations in the Indo-Pacific region heralded the Indo-Pacific Economic Framework (IPEF)—an economic platform designed to boost cooperation on global issues among members. However, cut through the rhetoric, and “There are scant details on how the new agreement is going to tackle its stated objectives such as supply-chain resilience and clean energy development, but the elephant in the room—changes to tariffs and market access—is conspicuously absent. India’s inclusion in the IPEF is particularly notable, as the country has always been skeptical about opening its markets too much. It pulled out of the RCEP [Regional Comprehensive Economic Partnership] because of the potential impact on its farmers and businesses. The fact that India is willing to join is perhaps a sign that the IPEF lacks bite to match its bark.” So for those at home wondering, the IPEF isn’t a free-trade deal or even close to a substitute for the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP, the rebranded Trans-Pacific Partnership after the US ditched it in 2016). Instead, as this piece nicely puts it, “The IPEF is therefore probably best viewed as a weak second or third best option: something that can survive domestic politics while still sending a signal of intent on the U.S.’s part. But it may not work nearly as well. China is a key trading partner for most countries in the Indo-Pacific. Trade between China and countries in the Association of Southeast Asian Nations, for example, has more than doubled in the past decade. The U.S. remains an important export destination but less so as a source of imports.” We don’t mean to throw cold water on politicians’ parades, but recognizing what their widely hyped plans likely can—and cannot—do is critical for investors.
MarketMinder’s View: Please note, MarketMinder isn’t for or against any policy—our analysis focuses strictly on the economic, market and personal finance impact only. This article also wades into some sociological waters, and while societal effects are important, they often don’t materially sway the economic factors influencing corporate profits over the next 3 – 30 months. Those disclaimers aside, we highlight this piece because it illustrates how despite the best of intentions or plans, politicians’ policies often don’t play out as projected in the real world. Six years ago, then-UK Chancellor George Osborne, “announced the minimum wage for over-25s would accelerate sharply to reach 60 per cent of median hourly pay by 2020. His decision was linked to his determination to cut welfare spending. But he also argued the intervention would boost the economy’s stubbornly poor productivity performance.” So what happened? “A review by the Low Pay Commission last week concluded the policy ‘did not improve productivity’. Industries and areas with a higher share of minimum wage workers did not experience faster productivity growth, relative to other areas, after the policy was introduced in 2016. … Surveys of employers showed they were keen to boost productivity initially, but their enthusiasm faded over time. More decided to simply accept lower profits or charge higher prices. Smaller companies, in particular, struggled to find money to invest. In surveys by the Federation of Small Business, the third most common response to the rising minimum wage was actually to cut or cancel investment as a way to cope with higher costs.” While the emphasis on economic productivity is a bit misguided—productivity metrics in general are ill-defined, volatile and backward-looking—we do think this article shows that pols simply can’t implement one policy and expect their desired outcome to pop out. In a complex, market-oriented economy like the UK’s, market forces will play a much bigger role in businesses’ decision-making. The idea a politician, central banker or any individual can successfully steer a decentralized capitalist economy toward some idyllic outcome is a fallacy, full stop. Politics and regulations are an important factor, but they are one of many—and we think that is worth keeping in mind, especially as US midterm campaigning and promising heats up in the coming months.
MarketMinder’s View: We always think IMF (or World Bank or whatever supranational outfit) forecasts are worth noting mostly for what they say about sentiment. That is perhaps doubly true here, in our view, given the wide gap between sentiment and fundamentals extant now. This piece is a good illustration of that. Consider the headline, which hypes recession risks, and the first two-thirds of the article extends that, talking of the IMF’s downgraded outlook for “143 of its member states” and the risk of rising prices. But late on in the piece comes this pearl: “The IMF is now predicting global growth of 3.6% this year, and [IMF head Kristalina] Georgieva said it was a long way from turning negative. ‘What we may see is recession in some countries that are weak to begin with. They haven’t recovered from the Covid crisis. They’re highly dependent on imports from Russia, of energy or food, and they have a somewhat weaker environment already.’”
MarketMinder’s View: You know, perhaps live sports ticket sales aren’t very responsive to price changes, explaining why ticket sales are burgeoning despite rising prices of these tickets and so many other parts of life lately. But it looks to us more like part of a broader trend: Pent-up demand for in-person services following the lifting of COVID restrictions. You can see this in Transportation Security Administration air passenger counts, hotel occupancy—which has surged despite higher rates—and restaurant reservations. You can also see this in real US personal consumption expenditures—the broadest measure of spending. PCE on services has outpaced goods in 3 of the last 4 months.
MarketMinder’s View: “S&P 500 companies that have reported first-quarter results so far spent $269 billion on buybacks in the period, up 58% from a year earlier, according to data provider S&P Dow Jones Indices. Buybacks reached a new peak of $972 billion during the 12-month period ended in March, S&P Dow Jones Indices said, up from $499 billion during the prior-year period. Share prices of many U.S. businesses have slumped between 15% and 30% since the beginning of the year, as interest-rate increases, high inflation, Russia’s invasion of Ukraine and slowing economic growth in the U.S., China and elsewhere worry investors.” Now, this article goes on to mention some individual firms, so please note that MarketMinder doesn’t make individual security recommendations. Any company referenced herein is merely incidental to a broader theme we wish to highlight. That theme: Companies are buying back shares aggressively while markets are down bullishly reduces share count, giving shareholders a greater stake in the companies’ future earnings. They also cut equity supply and stock prices are always and everywhere a function of supply and demand for shares. While buybacks don’t directly sway prices the way some presume (see this year for an example), we see bargain-hunting executives reducing share supply as a vote of confidence in the outlook for their businesses and a factor that should be in the “bullish” column for investors today.
MarketMinder’s View: While we find the news that the Biden administration will review and possibly remove the 2018 – 2019 era US tariffs on imports from China welcome, we don’t think anyone should overrate the impact. And, contrary to this piece, we say that not because of China’s COVID lockdowns, which likely aren’t lasting anyway. Rather, it is because these tariffs were too small and easily avoided to accomplish much. In fiscal 2018, before most of the tariffs took effect, America collected a total of $44.8 billion in net duties, per USAspending.gov’s data. That rose to $75.6 billion in 2019, in part reflecting those increased tariffs. Sound big? It isn’t. That $30.8 billion increase, which likely isn’t all due to the tariff hikes, was 0.9% of total US government revenue in 2019—0.2% of consumer spending. Even if importers passed every penny of those duties on to consumers, it wouldn’t have any material effect on growth. And again, that is total tariffs, not just those on China. So whatever happens with the tariffs in question, don’t assume it will have much impact beyond maybe sentiment—and that holds for the speculated impacts on inflation discussed late in this piece. Lifting these tariffs would be a plus, but a super small one.
MarketMinder’s View: Good news is in short supply today, so here is some modestly positive news on the global trade front. “The UK is hoping to conclude talks on joining a major Pacific trade bloc by the end of this year, as London pursues new commercial opportunities around the world post-Brexit.” As international trade secretary Anne-Marie Trevelyan put it, “They’re very enthusiastic about our application and everyone’s working really hard to try and … plough through the complexity that is trade language and detail to get there. So I’m hopeful that by the end of the year we should see that crystallise.” As always, any sort of big trade negotiation takes time—the UK opened talks to join the CPTPP last June. Furthermore, any economic benefits will reveal themselves over the course of years, limiting the impact on stocks. But for those concerned about the retreat of globalization, we think the UK’s efforts to strengthen its ties with the global economy is a positive worth nothing.
MarketMinder’s View: Please note, MarketMinder doesn’t make individual security recommendations. Any companies mentioned herein are simply part of a broader theme we wish to highlight. That theme: the limited effectiveness of economic sanctions. “China is quietly ramping up purchases of oil from Russia at bargain prices, according to shipping data and oil traders who spoke to Reuters, filling the vacuum left by Western buyers backing away from business with Russia after its invasion of Ukraine in February. … China's seaborne Russian oil imports will jump to a near-record 1.1 million barrels per day (bpd) in May, up from 750,000 bpd in the first quarter and 800,000 bpd in 2021, according to an estimate by Vortexa Analytics.” There is always a buyer at the right price, and Russian oil is trading at a big discount: “The low price of Russia's oil—spot differentials are about $29 less per barrel compared with before the invasion, according to traders—is a boon for China's refiners as they face shrinking margins in a slowing economy. The price is well below competing barrels from the Middle East, Africa, Europe and the United States. China separately receives some 800,000 bpd of Russian oil via pipelines under government deals. That would bring May imports to nearly 2 million bpd, 15% of China's overall demand. For Russia, oil sales are helping to cushion the blow to its economy from sanctions.” While it isn’t good news that sanctions lack teeth as a result of factors like this, this is how global markets work—buyers and sellers are largely interchangeable. And it is a reason why sanctions shouldn’t hit markets or the economy fundamentally. The more China buys from Russia, the more that frees up non-Russian supply that China would have bought for other nations to buy.
MarketMinder’s View: We generally aren’t for or against any particular asset class, art included. However, we think it is critical for investors to do their due diligence and ensure they know exactly what they are getting into when it comes to the hazy art world. “Many art sellers suggest that artworks bring a high pecuniary rate of return. Don’t be fooled. Too often these calculations are based on ‘survivorship bias’ — that is, the artworks that continue to appear in the auction records are the above-average performers. There is less data on the losers. The best estimates suggest that, over the long run, artworks have less price appreciation than equities. That is exactly what you would expect if some buyers of art enjoy owning it and looking at it. The net total rates of return, pleasure included, should equalize across different asset classes. So don’t buy art to get rich. But if you love the work, it will bring more pleasure than holding a lot of losing investments.” That last part is key—art is something to enjoy, similar to wine or baseball cards. If you own it for that reason, great! But as for its place in a long-term, growth-oriented portfolio, art comes with a lot of costs—e.g., storage and maintenance—and the market itself tends to be rather illiquid, and there is the risk of permanent loss if an artwork is damaged or the artist falls out of favor. It is also hard to get quality diversification due to the sheer cost of top-quality works.
MarketMinder’s View: While most of the experts interviewed here don’t think a US recession is the most likely outcome, they worry a combination of headwinds could converge and tip the economy into contraction. “Squeezed by higher prices for gasoline and food, American households are taking on record amounts of debt to help make ends meet. Socked by higher mortgage rates, homebuilders are turning gloomier about the outlook. Small firms are also struggling with rising business costs and difficulties in hiring or retaining workers.” While we don’t dismiss the challenges of today’s economic environment, the reasons for recession laid out here don’t convince us one is assured—or even likely. Yes, if the Fed hikes interest rates too far and overshoots—thereby leading to an inverted yield curve—that is a common harbinger to an economic downturn. But those decisions aren’t predictable, and the Fed’s power tends to be overrated anyways, as the central bank is more of a rate follower than a rate setter. Also, housing isn’t a leading economic indicator, and business surveys simply reflect the mood at the time—they are more coincident than a sign of where things are going. However, we do think there is some value in this chatter: It saps sentiment, making even tepid growth a positive surprise.
MarketMinder’s View: This piece gets pretty jargon-heavy in places, and we think it overstates currency swings as an economic risk. But it does make a key point that we think all those who fear the dollar strengthening (and euro, pound and yen weakening) substantially from here should consider: All the factors people base these currency forecasts on are well known and likely priced into markets at this point. The US’s higher long-term interest rates are splashed across headlines worldwide daily. So are the relevant central banks’ stated monetary policy plans (which may or may not come true). Sentiment could always cause short-term swings in either direction. But further substantial, sustained weakening of the euro (et al) would likely require big, surprising developments that markets haven’t already priced. Otherwise, staking a forecast on widely known information ignores how markets work. Usually, they price consensus expectations and then do something different.
MarketMinder’s View: This piece refers to some individual companies, and as always, MarketMinder doesn’t make individual securities recommendations. Rather, we bring you this article for its broader theme: While China’s government continues letting troubled property developers default, it continues efforts to stabilize the sector overall and ensure development and construction continue. The latest evidence is this creative trick to help healthier private firms continue raising money in onshore bond markets. Three firms are reportedly issuing bonds that will come with state-backed derivatives contracts. “Buyers of those swaps and warrants will pay an extra premium to reduce their credit risk, meaning their investment ultimately resembles a safer but lower-yielding government bond. Current prices in China’s credit markets mean they are still set to earn a higher interest rate than on a risk-free sovereign bond, despite using credit-default swaps as a form of insurance. The default risk will instead be borne by the underwriters and [China Securities Finance Corp.] CSFC, which is owned by China’s major exchanges and one of the country’s clearinghouses.” This won’t jolt economic growth immediately, as it will take time for this fundraising to flow through to new projects. But it should help stabilize a sector that has roiled sentiment over the past year, potentially bringing some relief to the broader market.
MarketMinder’s View: A good habit in life—and investing—is to always consider challenges to your thesis. So we read this piece with interest. It argues that given 2020’s sharp money supply increases preceded 2021 and 2022’s high inflation, there must be causality as well as coincidence, making it dangerous that some money measures are now showing contraction. This piece points to one outfit’s proprietary measure of real global money supply, but other narrow measures—like the US monetary base—are also slipping just a bit. If central banks keep tightening into contracting money supply, the argument goes, then the world is staring down a massive liquidity squeeze, credit crunch and contraction. Let us briefly explore both halves of this, starting with the causes of today’s inflation. It is true that inflation is too much money chasing too few goods. And it is also true that monetary aggregates jumped in 2020. This money wasn’t doing much chasing. Money velocity in the US sank to historic lows and hasn’t recovered. Perhaps that is because the money created merely offset lost activity (revenues and paychecks). Meanwhile, we are certainly living through too few goods, judging from the ongoing supply shortages and shipping bottlenecks. Might inflation have been slower without 2020’s monetary increases? Perhaps, but that is an unknowable counterfactual. As for now, while nominal gauges of narrow money supply may be in contraction, narrow money (notes, coins and reserve balances) is only a small part of the overall money supply. Whether you use gauges like M2 or M3 (which differ in some of the money-like measures they include), banks create most new money through lending. Loan growth tends to follow changes in the spread between banks’ funding costs and loan revenues. Funding costs remain near zero, despite central banks’ rate hikes and the rise in 90-day yields, thanks to the deposit glut—banks don’t have to raise rates to compete for business. The latter, which derives from 10-year government bond yields, is up. That points to faster loan growth, which we have seen in the US lately. That could very well make overheating, not a credit crunch, the primary risk to arise in a couple of years as long as central banks don’t overshoot now. With that said, we do agree with the broader conclusion that inflation is likely to ease regardless of what central banks do—but that is because we think it is largely supply-driven, not because of monetary tightening.
MarketMinder’s View: Essential reading here, folks. Even after the high-profile Bernie Madoff debacle, people continue falling for Ponzi schemes—including the crypto Ponzi highlighted here. That scheme ticked all the typical boxes, which this piece does a most excellent job highlighting. How did it hoodwink investors? It guaranteed unrealistic returns of at least 5% per week. Its promoters lived lavish lifestyles (funded by investors’ money, naturally). They called their strategy a “trade secret.” They used personal connections to recruit new investors. They paid early investors enough to generate big hype. And lastly, it rapidly became difficult to cash out once the sheen wore off. Don’t let yourself fall for the next Ponzi that rolls around. Remember markets go down as well as up, and anyone who sells you steady, strong returns with no risk of loss is lying. If it sounds too good to be true, it is.
MarketMinder’s View: Please note, MarketMinder doesn’t make individual security recommendations. The companies mentioned here serve only to illustrate a broader theme: Is there a difference between being in a recession and feeling like you are in one? This article posits that because stocks are down, gas is above $4 per gallon in every state and living costs are rising across the board, investor and consumer sentiment have fallen to levels that have historically coincided with recession. That, however, shouldn’t dictate your actions. Here is why: “So how can this possibly be bullish? Because what if the monster isn’t as scary as we think it might be? The first half of a scary movie is always better because the tease is more exciting than the reveal. If we go into a recession and the wheels don’t completely fall off the economy, the market can set itself up for a very nice rally. Who knows if we’re there yet, I happen to think it’s too early for that, but my point is we might be selling the rumor only to buy the news. Good things tend to happen when everyone is expecting the worst.” Yup. If stocks are pricing in the worst and that scenario doesn’t come to pass, that is bullish. Then, too, even if it does, it is already priced—limiting negative fallout. The ensuing clarity from falling uncertainty can itself bring relief.
MarketMinder’s View: Residential investment was only 3.6% of GDP in Q1 (per the St. Louis Fed), so we don’t think investors should put too much stock in it as an economic driver. Rather, our interest here is how markets respond to higher prices in supply-constrained categories, and housing provides a high-profile example. With the CoreLogic data showing its House Price Index up a record 20.9% y/y in March, many are wondering where home prices head from here. Usually, markets try to balance supply and demand. So this caught our eye: “Combined [single and multi-family residences], there are a record 1.641 million units under construction. This eclipses the previous record of 1.628 million units that were under construction (mostly apartments in 1973 for the baby boom generation).” Now, with a dearth of existing home inventory on the market, new homes in the pipeline aren’t a substitute, and local conditions differ. But as the article concludes, “Homebuilders are reporting that demand is slowing, yet a large number of housing units will be delivered later this year (with all these units under construction).” While that leaves what it means for house prices open to interpretation, we would venture to say price deceleration appears in order. For markets generally, we think this is a good example of why spiking prices don’t stay that way forever, which we think is underappreciated amid current headline inflation fears.
MarketMinder’s View: To answer the titular question, this article explores a related question about cryptocurrencies’ reason for existence, which many boosters see as decentralizing (or democratizing) a seemingly concentrated financial system controlled by central bank fiat. As the piece asks: “What’s the point of this kind of decentralized finance, and what purpose does it serve?” As of right now, the answers to those questions aren’t clear, as this argument expresses: “[T]he value of cryptocurrencies will have to rest on their underlying economic uses, which are ... Well, that’s just the thing. I’ve heard many discussions in which crypto supporters have been asked exactly what economic role crypto can play that isn’t more easily and cheaply achieved through other means — debit cards, Venmo, etc. Other than illegal transactions, in which crypto may sometimes offer anonymity, I have yet to hear a coherent answer.” Now, from an academic perspective, we can see some cases in which cryptocurrencies can serve a need—e.g., for people living in countries under regimes that don’t have stable currencies and face strict capital controls. (Although the notion they are anonymous is seriously in question, given many governments have proven capable of both uncovering users and tracking down funds.) But as a full-fledged money replacement in the developed world? We have doubts cryptofinance will replace the current financial system—which works pretty well as is—any time soon. Maybe after cryptocurrencies’ Wild-West phase—which hearkens back to America’s pre-central bank free-banking era—people will find borderless programmable money and code-as-law smart contracts more efficient than what is available today. As we are cryptocurrency agnostic—neither for nor against any—we don’t prefer one outcome over another. But for those treating cryptocurrencies as an investment, buyer beware—their huge volatility hasn’t gone away, so banking on what cryptos could be in the distant future runs a potentially high opportunity cost. For more on the current crypto crash’s wider market implications, please see yesterday’s commentary, “Why Cryptocurrencies’ Recent Swoon Holds Limited Impacts for Stocks.”
MarketMinder’s View: We don’t know whether the EU’s plans to support Ukraine’s reconstruction will bear fruit, but we find its proposal to lend funds interesting. As reported, the European Commission’s proposal would be in keeping with the EU’s prior joint-borrowing programs: “The Commission proposes to set up the ‘RebuildUkraine’ Facility as the main instrument for EU, through a mix of grants and loans and embedded in the EU budget. It would build on the EU’s experience of its own post-COVID recovery facility, but be adapted to the ‘unprecedented challenges’ of reconstructing Ukraine. ... The EU’s Recovery and Resilience Facility is part of a [€]800 billion scheme of grants and loans to help EU countries rebuild economies greener and more adapted to the digital age. The scheme’s major novelty is that the money is jointly borrowed and repaid by all 27 EU countries.” While the potential expansion of the EU facility’s remit is noteworthy, the details matter even more, in our view. Note: New funds would be earmarked for specific use—joint debt isn’t being raised for a general pool. Even more critically, see the process to get this small expansion up and running: “It is not clear how much support the financing scheme will get because some EU countries, like Germany, oppose new joint EU borrowing.” The upshot: This development is worth monitoring, but a lot can still change—so we suggest waiting for more concrete details beyond the proposal stage.