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: This article goes into some detail on the Fed’s reverse repo facility, which we have covered in this space before. While it gets into the monetary weeds, we think it makes a useful high-level point Fisher Investments’ founder and Executive Chairman Ken Fisher has made: Money supply measures count some things (e.g., trillions worth of Treasury bills) that really aren’t used as money—a medium of exchange. The crux: “When the Fed buys Treasuries, it creates just one kind of dollar: a reserve, a kind of deposit that commercial banks can hold. But reserves behave in completely different ways from the dollars that a commercial bank creates for a credit card balance, for example. Or for a car loan. [The Fed] has pushed so many reserve dollars out in the world that banks don’t know what to do with them. Is that increasing productive capacity, as the Fed mandate directs?” In other words, if the surge in money supply measures reflects financial institutions’ shuffling (massive) excess reserves among one another, that probably won’t have a major impact on the economy or inflation since that money isn’t doing any “chasing” of goods and services.
MarketMinder’s View: Contrary to this piece, we never really thought the Olympic Games would be all that much of an economic boost for Japan and are much more symbolic than anything, but that is, of course, doubly true now, given the lack of spectators. We also don’t see Japan’s aging population as the headwind this piece does. However, we do think this article’s revisiting former Prime Minister Shinzo Abe’s “Three Arrows” strategy to revive Japanese economic growth has some salient takeaways. While the strategy was to feature fiscal stimulus plus economic reform to liberalize the economy and inject competition, “The centrepiece of Abenomics, though, was a massive expansion of the Bank of Japan’s balance sheet, which has grown from under 30 per cent of GDP in 2012, to a staggering 135 per cent today. Japan has conducted by far the most aggressive quantitative easing program on earth - yet years of [quantitative easing or QE] have failed to solve a deflationary mindset that’s still curtailing growth.” While a deflationary mindset seems to have nothing to do with it, this lack of effect shouldn’t shock you. QE has failed to spur growth and inflation basically anywhere it has been tried. Why? Because it isn’t stimulus at all. Under QE, central banks lower long-term rates by buying bonds. They think this will stimulate borrowing, but they ignore the supply side: banks. They borrow at short-term rates to lend at long, with the gap between them a proxy for lending’s profitability. Hence, QE discourages lending, which would be necessary to spur inflation and economic growth. So we agree with the conclusion here: “Yet the overall economy will struggle to shake off the pandemic and a difficult Olympics, due to the ruling establishments’ ongoing and extremely counter-productive addiction to monetary and fiscal doping.”
MarketMinder’s View: This is some pretty definitive evidence new Peruvian President Pedro Castillo—whom many view as a borderline Marxist—isn’t likely to achieve a whole lot of radical change during his tenure. Now, mind you, he already swapped early campaign talk of nationalizing the mining industry for boosting taxes on profits. But now, “An opposition-led alliance won a vote on Monday to lead Peru’s Congress, a setback for socialist President-elect Pedro Castillo on the eve of his inauguration and a sign of challenges ahead to his plans to reform the constitution and hike mining taxes. … A list of candidates proposed by Castillo’s Free Peru party was rejected over procedural issues, underscoring challenges the outsider president-elect faces pushing through reform in a fragmented legislature where no single party has a majority.” Gridlock should be a relief for markets in the country, although Peru’s heavy value tilt likely weighs on returns in the period ahead anyway.
MarketMinder’s View: The IMF maintained its forecast for 6% 2021 global GDP growth, but that is entirely because of faster-than-previously-forecast developed world growth, as Emerging Markets, beset by higher COVID counts and continued lockdowns, weaken. The IMF says that is widening the gap between rich and poor nations, which we are sure is true, tied to poor nations’ difficulties in acquiring vaccines and therapeutics. The fallout is tragic on a human level, and it no doubt has economic growth implications in the developing world. But for stocks, this is no shock. Markets are coldhearted. They have long expected poorer nations to struggle more with COVID than the developed world—and pre-priced this, to a very great extent. Case-in-point: India, which has been ravaged by the Delta variant during much of 2021. Yet its markets are up 13.6% year-to-date, just ahead of the MSCI All-Country World Index’s 13.4%. (Source: FactSet.)
MarketMinder’s View: Far be it from us to rain on a parade, but this article hypes up June’s 0.8% m/m rise in durable-goods orders as if it is a sign of white-hot growth that would only be white-hotter if it weren’t for shortages, which seems a little bit overdone to us. For one, the headline gain in orders is inflated by aircraft and autos, which tend to skew the index. Non-defense orders excluding aircraft, so-called core orders, rose 0.5%. (Source: Census Bureau.) Strip out autos and the gain was 0.3%—fine, if unspectacular, growth. Ultimately, we largely see this as evidence widely publicized component shortages aren’t forestalling growth, but growth isn’t super-fast, either.
MarketMinder’s View: “Proceeds from U.S. IPOs have reached $89 billion in 2021, a 232% jump from the same period last year, according to data from Renaissance Capital. For the year-to-date period, the market is already at a record level in terms of funds raised, and it is expected to surpass the full-year all-time high of $97 billion raised in 2000 amid the dot-com boom.” Now, we have a couple of thoughts about this. One, that we have seen such a pickup in IPO activity shows you sentiment is pretty optimistic—you wouldn’t tend to see many companies go public early in a bull market, when dour sentiment depresses valuations. That suggests to us we are later in this bull market than its 16-month age may have you thinking. Second, while we may be on pace to breech 2000’s record, we wouldn’t automatically assume that is a sign of a top, as it was then. The quality, not just the quantity, of IPOs matters a lot. As this piece documents, many of the companies going public now are much more well-established than 21 years ago. But also, from a sheer supply perspective, the dollar value of 2021 IPOs isn’t adjusted for inflation and amounts to a far smaller share of US market capitalization than the $97 billion did in 2000.
MarketMinder’s View: Data from the Ifo Institute in Munich show the German “business climate index fell for the first time in six months, from 101.7 in June to 100.8 in July. Expectations for the next six months dropped, outweighing an improvement in sentiment about current conditions.” This missed estimates, which projected a slight uptick to 102.1 (per FactSet). Construction saw an improved outlook, but sentiment worsened in manufacturing, retail and services. Behind this microscopic dip from high levels: A rise in COVID caseloads tied to the Delta variant. Look, we won’t downplay that, as the public health effects could be big. But this piece’s speculation about where they could go if cases keep rising at the current rate and about potential lockdowns is just quite a stretch. We are skeptical of sentiment survey findings like these, but it is telling to us that most economists project growth and most companies expect rising sales in the immediate future. The world is going to see ebbs and flows in caseloads for some time to come. That isn’t in question. There just isn’t very much here that is going to surprise investors, and surprises tend to move markets most.
MarketMinder’s View: Here is a good look at how politicians very often use budgeting tricks to move spending bills through Congress. Before we start, keep in mind: MarketMinder is non-partisan and favors no politician or political party. We cover events solely for their potential economic and market impact. The two bills in question here are the $1 trillion bipartisan infrastructure spending on roads, bridges and broadband and the Democrats’ push for an additional $3.5 trillion to expand Medicare, education and climate-change initiatives. As roughly half the bipartisan plan is already budgeted spending, the two total somewhere around $4 trillion—which politicians say will be “paid for” (i.e., won’t add to America’s federal debt above current projections). But “finding $4 trillion in tax increases or spending cuts to pay its costs would be prohibitively painful for politicians,” not to mention hard to achieve in a gridlocked Congress. So while lawmakers are considering some tax hikes on the wealthy and big corporations, most of the “paying” seems … ummm … creative. For example, beefing up the IRS budget may collect more revenues from tax cheats, but the range of estimates is super wide. Furthermore, repealing Trump-era regulations on drug rebates—regulations that never took effect—is estimated to “save” $177 billion. It all seems a little fictitious to us. But this illustrates how gridlock prevents extreme ideas from materializing, helping whatever passes (if anything) be much less sweeping than people fear. That helps reduce markets’ legislative risk aversion, and we think it is a big political driver this year.
MarketMinder’s View: First, please note MarketMinder favors no politician nor any political party, assessing developments solely for their potential economic and market impact. Or, as in this case, the lack thereof. Friday, Treasury Secretary Janet Yellen sent a letter to House Speaker Nancy Pelosi discussing the Treasury’s expectations and plans regarding the debt ceiling, set to come back from a nearly two-year hiatus on July 31. This is the traditional kickoff for a debt-ceiling squabble, and it is (as usual) loaded with warnings of “a default on any obligation of the United States” being catastrophic and notes that even to squabble over it is super-bad. A couple of things about that. One, default is specific, not general. It doesn’t include any obligation, or else every government shutdown in history is a default, as some workers and contractors don’t get paid. Default is specific. It is failure to pay interest and principal on US Treasury debt. The government will be able to do that, debt ceiling raise or no. Also, that downgrade? It was based partially on a multi-trillion dollar math error and, contrary to fears, rates stayed super low. 10-year yields were at 2.82% in July 2011, just before the downgrade in early August. A year later? 1.51%. (Source: FactSet.) Now, mind you, we think the debt ceiling is pretty dumb, considering it doesn’t actually limit debt at all. But people seem to presume it is some incredibly scary thing, and it just isn’t. Lastly, “Extraordinary Measures” aren’t really that extraordinary, given the frequency they have been used in recent years, but it would make for a decent name for a band.
MarketMinder’s View: Using Monday’s volatility (and pundits’ immediate—and wrong—presumption that it was the start of a new panic like February – March 2020) as a jumping off point, this piece explores why investors continually act like past performance predicts future returns. “We live in a world in which skill and excellence often persist and price is generally a good signal of quality. Great athletes with a ‘hot hand’ seem to score again and again; your favorite restaurant’s food should be as tasty today as it was last month; a luxury car typically drives better than a cheap compact. …The human habit of pretending that a rearview mirror is a crystal ball is almost incorrigible. Investors like seemingly coherent explanations of market moves, such as those the news media provides. As soon as the market stops going up, those explanations—no matter how arbitrary—tend to make the new ‘down’ world seem more likely to persist.” Add to that stock market trends’ tendency to last for a while, and you can see why it is easy to get sucked in. Problem is, the trend is your friend until it isn’t, and even gauges that used to work get priced in quickly, sapping their advantage. “Investing is so competitive that history can rarely repeat for long; if any past pattern reliably recurred, so many people would pounce on it that it would soon stop working. Indeed, when the winners-keep-winning patterns reverse, they can deliver devastating losses.” As a solution, this piece suggests tweaking disclaimers to give people a stronger psychological nudge, which some experts think will help stave off the mistake. We will leave the psychoanalyzing up to them, but in our view, clear, direct communication and education are far more beneficial in the long term than linguistic trickery.
MarketMinder’s View: This piece argues that with interest rates low, bank liquidity high and rising household net worth improving people’s borrowing capacity, it is only a matter of time before banks start lending willy-nilly, fueling a credit bubble that will eventually overheat the UK economy and end dismally. Rather than pick apart the underlying loan growth forecast, which ignores the flat yield curve when discussing potential net interest margins (a big omission that overestimates loan profitability and, likely, banks’ willingness to lend broadly), we will offer a simple observation: So what? That forecast is basically a blueprint for all economic expansions. Risk aversion gradually fades, credit increases, and the economy grows beautifully until everyone gets overextended and a recession resets the cycle. Saying the BoE should hike rates now to avoid a lending boom, as this piece argues, basically amounts to saying no economic expansion should happen ever. Every cycle ends eventually—it is unavoidable. Our suggestion? Relax and enjoy the boom times as they happen, enjoy the accompanying bull market, and worry about the eventual peak when it is actually materializing.
MarketMinder’s View: This, while not perfect, does an overall good job interpreting the UK’s flash purchasing managers’ indexes (PMIs) for July. PMIs are business surveys that aim for a rough snapshot of whether services, manufacturing and construction are growing in a given month, with readings over 50 indicating expansion. The composite PMI, which slipped from 62.2 to 57.7, still indicated broad growth, but less broad than in June. Tempting as it may be to read into the coincidence of the downtick and the country’s “pingdemic,” which has now sidelined hundreds of thousands of workers for coming into contact with people who tested positive for COVID, that would be a mite too hasty. As the article notes, the survey was conducted in the 10 days through July 21, including only three after the pingdemic made Freedom Day a flop. The more significant factor was the sharp dip in the new orders component over the entire period. That, not pings, is what suggests slower growth in the months ahead, as today’s orders are tomorrow’s production. None of this is bearish for the UK economy or stocks, in our view—rather, it is more evidence we are moving into a slower-growth phase, resembling the latter stages of the economic cycle. That is a time when stocks can do very nicely overall, with growth stocks leading the way.
MarketMinder’s View: Well lookie there, economic recovery is now taking hold in Canada, the land of the Western Hemisphere’s long lockdowns! First, revised May retail sales showed a milder-than-expected contraction, falling only -2.1% m/m versus the previously estimated -3.0%. Then June’s preliminary estimate showed a nice 4.4% rise. That recovery coincides with the start of provincial reopenings, and the rebound should continue in July tied to a restrictions’ further easing. Better still: “Economists anticipate that as the reopening continues consumers will shift some spending to services — not captured in retail sales data — from goods as salons and restaurants reopen.” Canada isn’t an outsized piece of the global economy, but all the recoveries in smaller nations add up to continued global improvement—which global stocks are pricing in.
MarketMinder’s View: While this piece makes some sensible, high-level observations (e.g., the forward-looking market efficiently prices in widely known information), it also suffers from the myopia running rampant among headlines recently. For example, it gathers a host of indicators—including CPI, Treasury yields, narrowing market breadth and commodity-sensitive stocks’ relative performance—as evidence the reopening trade has petered out. With markets no longer seeing a Roaring Twenties-style economic boom on the horizon, investors should prepare themselves for slow growth ahead. Well, we largely agree, but the thing is, far from being the bad development this piece implies, these are all hallmarks of a late-stage bull market where growth stocks lead. Last year’s unique bear market and recession didn’t strike when companies were bloated and didn’t last long enough to spur the deep, prolonged cost cuts that traditionally mark a reset of the economic cycle. When the economy began recovering, companies picked up where they left off, and the economy is increasingly behaving as it normally does in a late-stage expansion. That is generally when slowing growth favors companies with a proven ability to churn out earnings in any environment—namely, big, global growth stocks. All the recent fretting and handwringing over slow growth also suggests the bull market still has some wall of worry to climb—perhaps a counterintuitive reason to be optimistic about stocks looking ahead.
MarketMinder’s View: Before the pandemic dominated all facets of life, US-China trade tensions—often referred to as a “trade war”—regularly made headlines as a potential economic and market threat. At the time we thought those fears were vastly overstated. Tariffs seemed more political negotiating tactic than new protectionist economic policy, and they lacked the scale to derail commerce. Despite new tensions over regulations and a host of sociological issues, trade between the world’s largest economies has continued without much interruption, as this article shows. “… the bustling trade has defied all expectations that the tariffs on hundreds of billions of dollars worth of merchandise would force a decoupling of supply chains. Instead, both sides have learned to live with the taxes, with Chinese firms buying more to fulfill the terms of the 2020 trade deal, and U.S. companies purchasing goods they can’t get elsewhere to meet elevated household demand fueled in part by trillions of dollars in government stimulus.” Now, trade figures, like most other economic data, are backward-looking and don’t tell you anything about upcoming commerce prospects. However, that the US-China trade relationship has remained robust despite everything over the past 18 months highlights its resiliency, in our view—important to keep in mind whenever pundits warn political developments may hinder commerce.
MarketMinder’s View: Please note, MarketMinder is nonpartisan, and our discussion of policy is focused squarely on the potential economic or market impact. With Congress busy negotiating an infrastructure bill, we found this an excellent roundup of some of the tools and phrasing lawmakers use to make the numbers work so they can claim they are making good on their promises. For example, regarding the ghoulish-sounding titular tactic, “Congress can eliminate a program and claim credit for savings, even if the program was going to end anyway. For example, lawmakers are now considering eliminating or delaying a Medicare prescription-drug rebate created by the Trump administration. Democrats have discussed tapping the program for both the infrastructure plan and a subsequent bill addressing poverty, education and other party priorities. If the Biden administration stalled or stopped the prescription-drug program, the savings couldn’t count toward other spending. If Congress does it, the money counts.” Another popular technique: growth assumptions, in which lawmakers claim—usually based on ideal, rosy estimates—that a proposal will pay for itself since it will boost economic growth, thereby leading to higher tax revenues. None of these budgetary techniques are new, but as one policy expert here notes, “The flimsiness is a function of compromise. Neither side can have their sacred cows gored.” Moreover, markets aren’t fooled by creative language—they recognize the gridlock prevalent in Washington today will water down or even kill the most radical ideas.
MarketMinder’s View: Statistics Canada updated the basket weights for the goods and services in its Consumer Price Index (CPI) based on 2020 consumer spending patterns (2017 spending trends underpinned it before). As the article reports, “Three of the eight major components saw unprecedented growth in their basket weights, the statistics agency said, led by shelter, already the highest-weighted major component, which grew to 29.78% as a share of the basket, from 26.92% in 2017.” Now, if you are anything like us, you may be wondering about the logic behind updating an important economic series based on data out of an unprecedented year—so we went straight to the source. While Statistics Canada acknowledged 2020 was unusual, they think some pandemic-driven shifts in spending may lead to permanent changes (e.g., more remote work and online shopping). That is possible, though Canadian consumer spending returning to pre-pandemic trends is another plausible outcome—only time will tell. We share this to highlight a simple, broader point: By understanding an economic data series’ underlying construction, investors can better grasp what the final numbers do (and don’t) show.
MarketMinder’s View: Don’t overrate cash on the sidelines. Sure, Corporate America being flush with cash may, “... give companies flexibility to take potentially share-supportive measures, including facilitating buybacks, which boost earnings per share. Companies may also raise dividends, making their stocks more attractive to income-seeking investors amid falling Treasury yields.” But this isn’t the boost many, including this piece, think. For one, stocks price in corporate actions ahead of time. Markets account for any future dividend hikes or buybacks well before they officially happen, so these measures won’t provide bull market fuel in 2022 and 2023, as one expert argues here. (Buybacks support stock prices by reducing supply, everything else equal, but they are just one supply driver among many.) Two, we think this argument misses another possible course of action: Companies may just hold that “excess” cash, similar to what they did following the 2008 – 2009 financial crisis. Corporate cash piles—and their likely use—aren’t big secrets. Rather, they are part of the landscape forward-looking stocks are continually evaluating.
MarketMinder’s View: We agree with Milton Friedman’s dictum, presented here, that too much money chasing too few goods and services causes inflation. Money supply, as measured by M2 (mainly currency in circulation, checking and savings deposits and money market funds), is certainly galloping: “Since March 2020, the M2 has been growing at an average annualized rate of 23.9%—the fastest since World War II.” But we disagree with the conclusion this will inevitably lead to 6% – 9% y/y inflation by yearend. The reason: All that money isn’t doing much chasing, as this piece acknowledges. “There is so much money out there that banks don’t know what to do with it. Via reverse repurchase agreements, banks and money-market funds are lending money to the Fed to the tune of $860 billion.” Money stashed back at the Fed isn’t circulating. Then too, velocity—the speed money changes hands economy wide—has collapsed. The article suggests velocity is poised to pick up, but it provides no evidence. We are watching for signs excess money sloshing around is actually coursing through the economy, but we—and inflation-sensitive bond markets—remain unconvinced that is around the corner.
MarketMinder’s View: Australia reinstated local lockdowns in June, and the data show it: “Australian household spending recorded its largest monthly decline this year as the early impact of coronavirus lockdowns took a toll on consumption. Preliminary retail sales dropped 1.8% in June from a month earlier, compared with economists’ median estimate of a 0.7% decline, the Australian Bureau of Statistics said in a report released in Sydney Wednesday.” While nothing here is surprising, we think the numbers reinforce a useful, high-level message for investors: The path to a post-pandemic normal won’t be smooth, so set your expectations accordingly. COVID restrictions, which defy prediction, could return as they have in Australia. Pundits’ myopic focus on day-to-day events adds to the noise. Our suggestion? Think like markets do and look forward—stocks have priced in and moved on from developments in the next week or even couple months, so your focus should be beyond that timeframe, too.