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.


Whatever We May Think of Modern Monetary Theory, Its Day in the Sun Has Arrived

MarketMinder’s View: This article details recent fiscal and monetary moves made in response to the pandemic and compares them to modern monetary theory (MMT)—a fringe economic theory that argues governments can borrow and spend as much as they like with no risk of default. The only brake? Inflation. But the trouble with this theory was summed up quite well here, in our view: “‘When you look at MMT, there’s really no evidence in history that it’s worked,’ Bank of Canada Governor Tiff Macklem said during a speaking engagement last September. ‘In fact, when monetary policy has been directed to supporting government deficits and underwriting the government, it has ended badly.’” Just take a look at Turkey or Argentina presently. We get that these are far from developed markets, but both have taken steps away from advancing lately, largely because the governments are too intertwined with their central banks. Besides, it takes a lot of confidence in policymakers, more than we have, to suggest that unlimited government spending would be allocated well, or that they would accurately forecast and address inflation before it became hugely problematic. Note: That is also true if you believe a government couldn’t or wouldn’t be forced to default if it constantly ran huge deficits. Doing so for one year is just a coincidence—not evidence of MMT’s viability.

For US Companies, Home Is Where It's At

MarketMinder’s View: This piece posits that America’s fast vaccination rates and its huge COVID fiscal response—and a potential infrastructure bill—favor US stocks over foreign, as well as domestically oriented firms over multinationals. But to us, this amounts to arguing the most widely known pieces of information globally are set to drive performance going forward. Folks, markets are efficient and forward-looking. Suggesting an already-passed fiscal relief bill—much less widely scrutinized vaccine rollouts—will impact stocks looking forward is to suggest they are somehow blissfully unaware of all the factors media covers minute-by-minute lately. That is quite unlikely. Now, we do suspect US stocks will fare well going forward—both in absolute and relative terms. But it is more because of the country’s tilt toward large growth stocks, as they discount what is on the other side of the widely watched economic uptick—which we figure is a pretty quick slowdown toward pre-pandemic trends.

China March New Bank Loans Rise but Broad Credit Growth Eases

MarketMinder’s View: Chinese new bank lending hit a record high in Q1, even as “total social financing,” which includes state-run banks’ lending as well as the shadow banking sector, slowed and missed expectations. This has many worried about policymakers’ reining in stimulus and hurting economic growth, but we see it as policy returning to normal. Before the pandemic last year, officials’ primary focus appeared to be getting corporate and local government debt in shape in order to shore up financial stability. Critical to that effort, whether you consider it a net benefit or not, was clamping down on shadow banking and private lending in general. If loan growth jumps while total social financing slows, that indicates policymakers have returned to that effort. That they are able to do so is a testament to how much China’s economy has recovered from last year’s lockdowns, and we think it is a good preview of what a return to post-pandemic life and priorities looks like. That weaning from stimulus is overall good, not bad, in our view.

London Stock Exchange Has Best First Quarter for IPOs Since 2007

MarketMinder’s View: As always, MarketMinder doesn’t make individual security recommendations, and the companies mentioned herein simply represent a broader theme we wish to highlight: the titular strong quarter for IPOs on the London Stock Exchange. Not only did a dozen companies go public (along with 8 on the smaller AIM index), but the 20 companies combined raised about £5.6 billion, compared to just £615 million total from UK IPOs in Q1 2020. This fits right in with booming IPO activity globally, and while we are watching closely for indications of stock supply overshooting, we aren’t there yet. Today’s IPOs are generally better quality than in 2000 too, which is key. But the boom is noteworthy considering this bull market is barely one year old—you usually don’t get big IPO activity until much later in a bull market. To us, that is a big indication that last year’s bear market didn’t last long enough to reset the market cycle, and stocks are acting now as if it were a correction, not a bear market, and behaving like they usually do late in the cycle. So watch this space for signs of excess looking forward.

Simple Math Is About to Cause an Inflation Problem

MarketMinder’s View: This article explains why upcoming inflation data—including the Consumer Price Index (CPI) tomorrow—are likely to come in hot. The focus is on the base effect: “Inflation metrics are calculated on both a month-over-month and year-over-year basis. Economists and investors tend to look at the year-over-year figure, since there can be a lot of monthly volatility. But what happens when the month you’re harking back to coincides with the onset of a global pandemic? That’s where the base effect comes into play.” Most inflation gauges fell beginning in March 2020 due to the impact from lockdowns and remained low through May. “And while prices soon began picking up, the year-over-year increases for March-May will appear abnormally large as the upcoming figures are compared to the very low readings of last year.” That will be math, folks, not actual inflation—a critical thing to bear in mind when assessing the data. As for the rest of the article, which dwells on concerns that fiscal stimulus plus the end of lockdowns equals hot inflation, we rather doubt it. For one, stimulus is a misnomer, considering most of the new money merely replaced lost economic activity last year, so calling it stimulus commits the Broken Windows Fallacy. Two, federal spending approved and proposed thus far doesn’t really qualify as stimulus, as it drips out over many years and likely hits bureaucratic roadblocks along the way. Three, the velocity of money is at historic lows. To the extent that broad money supply measures accurately capture money, which isn’t at all certain, if last year’s monstrous increase didn’t stoke hot inflation, it probably isn’t in the offing any time soon.

Investors Have Put More Money Into Stocks in the Last 5 Months Than the Previous 12 Years Combined

MarketMinder’s View: While we don’t disagree that investors are much, much more optimistic now than they were during the 2009 – 2020 bull market, we think this piece paints with too broad of brush strokes and omits some important data. Using Bank of America’s data, it compares flows into equity funds from November through March with flows during the March 2009 – February 2020 bull market. This is not a like-with-like comparison. As similar fund flow data from the Investment Company Institute (ICI) show, investors usually continue pulling money from stock funds in the weeks or months after a bear market. ICI’s data show that happening last year, leaving us to wonder how much of the $569 billion entering stock funds since November, according to BofA’s data, simply replaced previous outflows during the young bull market’s first seven months. Without that information, the entirety of the previous bull market isn’t a relevant comparison, as that sample includes post-bear-market outflows as well as later on. Again, we don’t dispute the overall impression of widespread cheer, and we think this is another indication that last year’s downturn behaved much more like a correction than a bear market. But these data, as presented, don’t show much else.

Trade With France Bounces Back to Pre-Brexit Levels

MarketMinder’s View: This is just one report, and pandemic-related shutdowns provide some obvious skew, but it is still an encouraging sign of trade returning to normal as businesses get used to more complicated procedures at UK ports: “Trade between the UK and France bounced back towards normal in March as firms adjusted to life after Brexit, according to analysis by French customs officials. Imports from Britain climbed to 107pc of typical levels after taking Covid effects into account, the research found - with exports back at 96pc.” Now, it will probably take several months, if not longer, to get broader, reliable data as lockdowns from last year and lingering restrictions now on both sides of the English Channel add huge variables to the data. Staffing remains low at ports because of the pandemic as well, leading to longer wait times than we might otherwise see at this juncture post-Brexit. But markets are adept at seeing through all of this, and the UK is one of the developed world’s best-performing stock markets year to date. If Brexit were some huge negative, that wouldn’t be happening.

Biden Details $1.52 Trillion Spending Request

MarketMinder’s View: As always, we are politically agnostic—we prefer no politician nor any political party and assess political developments for their potential economic and market impact only. Presidential budgets get oodles of ink every year for their perceived impact, and this article captures why that is generally a misspent effort: “Congress, which is responsible for approving government spending, is under no requirement to adhere to the White House budget, which is generally viewed as a political messaging document.” Yep, much like last week’s big infrastructure plan, this is marketing, pure and simple. Congress holds the purse strings, and they veer from the White House’s budget request much, much more often than not. So whether you think the many initiatives outlined here are the cat’s meow or a big woof, we suggest not getting worked up over them now. As for the large size of this requested spending, considering big spending has topped headlines since the campaign last year, markets are well aware and probably already reflect it. Reacting now amounts to trading on backward-looking information, in our view.

Don’t Be Fooled by This Stock Market’s Newest Magic Trick

MarketMinder’s View: That trick is a turn of the calendar. The vast majority of funds report returns on trailing 1-, 3-, 5-, 7- and 10-year bases, usually as of quarter-end. The COVID bear market’s low arrived about one week before Q1 2020 ended, creating a very, very attractive starting point for trailing one-year returns today. “At the end of February, 40 mutual funds reported total returns of at least 100% over the prior 12 months, according to Morningstar. Among exchange-traded funds, 59 had one-year returns greater than 100% at the end of February; one month later, according to FactSet, 218 did. What happened? Did hundreds of fund managers start popping genius pills? No, although marketing departments are probably gearing up to tout their brilliance. Instead, the ghastly losses of early 2020, when stocks fell by 34%, have just disappeared from trailing one-year returns.” The article goes on to thoroughly debunk the use of these arbitrary periods as the be-all, end-all criteria for judging performance: “How much your investments earn always depends on when you start counting and when you stop.” Very, very few investors’ personal performance lines up perfectly with calendar-year based periods, and the timing of your additions and withdrawals adds another wild card. That is why, whether you are judging your personal self-directed performance or that of an investment manager, it is critical to square up time periods, use a relevant market index as a comparison point, and evaluate at least one full market cycle (meaning, one bull and bear market). That should help minimize quirks like this and give you a more accurate view.

Joe Manchin Says There Is ‘No Circumstance’ in Which He Would Back Weakening the Filibuster

MarketMinder’s View: As a reminder, MarketMinder is nonpartisan, and our discussion of politics focuses solely on potential economic or market impact. We favor no politician or political party, as doing so invites bias—blinding in investing. We also caution readers against treating political pledges as airtight, as politicians change their minds all the time—especially when it suits their purposes. Those caveats aside, we think West Virginia Democratic Senator Joe Manchin’s latest statement about the filibuster—affirming his early comments that he will not vote to eliminate or weaken it—illustrates the Senate’s difficulty with approving anything remotely controversial. Even matters eligible for the fast-track reconciliation process that require just Democratic unanimity to get a simple majority are a tall order. “While Mr. Manchin did not outright refuse to support another use of the fast-track reconciliation process, he challenged both parties to work together and compromise on critical pieces of legislation, including infrastructure and tax changes. Any use of reconciliation would require Mr. Manchin — and virtually every congressional Democrat — to remain united behind the legislation.” Gridlock doesn’t prevent all laws from passing, but it usually does lead to compromise or a more moderate result—and in our view, that is an underappreciated bullish positive for stocks.

A Large Chunk of the Retail Investing Crowd Started During the Pandemic, Schwab Survey Shows

MarketMinder’s View: This is just one survey, and its takeaways don’t have any direct investment implications. However, we found some of the results interesting and worth sharing. One of the prevailing narratives in this new bull market is that young, inexperienced investors were dabbling in markets out of boredom—and this cohort was driving the rally. We suspected reality was more complex—a point this survey supports. “Schwab found that these new investors are not just young people. They are also an older cohort discovering investing for the first time. Generation Investor has a median age of 35, compared with pre-2020 investors whose median age is 48, Schwab said. More than 50% of Generation Investor are millennials, 22% are Gen X, 16 are Gen Z and 11% are baby boomers. Schwab found that Generation I was more financially impacted by Covid-19. About 55% of respondents said they started investing during the pandemic to build an emergency fund and 53% said they started to gain an addition source of income.” Now, an influx of new investors isn’t reason to be bullish—the stock market is an auction marketplace where buyers’ willingness to bid prices higher matters more than their numbers—but people of all ages learning about the magic of long-term investing and compound growth is a positive to us. For more, see Christopher Wong’s column, “Have Markets Gone Young, Wild and Free?

Italy and Greece Risk Post-Pandemic Debt Crunch

MarketMinder’s View: In a sign pockets of skepticism persist, the argument raised here combines some of the most popular eurozone ghost stories over the past 10 years. The worry: If/when the ECB ends its bond-buying program, heavily indebted eurozone countries (e.g., Italy and Greece) will be left in a lurch. That could lead to a return to unpopular austerity, which could then trigger a new wave of political populism, creating uncertainty about the eurozone’s future. While that outcome is possible, we think this scenario stands on a shaky foundation, as it presumes high debt alone sets the stage for trouble. That is a misperception, in our view. Rather than an absolute level of debt, what matters most is a country’s ability to service it—i.e., make its interest payments. This doesn’t appear to be an issue for eurozone countries for the foreseeable future, especially since governments have been able to refinance maturing debt at ultra-low long-term rates. Italy’s annual debt service costs are at generational lows relative to tax revenue. Note, too, that debt doesn’t reveal the whole picture. For example, Greece’s economic troubles over the past decade stemmed more from its uncompetitive, state-dominated economy—not just high debt. Sovereign debt jitters could always arise post pandemic, but unless something changes radically, the feared worst-case scenarios of a major eurozone shakeup seem more speculative than probable, in our view.

UK Labour Market Shows Strongest Rebound in Hiring Since 2015

MarketMinder’s View: Similar to the US, the UK labor market is reporting some green shoots. “The latest official data showed employers had put hiring plans on ice over the winter, with the number of vaccines stuck well below pre-pandemic levels, but real-time data published by the Office for National Statistics suggests online job adverts have now risen to levels seen on the eve of the first lockdown. … The KPMG/REC survey showed that the strongest growth in vacancies was for nursing and care jobs, and in the IT sector. However, it also suggested that hospitality businesses were starting to hire again, as well as bringing back workers who had spent much of the last year on furlough.” Jobs are great. But labor market data are late-lagging economic indicators in all countries, so we disagree with the point here that a “sustained recovery in hiring” is essential to a strong economic recovery. Economic growth begets jobs, not the other way around. However, we won’t pooh-pooh the latest confirmation that developed world economies are slowly returning to normal—a development worth cheering, in our view, even if stocks have already priced it in.

Blank-Check ETFs Keep Coming Even as SPAC Fever Cools Down

MarketMinder’s View: Please note, MarketMinder doesn’t make individual security recommendations. However, this piece raises a broader theme we wish to highlight: Markets digest the hype around an investing theme pretty quickly. Take special-purpose acquisition companies (SPACs), which started grabbing headlines late last year. Everyone who was anyone seemed connected to this red-hot corner of the market—and fund managers took notice. As this article notes, despite a rocky recent stretch for SPACs, three SPAC exchange-traded funds (ETFs) already exist, and three more will soon roll out—each with their own spin on SPAC investing. Considering ETFs take several months to launch, their price likely reflects all widely discussed SPAC information by the time they go public. We aren’t anti-SPAC, but unless you know something that isn’t broadly appreciated—unlikely given all the buzz today—buying in now smacks of heat-chasing, in our view. For more, see our 1/28/2021 commentary, “SPACs, Thematic ETFs and the Perpetual Hunt for Investing’s Next Big Thing.”

US Actor in Low-Budget Films Accused of Running $690m Ponzi Scheme

MarketMinder’s View: Scammers come in all shapes and sizes, which is why investors must always do their due diligence and maintain constant vigilance with any investment offers. In this case, an unheralded actor swindled investors in a Ponzi scheme where he “... promised financial backers 35% returns on their investments by claiming his distribution company, 1inMM Capital, had licensing agreements with Netflix and HBO, the SEC said. But those relationships never existed, and investors were instead bilked out of $227m in the last three years alone, according to the FBI.” Not all ne’er-do-wells send fishy emails or text messages, but fortunately, the ways to protect yourself remain generally true across the board. For one, never hand your money over to a supposed investment professional—or actor—who comingles your funds with other clients’ in their own account. Instead, have your funds managed in an account under your name through a reputable third-party custodian. Keeping an investment manager at arms-length in this way prevents them from absconding with your cash. Also, always remember: Promises of quick riches, straight-line returns or both are big red flags. They are usually too good to be true. For more on how to spot pyramid schemers, please see last year’s commentary, “Some Basics to Help Keep Would-Be Madoffs at Bay.”

Italy, Portugal Bond Sales Flooded With Orders by Yield Chasers

MarketMinder’s View: This article touches on several debt matters around the world, but we highlight it for its treatment on the titular Southern European bond sales. For those wondering about these countries’ ability to garner interest in their bond sales, demand looks plenty healthy. “Italy received more than 64 billion euros ($76 billion) of bids for its first new 50-year bond in almost five years via banks on Wednesday, according to a person familiar with the matter. That’s more than three times the previous record. ... Its longest-dated bond is a 50-year security issued in 2016, which currently yields around 2%. That’s the highest level since September, but still low by historical standards.” In the meantime, “Portugal is bringing to market a 10-year security, racking up more than 30 billion euros of orders from investors. ... the bond sale is also symbolic, coming nearly a decade after it first asked the International Monetary Fund for a bailout package. Its 10-year yield is now at just 0.22%, compared with over 18% at the height of the sovereign debt crisis.” We think bond sales like these illustrate investors’ hunger for yield in a low interest rate world. Italy and Portugal have locked in some low funding costs for a while—a counter to concerns that COVID relief spending may harm these countries’ finances in the near future.

Investors Big and Small Are Driving Stock Gains With Borrowed Money

MarketMinder’s View: Is a record-level of margin debt—i.e., funds borrowed against securities including stocks and bonds—a problem? That is the issue explored here. “As of late February, investors had borrowed a record $814 billion against their portfolios, according to data from the Financial Industry Regulatory Authority, Wall Street’s self-regulatory arm. That was up 49% from one year earlier, the fastest annual increase since 2007, during the frothy period before the 2008 financial crisis. Before that, the last time investor borrowings had grown so rapidly was during the dot-com bubble in 1999.” That may seem ominous, but the article also acknowledges why margin debt’s run-up doesn’t necessarily mean trouble is around the corner for the broader stock market. For one, not all margin loans are used to buy more securities. Moreover, rising investor borrowing is consistent with rising stock markets since the latter increases the pool investors can use for collateral. Still, we think investors’ willingness to ramp up leverage is worth monitoring. Rather than the absolute level, spikes in margin debt can signal euphoric behavior typically seen at bull market tops. We don’t think we are there yet, but take this as another indication the bull market’s end may be closer than many presume.

U.S. Companies Dish Out Wages Like Never Before

MarketMinder’s View: The prospect of higher inflation has dominated headlines this year, but this take posits an old argument: that wages drive inflation. “However, the fact that overall private wages are higher than ever, even with the U.S. economy down some 9 million jobs, seems to raise the risk that inflation could be stronger than policy makers anticipate. ‘As jobs continue to come back, all in the context of businesses that are right now saying labor markets are tight, these wage pressures will only grow, thus adding momentum to an inflationary dynamic that is primed to rise from here,’ [analysts] wrote.” We see several problems with this. First, before the pandemic, the aggregate payroll data cited had been hitting record highs every year since 2010—yet low inflation has characterized the past decade. The return to new highs suggests a return to normal, not some new accelerating price regime. Second, if companies are paying workers more, that is an after-effect of inflation, not a cause. Companies pay workers with inflation-adjusted wages, as they must take into account the cost of living. Third, wage data (like all labor indicators) are backward looking, reflecting past price increases. For forward-looking markets, it is irrelevant. Yes, we expect a pop in the economic data (including inflation gauges) as reopenings across the country become more widespread and last year’s depressed levels become the base for year-over-year growth rates, but it will likely be short-lived. From an investing perspective, misperceived inflation fears like this suggest sentiment hasn’t gotten out of hand yet and that stocks still have more bricks in the wall of worry to climb.


Biden’s Infrastructure Plan Faces New Hurdle in Senate Rules

MarketMinder’s View: Please note MarketMinder is nonpartisan, favoring no party or politician. Our political commentary serves only to assess policies’ potential market impact. With likely little chance of bipartisan support for President Joe Biden’s infrastructure package, many think Senate Democrats will resort to budget reconciliation, which requires only a simple majority to pass a bill—allowing them to bypass the need to drum up 60 votes to overcome a GOP filibuster. But as this article details extensively, going down the reconciliation route narrows the bill’s scope to matters touching only taxes, spending and the debt limit—necessitating lawmakers water it down from its currently expansive ambitions. That means “... several provisions in the plan, including labor rules and a clean electricity standard, may have to be removed from or amended in the final legislation, according to lawmakers and aides.” This article gets further into the nitty-gritty of the lawmaking process, and in our view, it offers another reminder that if an infrastructure bill passes, compromise will likely lead to a more watered-down result than many hope or fear—a probability markets have likely already priced in to a large extent.

Yellen Pushes for Global Minimum Tax Rate on Multinational Corporations

MarketMinder’s View: With the Biden administration pushing to raise corporate taxes from 21% to 28% (or 25%, which some Democratic senators are arguing for), mitigating tax avoidance is key to making revenue projections tied to this come close to true. Hence, Treasury Secretary Janet Yellen’s call Monday for a redoubled effort in creating a global minimum corporate tax rate, an effort years in the making involving over 100 nations. The idea is that, “The U.S. has long had more stringent tax rules on its companies than other countries do, but business groups warn that a significant disparity could lead to U.S. companies getting taken over by foreign competitors. Such tax rate gaps could also reanimate inversions, transactions in which U.S. companies take foreign addresses, often through mergers. The U.S. tax-rate cuts and Obama-era regulations made them less attractive.” A global minimum tax rate would make them even less attractive, in proponents’ view. But there are two major, practical problems here. One: America’s corporate tax hike faces gridlock in Congress, making its future uncertain. Two: Getting 100 nations to agree on almost anything is going to be tough. Heck, the EU has been trying to get 27 closely aligned nations to agree to “harmonize” tax policy for years, but Luxembourg, Ireland and others keep thumbing their noses at them. Ponder that while you consider the volatility in America’s tax code: Recently, it has shifted with administrations. So if you are a foreign nation looking to ink a deal, what assurance do you have the next American administration won’t radically change course?