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.


Fed Raises Risk of Policy Mistake and Market Accidents

MarketMinder’s View: We agree with the high-level, 50,000-foot concept of this piece: Monetary policy mistakes are risks worth monitoring for. History has plenty of examples in which central bankers overshot in their efforts to contain inflation, pushing short rates above long rates and inverting the yield curve—crimping bank lending and leading to recession. However, this article argues the Fed’s quantitative easing (QE) program is overstimulating certain segments of the economy, and if they don’t start pulling back soon, they risk “… having to slam the policy brakes down the road”—perhaps triggering a recession. Trouble is, this presumes QE is stimulus—a long-running misperception, in our view. Going back to recent history, the Fed deployed three huge rounds of QE since 2008—and none of them spurred bank lending. Counterintuitively for many, loan growth improved after the Fed started to taper QE. What many miss, in our view: Short rates already near zero. Lowering long rates, which QE does, narrowed the spread between the two. Banks borrow short term to lend long, so this spread is a proxy for lending’s profitability. Making lending less profitable discourages banks from lending, which also weighed on money supply growth. If money isn’t moving around the economy, it isn’t doing much stimulating. So, we agree ending QE makes a lot of sense, but not because it is causing the economy to overheat—rather, because it is a headwind (albeit, a minor one) to growth.

Economic ‘Pothole’: Banks, Economists Warn Sydney Lockdown Will Hit GDP, Employment

MarketMinder’s View: Here is a roundup of several experts’ updated Australian GDP forecasts to account for the renewed lockdown measures in Sydney, the country’s largest city responsible for about 25% of national output. The general consensus, as described by one economist quoted here: It is a “pothole” for the economy, but it likely won’t derail the broader recovery. That sounds more or less right to us, even as Melbourne—Australia’s second most-populous city—announced a new stay-at-home order going into effect tomorrow. Now, we won’t know the exact hit to GDP for months, and we don’t dismiss the pandemic’s tragic human toll, which numbers can’t adequately capture. But from an investing perspective, coldhearted markets have long recognized the path to a post-pandemic normal was going to be bumpy. Moreover, as another economist noted here, the world is (unfortunately) very familiar with lockdowns 16 months after they began in developed nations. Surprises move markets most, and at this juncture, COVID restrictions aren’t sneaking up on anyone. In our view, markets are looking beyond these near-term COVID setbacks and ahead to a post-pandemic normal.

Your Child Tax Credit Payment Just Arrived. Are You Sure You Want It?

MarketMinder’s View: In today’s “News You Can Use” segment, eligible households have started to receive payments today as part of Congress’s expansion of the child tax credit via the American Rescue Plan. While the payment will quite possibly help struggling families, take note—some may have to pay back some or all of the prepayments on their 2021 tax returns depending on their particular circumstances. Here is a helpful hypothetical: “Say a married couple with two children over age 5 and $220,000 of income got a $500 refund for 2020. Their 2021 income is similar, so that’s too high for this year’s extra child credit. But they’ll still get permanent credits totaling $4,000—and receive half of that in prepayments this year of about $333 a month. Next year, when they do their 2021 tax return, the $2,000 of prepayments won’t be available to lower their tax bill. So instead of getting a $500 refund, they could owe the IRS $1,500.” This article provides some more helpful tips—e.g., how to stop or change payments if you wish—so if you or someone you know find yourself in this situation, read on for more perspective.

Biden to Rally Senate Democrats on Spending Goals After They Reach $3.5 Trillion Budget Deal

MarketMinder’s View: As always, MarketMinder favors no party nor any politician, and we don’t pass judgment on any legislation. We aim solely to assess political and legislative developments’ potential market implications, if any. With yesterday’s news that Senate Democrats on the Budget Committee reached an agreement on a $3.5 trillion budget over the next 10 years, President Joe Biden is now trying to rally support for the plan—and this article highlights some of the high-level details. But before getting too excited—or distraught—over the agreement, there are still several hurdles before anything becomes law. To name one, “Sen. Bernie Sanders, whom [Senate Majority Leader Chuck] Schumer credited with leading the charge to include expanded Medicare coverage in the budget resolution, and other progressives had initially pushed for a $6 trillion price limit for a budget. Biden had proposed less than $5 trillion. Moderate Sen. Joe Manchin, D-W.V., expressed a starkly different sentiment Tuesday, telling reporters, ‘I think everything should be paid for. We’ve put enough free money out.’” Some senators, like Manchin, also seem lukewarm to the deal, claiming they don’t even know what is in it yet. Swing-state senators may balk at plans that put their seats in jeopardy at home, and 100% unanimity will likely be required to pass this plan. Despite Democrats’ nominal control of the Senate, intraparty gridlock is significantly watering down legislative proposals. Combine that with the politicking and moderating related to next year’s midterms, and the impact of any legislation Congress passes would likely be far less than hoped (or feared). Moreover, the debate over a mega-spending bill is taking place in the public eye, which substantially reduces any surprise power. Whether this becomes law or not, we doubt the outcome shocks markets.

How Biden’s Executive Order Could Reshape Rail and Ocean Shipping

MarketMinder’s View: Here once again, we remind you that MarketMinder is nonpartisan and assesses developments in politics solely for their potential impact on markets and personal finance. In this case, the titular operative word here is “could.” President Joe Biden’s executive order last week is worth being aware of for the regulatory implications it could have, which this article details (with nifty graphics and maps) regarding transport rules, particularly for railroads and ocean shipping. As it describes, “The executive order encourages the Surface Transportation Board to take up a longstanding proposed rule mandating so-called reciprocal or competitive switching, the practice whereby shippers served by a single railroad can request bids from a nearby competing railroad if service is available. The competitor railroad would pay access fees to the monopoly railroad, but could win the shipper’s business by offering a lower price, using the rival railroad’s tracks and property.” This could affect railroad operators’ earnings—and regulatory change is something for investors to keep an eye on. But until there is an actual rule made, such prospects exist only in the realm of possibility, not probability—and markets deal more in the latter. For more, please see yesterday’s commentary, “Our Take on Biden’s Executive Order Targeting ‘Competition’.”

Global Investors’ Exposure to Chinese Assets Surges to $800bn

MarketMinder’s View: This article explores a broad, long-running trend: China’s strengthening ties with global markets. As the article notes, “Offshore investors have bought a net $35.3bn of Chinese stocks in the year to date via trading platforms that link Hong Kong with exchanges in Shanghai and Shenzhen, according to Financial Times calculations based on Bloomberg data. That was about 49 per cent higher compared with a year earlier. Foreign investors have also bought more than $75bn in Chinese Treasuries in the year to date, according to figures from Crédit Agricole, representing a 50 per cent rise from a year earlier. Foreign buying of Chinese stocks and government bonds has risen at the fastest rate ever compared with corresponding periods in previous years.” Despite high-profile examples of Chinese companies facing regulatory uncertainty and sharply worded barbs between governments, investors globally aren’t shunning the world’s second-largest economy. Now, policy and/or geopolitical uncertainty could always stir short-term volatility. But to think markets aren’t familiar with those realities in China implies they are inefficient—a shaky premise, in our experience, as the market does a much better job of cutting through the noise than any other pricing mechanism.

ECB Starts Next Digital-Euro Stage With Investigation Phase

MarketMinder’s View: Central banks have been exploring digital currencies for a while, and this article describes the ECB’s progress on the much-ballyhooed digital euro proposal: “The ECB’s website says a digital euro would be ‘like banknotes but digital.’ In reality, a key characteristic of notes and coins -- the ability to make payments that are simultaneously anonymous and offline -- will be challenging to replicate. Sweden’s Riksbank noted in a report this year that digital currencies will need to be verified by a remote ledger to avoid counterfeiting, compromising anonymity. The ECB appears to have recognized that, saying in a report last year that ‘the Eurosystem would be best placed to win the trust of European citizens in an offline payment tool,’ and that ‘anonymity may have to be ruled out.’ It did see room for a ‘selective’ approach to privacy though. The system could allow certain types of transaction to be executed without registering the identity of the payer and payee.” This is all still early days. Besides privacy issues, there are questions over who will primarily administer the system—the ECB or private banks (the ECB leans toward the latter); whether to adopt decentralized “blockchain” technologies like bitcoin and other cryptocurrencies use; and how to conduct monetary policy with any newfangled digital currency, to name just a few topics under consideration. Moreover, as the article rightly details, any ECB-approved digital currency is likely years away—nothing for investors to act on at this point. Ultimately, they really look like a potentially new twist on payment systems, not much like bitcoin or other cryptocurrencies.

UK Retail Sector Records Fastest Quarterly Growth on Record

MarketMinder’s View: Well, according to a survey from the British Retail Consortium, that is. It estimated UK retail sales in June 2021 topped June 2019 (to avoid base effect skew from lockdowns) by 13.1%, with total Q2 sales 10.4% above Q2 2019. Meanwhile, Barclaycard’s measure (based on credit card spending) pegged June 2021 at 11.1% above June 2019. These are all very nice numbers, and in a week we will see what the Office for National Statistics shows in the official report, which uses different methodology and, unlike these reports, also shows seasonally adjusted month-over-month figures. Overall, though, nothing here is terribly surprising: It was a foregone conclusion that as England’s third lockdown slowly lifted, consumers would splash more cash on goods and services. Also helping was the Euro 2020 soccer tournament, with the early parts of England’s amazing run spurring demand for all football-related accoutrements (e.g., televisions, munchies and a goodly store of ale). That one-off boost will probably also help July’s numbers, but it should fade. Ditto for the reopening boomlet, once people get all that pent-up demand out of their system. So while this flurry of consumption is no doubt a welcome development, we don’t think it is a sign the UK is jumping to a higher plateau of economic growth. More likely, as in the US, it is a fleeting party before a return to normal growth rates—a fine environment for stocks.

Biden’s Plan Risks Bursting Ireland’s Bubble

MarketMinder’s View: So far, Ireland is perhaps the most important holdout in OECD’s global minimum corporate tax pact, which 131 other nations signed on to (and which the G-20 blessed over the weekend). This article argues that resistance will run out and Ireland will eventually cave, citing speculation from think tanks and tough words from one member of Parliament (MP). Thing is, that MP, who stated Ireland’s 12.5% corporate tax rate’s day in the sun “has come to a shuddering halt,” is an independent. It would take a majority of MPs to actually change corporate tax law, presuming the government (a three-party coalition) even bends to other countries’ politicians and signs on. That appears to be a stretch, based on Finance Minister Patrick Donohoe’s repeated statements on the matter. Even if leaders yield, the coalition holds only 83 of the Daíl’s 160 seats, so it would take just a handful of holdouts to scuttle any legislation. We imagine all would be watching the US Congress closely, and gridlock on our shores would likely remove any potential incentive for Irish MPs to jack up their corporate tax rate. Mind you, we don’t think a potential increase is the giant economic risk for Ireland that this piece portrays. Yes, Ireland’s tax arrangements artificially inflate GDP, but there has always been an easy way to see through this: GNP, which omits those distortions and which the statistics agency has long emphasized over GDP. GNP is only -1.0% below its pre-pandemic peak (per FactSet), defying the notion of corporate accounting tricks papering over deep economic cracks. The potential tax change is more of a global issue for markets, not a local one. Ireland’s situation merely shows why that global change isn’t anywhere near as likely as its champions claim.

Suga Cabinet’s Low Approval Rating Sparks Call for Reshuffle

MarketMinder’s View: As always, we are politically agnostic and favor no politician or party in any country. But political developments can impact markets, so we think this look at Japan’s political maneuverings is worthwhile for investors. The next general election is due by October, and while the current coalition of the Liberal Democratic Party (LDP) and Komeito has a commanding majority, cracks are forming. “According to the survey, the percentage of people who would vote for the LDP in the next lower house election was 39%, the lowest since [Prime Minister Yoshihide] Suga formed his Cabinet.” Now, that isn’t quite as dismal as it might appear, considering the opposition is in disarray—with the Constitutional Democratic Party of Japan (CDPJ) polling at 10% and all other opposition parties trailing that. Moreover, 39% isn’t far out of line with the LDP’s showing in 2017. Then, according to the official results, the LDP took about 33% of the vote in the proportional representation section of the election and 48% of the vote in constituency contests. So the latest poll doesn’t mean voters are going to toss the LDP. But in our view, it underscores why Suga is reportedly eyeing a snap election after the Olympics wrap: The more his popularity flags, the lower the likelihood he wins the LDP’s leadership contest in September. Securing a fresh mandate before then might help his chances. Whatever happens, though, the likelihood of any Japanese administration having the political capital necessary to break gridlock and push through reforms seems low. An election might ease uncertainty, but it won’t alter fundamentals, which largely favor huge multinationals over companies reliant on economic revitalization at home.

Federal Drilling Approvals Surge Despite Biden’s Climate Pledge

MarketMinder’s View: Remember when President Joe Biden issued an executive order that supposedly banned new oil drilling while he was still unpacking boxes from the move into 1600 Pennsylvania Ave? At the time, we explained the order did little more than change the permit review process for drilling on federal land and wouldn’t prevent companies with existing leases from drilling new wells. Now, several months on, reality has utterly disproven those rumors of the US oil industry’s impending demise. Drilling permits have soared at the fastest pace since the waning days of President George W. Bush’s administration: “The Interior Department approved about 2,500 permits to drill on public and tribal lands in the first six months of the year, according to an Associated Press analysis of government data. That includes more than 2,100 drilling approvals since Biden took office Jan. 20.” This comes on the heels of a rush to lock in permits while President Donald Trump was still in office, as oil producers raced to get ahead of a feared oil drilling crackdown under the new administration. “The pace dropped when Biden first took office, under a temporary order that elevated permit reviews to senior administration officials. Approvals have since rebounded to a level that exceeds monthly numbers seen through most of Trump’s presidency.” Now, as in 2008, high prices are encouraging producers to boost supply, which is how this stuff always works. This new production won’t raise supply (and ease oil prices) immediately, as it takes time for new wells to come online. But it is yet another example of watching what politicians do, not what they say. After all, the federal agency approving all these permits is run by someone who “adamantly opposed drilling on federal lands while in Congress and co-sponsored the liberal Green New Deal.” Basing investment decisions on political rhetoric is always and everywhere an error, in our view.

Japan's May Machinery Orders Rise for 3rd Straight Month

MarketMinder’s View: The data here are actually a lot more encouraging than you might think, as the article doesn’t give a complete timeline of Japan’s multiple COVID states of emergency (their version of lockdown). The government declared the third state of emergency in late April, and it ran until mid-June. So it is noteworthy, in our view, that core machinery orders jumped 7.8% m/m in May—trouncing  expectations for 2.8% and notching their third straight monthly rise—even as restrictions persisted. Demand also bounced among non-manufacturers, whose orders jumped 10% m/m, the first rise in six months. This is rather encouraging in light of the government declaring a fourth state of emergency for Tokyo last week—it shows how lingering restrictions aren’t preventing a recovery. None of this is news to stocks, but it does show how much the world is increasingly moving on from lockdowns as an economic risk. 

Freedom Day Is Coming - Now Watch British Stocks Soar

MarketMinder’s View: We have no comment or opinion on the stock-specific part of this discussion, as MarketMinder doesn’t make individual security recommendations. But the broader thesis here deserves some attention. It argues: “On Freedom Day [July 19], laws to enforce mask wearing and social distancing will be scrapped, nightclubs will reopen, sports stadiums will return to full capacity – and shares in British companies are primed to rally. Fund managers say the successful reopening of the economy could add more fuel to Britain’s stock market recovery and entice foreign buyers back to the market, pushing shares higher still.” Um ok problem is, markets are forward-looking, and they have known July 19 was the day since UK Prime Minister Boris Johnson delayed the end of England’s third lockdown on June 14. Even that is putting too fine a point on things, considering markets usually look about 3 – 30 months out and everything from vaccine progress to China’s experience helped markets price this year’s eventual reopenings several months ago. The precise timing mattered much less than the simple fact that reopening would happen. Plus, most economic activity that publicly traded companies care about is already open. So we recommend taking reopening out of your calculations and focusing instead on the UK’s value-heavy tilt and large concentrations in Financials, Materials and Energy—and its relative lack of Tech and Tech-like companies, which we think remain poised to lead. Owning UK stocks makes sense for diversification, in our view, but we don’t think basing some huge overweight on reopening is wise.

An Infrastructure Spending Bust Might Still Boost Markets

MarketMinder’s View: This piece is an epic case of on-the-one-hand-on-the-other that would have Harry Truman spinning in his grave. The first two-thirds argue that if President Biden’s infrastructure spending plans die in gridlock, it will threaten “financial markets and an economy that have relied on massive fiscal spending to climb out of coronavirus-induced depths.” The evidence is a retreat in a basket of infrastructure-related stocks, which is a stretch (also, MarketMinder doesn’t make individual security recommendations). But the last part contradicts that, arguing DOA spending bills will inspire the Fed to keep its own “stimulus” intact and all will be fine. Now, we find the gridlock discussion here overall sensible, and we agree big spending bills are likely to fall apart or get watered down significantly (we also don’t favor any politician or political party and don’t take stances for or against legislation). But the notion that stocks are up big over the past year-plus because of monetary and fiscal stimulus strains credulity. As we have detailed before, most of the “stimulus” passed thus far hasn’t done much stimulating. Households put the majority of their stimulus windfall to saving or paying down debt. Another nearly $600 billion of approved COVID relief money that wasn’t spent is now loosely slated to pay for the infrastructure bill. The infrastructure plan wouldn’t have a radically different outcome, considering that a) the money is slated to drip out over nearly a decade and b) shovel-ready projects are a myth. Plus, with midterms looming, there is every chance a future Congress could reappropriate funds the current crop of legislators approves. That is normal practice. Markets see this, and if it were a risk, stocks broadly wouldn’t be notching new highs—and that, not some infrastructure basket, is the real tell. As for the monetary angle, we continue to believe Fed policy is more of a hindrance than a help, as it flattens the yield curve and discourages bank lending. Neither tapering quantitative easing nor raising interest rates killed the 2009 – 2020 bull market, and we doubt this time is different.

Binance Froze When Bitcoin Crashed. Now Users Want Their Money Back.

MarketMinder’s View: Look, we aren’t inherently for or against bitcoin or any cryptocurrency, but this is a shining example of why considering the risks of any investment is paramount. On May 19, a day bitcoin fell -14% (per CoinMarketCap.com), the titular cryptocurrency exchange crashed, leaving users unable to sell if they wished. When they logged back in, those using leverage discovered the drop had triggered margin calls and forced selling, which wiped out their collateral. When outages at regulated brokerage firms lead to personal losses, there is sometimes recourse, as regulators can step in and mandate payments to the afflicted users. That just happened with a certain popular stock trading app named after a folk hero, as the article notes. But crypto exchanges aren’t required to register, as crypto trading is an unregulated activity, leaving users out of luck in this case. So, while we empathize with the people profiled here, we also think it is important to internalize the lessons their experience teaches. One, make sure you know the ins and outs of whichever company you are trading through, including their regulatory status and the level of protection against technical glitches and the risk of loss of your securities if the brokerage or crypto exchange goes under. Two, remember that using margin risks losing more than your initial investment, a fact that seems to have surprised people here. Three, if executing your strategy successfully requires pinpoint timing during periods of extreme volatility, there is a large chance it is out of step with your financial goals. Four, really, never lever yourself up by a factor of 125 to 1, which is the maximum this exchange offered.

I Saved My Sister From a Social Security Scam. Listen to the Actual Call.

MarketMinder’s View: This is great, and not just because it gives a striking example of fraudsters in action. It also shows why people continue to fall for this and other scams, even as they become well-known and, to the outside observer, seem to have obvious tells. “Social Security numbers can’t be suspended. No government agency will ask you to pay with gift cards. The feds will never threaten arrest or legal action unless you immediately send cash. No, that’s not the government calling threatening to ‘suspend’ your Social Security number. You may wonder: How do so many people fall for what seems like an obvious scam? The simple answer is, they get scared there’s a chance what they are being told is true. … Fear overwhelms any reservations they may have and sucks them into the con.” Plus, this: “Here’s why he was able to disarm my sister: He already had a lot of her personal information, which played into her thinking perhaps what he was telling her was legit. He knew where she banked and how many accounts she had.” Don’t let fear overtake you and shut off your discernment. Stay calm and you will take away scammers’ greatest weapon.

China Moves to Spur Bank Lending to Help Troubled Small Businesses

MarketMinder’s View: Newsflash: Centrally planning economies is hard. “China’s monetary policy has swung sharply over the past 18 months in response to the pandemic. The central bank pushed banks to lend heavily early last year as the virus raced through Wuhan and beyond, to make sure businesses did not run out of cash. Worried that the extra money might fan inflation, the central bank later tightened policy. But with many companies struggling to pay interest on their debts, and with the economy not quite fully recovered from the pandemic, the central bank then changed policy again on Friday toward further easing.” Now they have trimmed reserve requirements, theoretically enabling banks to lend more, but it is questionable whether this will have more than a marginal impact on economic growth for two big reasons. One, small businesses might be loath to take on even more debt. Two, “The People’s Bank also cautioned in its announcement that the effect might be somewhat muted, because part of any extra lending is likely to disappear quickly into the government’s coffers as the summer tax collection season starts.” Overall, we think it is pretty clear officials are trying to strike a balance between growth and financial stability, which is a tightrope they have been walking for years—all in all, a sign things are increasingly getting back to normal in the world’s second-largest economy.

UK Growth Slows as Computer Chip Shortage Hits Carmaking

MarketMinder’s View: This is overall sound coverage of the UK’s May GDP report, which pegged month-over-month growth at 0.8%, missing expectations for 1.5%. This isn’t a sign of a weakening recovery from the slowly lifting third lockdown—rather, it is a blip stemming from shortages of semiconductors and commodities, which dragged down auto production and construction. While we aren’t dismissing the shortages’ impact on manufacturing, there are already signs those shortages will ease as producers respond to high prices by cranking up investment (see US lumber prices’ big drop since mid-May, for example). More importantly in the here and now, the vast majority of UK GDP is services, and that component grew nicely, more than offsetting heavy industry’s drag. Consider this a microcosm for the developed world and more evidence supply shortages aren’t the economic drag many suspect.

Wall Street Is Chasing the Value Trade Beyond U.S. Stocks

MarketMinder’s View: Ok, let us see if we have this right: European value stocks have underperformed US value stocks this year, which means they have room to catch up and are about to go on a tear? Folks, we are sorry to rain on your parade, but that isn’t how markets work. There is no such thing as the law of catching up. Plus, growth and value stocks tend to move cyclically, and those trends are generally global, not local. Growth stocks’ returns relative to value in the US have mirrored their European counterparts—and in both places, growth has been on a tear relative to value since mid-May. The notion that they will diverge radically now for reasons that have been well-known to the masses for eons is far, far out of step with normal market behavior. In our view, growth stocks are poised to keep leading globally as the reopening pop fades and slow economic growth sets in. So by all means, have some European exposure to ensure diversification, but we think value categories—whether in the US or anywhere else—aren’t likely to deliver lasting leadership anytime soon.

The Investment Lessons to Be Learned From Golf

MarketMinder’s View: This piece was a mixed bag, in our view, and not just because of the drawn-out, tired sports analogy. Positively, the thought exercise of reviewing various assets’ performance between 2003 and 2020 highlights some basic, albeit still useful, points for investors. For example, the best-performing asset class or geography one year may struggle mightily the next—a reminder that recent returns say little about the future. Thus, rather than try to find a needle in a haystack, investors should opt for diversification among various equity categories. Doing so properly smooths returns over time, so “You won’t multiply your money 100-fold between the birth of your child and their A-levels, but you are also unlikely to lose three quarters of your starting capital either.” On the less-sensible side, we think this article confuses diversification with asset allocation. The latter is about designing a portfolio of different assets that results in a risk versus return balance that targets your long-run goals and needs. The former is about avoiding concentration risk within those asset categories. Hence, this analysis seems a bit too preoccupied with an asset’s returns and not enough on its role in a portfolio. For example, it points out that bonds have been big laggards this year. Yet in our view, fixed income’s role in a portfolio is to dampen short-term volatility—an important consideration if investors have cash flow needs—not boost returns. Moreover, implying that history may be rhyming today because commodities and real estate are hot—just as they were in 2000—is a stretch. Markets are forward-looking, focused on economic and political conditions over the next 3 – 30 months, not what happened more than two decades ago.