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.


Meet the New Chinese Economy, Same as the Old Chinese Economy

MarketMinder’s View: Upon the release of May Chinese economic data, some economists worry the latest numbers suggest pre-pandemic problems are returning to the surface. This piece touches on two of them: slowing industrial exports (allegedly bad because heavy industry drives Chinese growth) and a fragile real estate industry (also allegedly bad because disruptions could have negative financial and social implications). Incidentally, these are two old Chinese ghost stories—and they remain false fears, in our view. However, we found this particular observation interesting: “It is best to compare the numbers released on Wednesday to their equivalents from 2019 for a clear picture, since those aren’t distorted by the extremely unusual economic conditions of early 2020. Industrial production is up 13.6% for the first five months of the year, compared with the same period in 2019. On the same basis, retail sales have risen by 9.3%, fixed-asset investment by 8.5%, and real-estate investment by 17.9%. If a recovery led by investment in real estate and industrial production, with consumption lagging behind, sounds familiar, it may be because the same could be said of the makeup of China’s growth before Covid-19.” Well, maybe, but retail sales don’t represent the entire services sector, which also attracts a great deal of consumer spending and happens to be China’s largest economic sector now. Plus, with localized lockdowns continuing to flare up in China, it isn’t hugely surprising that heavy industry is managing to grow a bit faster than services-related gauges. So we wouldn’t read too much into the divergence, although we do agree with the broader observation that post-pandemic growth resembles its pre-pandemic trend, which in China’s case amounts to a long-running slowdown as stability takes government precedence over rapid growth. We expect other major economies to follow a similar trajectory following reopening-related pops—worth keeping in mind for investors when setting expectations about future economic growth.

It’s Not the Bank of England’s Job to Save the World

MarketMinder’s View: Please note, MarketMinder doesn’t support or oppose policy—our analysis focuses strictly on the potential economic and market implications. Moreover, this article discusses climate change—a hot-button topic that can elicit strong opinions. Regardless of your personal stance, climate change falls in the realm of sociology, which doesn’t materially affect stocks’ fundamental drivers—important for investors to keep in mind, in our view. Those disclaimers aside, we thought this article highlighted an important theme: why adding to central bankers’ responsibilities isn’t necessarily a positive. While many pundits seem to think monetary officials determine the fate of the economy, central banks just aren’t that powerful. Expanding their mandates to address environmental issues—when history shows their struggles to meet their existing inflation targets—may lead to a host of other unintended consequences. “It’s true the Bank [of England] is currently only considering making bigger allocations to greener companies in its corporate bond portfolio. But Lord King is worried this could be the start of a slippery slope and that the Bank will in time be forced to take positions that will undermine its independence. The counter to this is that climate change could pose a threat to financial stability, which is the Bank’s responsibility. But, as Sir Paul Tucker, a former deputy governor of the Bank of England, told a House of Lords select committee recently, wars are bad for financial stability too. Should central banks not buy the bonds of arms manufacturers?” Adding further complexity to an already complicated job doesn’t seem like a recipe for better monetary policy, in our view, particularly when central banks haven’t exactly acquitted themselves well throughout history when it comes to fulfilling their actual economic mandates.

UK-Australia Trade Treaty Is the ‘New Dawn’ You May Never Notice

MarketMinder’s View: In regards to scaling, we think this article does a fine job putting the UK-Australia free-trade deal into economic perspective. Yes, the savings from tariffs amount to a rounding error in the context of GDP; yes, details still need to be worked out; yes, given the slow phase-in, the economic benefits won’t fully arrive for years; yes, trade with the EU remains integral, and a free-trade pact with Australia—or even membership in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)—won’t change that. But we think the rather dour tone here misses a broader, symbolic point: Contrary to many post-Brexit fears, the UK hasn’t turned away from the global economy. They haven’t even turned away from the European Union—though London and Brussels are griping over their agreement deal now, returning to a no-deal scenario doesn’t mean commerce will cease between the UK and the Continent. While we do think markets prefer free trade, free-trade pacts don’t unleash new commerce, just as the lack of an agreement doesn’t block trade. In our view, the UK’s eagerness to strengthen ties with other countries illustrate a bigger point: Reality is turning out to be better than post-Brexit skeptics projected. For more, see last week’s commentary, “The UK Is Lining Up Trade Deals.”

'Going Home With Nothing': Dems Agonize Over Infrastructure Strategy

MarketMinder’s View: Please note, MarketMinder is nonpartisan and favors no party nor any politician. We share this piece to highlight a broader theme: rampant gridlock in the Beltway. At the end of March, the Biden administration released its widely anticipated infrastructure plan. We are now halfway into June, and Congress remains in fierce debate about what should and shouldn’t be included in the bill. Moreover, that debate isn’t just between opposing parties—it is happening within the party in power. “Democrats are grappling with whether to pair a bipartisan infrastructure proposal with an expansive spending plan passed on party lines — and with how soon to push forward on either bill. There’s a problem though: The party and its reed-thin majorities are nowhere near agreement on how big that spending package should be and what should be in it, with a progressive wing threatening mutiny if certain demands are not met. And they need lock-step unity in the Senate and near unanimous agreement in the House to pass anything at all under budget reconciliation. Without it, President Joe Biden and congressional Democrats could have a key campaign promise stalled indefinitely.” The rest of the article dives into what different Democratic factions want, but the upshot for investors: Congressional gridlock appears to be strengthening—an underappreciated bullish positive for stocks this year, in our view.

Britain Signs Its First Major Post-Brexit Trade Deal With Australia

MarketMinder’s View: A free-trade deal between the UK and Australia may not be the biggest economic driver in the world, but we think it is quite noteworthy for what it represents. This is the first trade deal the UK has negotiated soup to nuts since Brexit took effect last year, which is warp speed compared to how long trade deals normally take. In our view, that is a huge counterpoint to pundits’ repeated warnings that Brexit meant protectionism, or the UK didn’t have the manpower or expertise to negotiate its own deals, or or or. They also managed to overcome two sticking points that threatened to delay or torpedo the agreement outright: “Details of the agreement haven’t been published yet, but the government said it would include a cap on tariff-free imports for 15 years, a measure intended to appease British farmers concerned about a flood of beef and sheep imports from Australia. The deal will remove Australia’s 5 percent tariff on Scotch whisky exports.” Even with speedbumps like the spat with the EU over customs checks on goods traveling from Great Britain to Northern Ireland, Brexit reality is vastly exceeding dreary Brexit expectations, which we think has been a modest tailwind for UK stocks this year. For more, see our 6/7/2021 commentary, “The UK Is Lining Up Trade Deals.”

China Approves Highest-Ever Outflows for Mainland Investors

MarketMinder’s View: “China has approved record amounts of investment to flow out of the country through an official scheme as authorities liberalise the local financial system against a backdrop of a rallying renminbi. A cumulative $147bn of approvals have been added to the nation’s qualified domestic institutional investor scheme, which allows investors to access assets outside mainland China through banks and other institutions. In early June, Beijing approved $10bn in new QDII allocation, the highest single amount in the history of the scheme, which was launched in 2006 and is used mainly by China’s retail investors.” While China’s long-running effort to open its capital account has moved in fits and starts, we think the timing of this latest move is noteworthy. As the article points out, the stronger yuan and rising domestic stock markets have apparently stoked concerns about domestic stability, and allowing more capital outflows is a way to let some of the air out while opening up the economy at the same time—accomplishing the Chinese government’s twin goals of shoring up financial and economic stability while slowly liberalizing the economy overall. Consider this another sign of China’s return to normal post-pandemic.

US Retail Sales Fall as Spending Shifts Back to Services; Producer Prices Rise

MarketMinder’s View: We will spare you a deep dive into the accelerating Producer Price Index, whose acceleration shouldn’t be shocking considering that is where supply shortages will show up the most in prices, and which isn’t a leading indicator for actual inflation or anything else. More significant here is May’s retail sales report, which showed total sales falling -1.3% m/m. This piece has an overall decent take, highlighting that sales fell not because consumption is weakening, but because more services are finally reopening—and most services aren’t in the Census Bureau’s retail sales gauge. For example, it doesn’t include travel (e.g., airfare and hotels), which likely got a big boost as tourism began to return. Services account for over half of all consumer spending, so a return to normal on that front is overall good news, even if it is widely known by now. Mostly, this development shows the follies of relying on retail sales as an indicator of consumer spending—and the broader fallacy of presuming any one metric is all-telling.

Lumber Prices Are Falling Fast, Turning Hoarders Into Sellers

MarketMinder’s View: Lumber prices are still elevated from last year and their longer-term average, but the spike that got heaps of attention a few weeks ago has subsided significantly. “The rapid decline suggests a bubble that has burst and the question now is how low lumber prices will fall. Even after tumbling, lumber futures remain nearly three times what is typical for this time of year. Lumber producers and traders expect that prices will remain relatively high due to the strong housing market, but that the supply bottlenecks and frenzied buying that characterized the economy’s reopening and sent prices to multiples of the old all-time highs are winding down.” Helping prices fall: Companies that hoarded lumber during the shortage are now unloading it, bringing supply closer to demand. Consider this a real-time lesson in how quickly short-term supply hiccups can resolve, muting their economic impact over time—despite what all those headlines a couple of months ago would have led you to believe.

England's Delayed Reopening Is Expected to Have a 'Minor' Economic Impact

MarketMinder’s View: UK Prime Minister Boris Johnson has officially delayed the final easing of the UK’s lockdown restrictions, originally scheduled for June 21, for four weeks, and this is an overall good exploration of the likely economic impact—which is, in a word, tiny. For one, much of the UK’s economy reopened in April, and delaying the third phase of reopening doesn’t rollback the previous loosening. Two, the trough isn’t as deep this time: “As businesses have learned to adapt to restrictions — for example, as more restaurants have begun offering takeout service — the economic impact of each lockdown has been smaller. Last year, the economy suffered its worst recession in 300 years because of the severity of the impact of the first lockdown in spring 2020. At the start of this year, when most businesses had shut their doors because of the second wave of the pandemic, the economy contracted only 1.5 percent in the first quarter.” There will be winners and losers, of course, but those are exceedingly well known at this juncture, and markets generally don’t focus on the very short term. It matters less whether businesses can serve at full capacity starting in June or July and more that, over the foreseeable future, the full reopening of the UK economy will continue. The post-lockdown economic rebound might not happen in a straight line, but that has never been necessary for stocks to do fine.

Time to Start Preparing for No Deal 2.0

MarketMinder’s View: Five and a half months into the post-Brexit landscape, and the UK’s trade deal with the EU is allegedly at risk of collapse over … sausages. Or, to be less reductive, a disagreement over customs checks on goods traveling from Great Britain to Northern Ireland. This arrangement was a sticking point in Brexit trade talks for years, and most observers warned it would be untenable in real life. That seemed to come true earlier this year, when UK Prime Minister Boris Johnson unilaterally delayed the implementation of rules governing shipments of meat, and the EU is warning further delay could torpedo the entire free-trade deal between the UK and EU. Hence, this article predicts a return of no-deal Brexit dread, and that seems to us to be a fair hypothesis. But, as the piece then spends the majority of its space arguing, those fears are as unlikely to come true now as they were then, and not just because politicians on both sides of the English Channel have a history of compromise. Perhaps more importantly: “The trade deal, as it turned out, was very thin. It removed tariffs and quotas on goods flowing between the two sides, but it still imposed all the paperwork, enforced rigorously on the other side of the Channel, and had nothing to offer on services or finance, which happen to be the UK’s most significant exports. As the trade data released last week made clear, the flow of goods across the Channel was hugely disrupted through January and February but has mostly returned to normal as firms got used to the changed regime. Even exports of shellfish, one of the most contested products, are almost back to 2020 levels. Most companies have either got their heads around the extra paper, or decided not to bother exporting to the EU. Switching to WTO rules won’t make a lot of difference on top of that.” As for any headaches that would arise, as the article also notes, businesses spent most of last year devising no-deal Brexit plans. Those are easy enough to dust off and implement. So, overall, we see this as a prime example of reality being quite likely to exceed dreary expectations.

Israel Swears In New Coalition, Ending Netanyahu's Long Rule

MarketMinder’s View: This coverage veers into some politically charged waters and sociological matters, so we ask that you put all of that aside and remember that MarketMinder favors no politician nor any political party and assesses developments solely for the potential market impact. To that end, this piece does have a lot of detail illustrating why Israel’s new coalition government, which narrowly won a confidence vote Sunday, will likely face considerable gridlock. New Prime Minister Naftali Bennett’s Yamina party holds only 6 seats in the 120-member Knesset, and it has 7 coalition partners—a diverse array including left-wing, centrist, right-wing and other parties, all of whom have next to no common ideological ground. That makes the coalition’s long-term stability a question mark, but for now, we think stocks should enjoy the break from successive elections—and the uncertainty they brought—and gridlock should keep legislative risk low.

The Recession Isn’t Over Till They Say It’s Over. (But Who Are They?)

MarketMinder’s View: The titular “they” is the Business Cycle Dating Committee at the National Bureau of Economic Research (NBER), which has yet to declare an end to the recession that began last year. That isn’t very unusual, considering NBER normally declares recessions’ ends at a considerable lag. As the article notes, the recession accompanying the 2007 – 2009 financial crisis bottomed out in June 2009. But NBER didn’t declare that trough—and the recession complete—until September 2010. Before that, NBER announced the dot-com era recession’s November 2001 end … in July 2003. So it isn’t odd that while last year’s economic contraction bottomed last April, based on the vast majority of output- and spending-based economic indicators, NBER hasn’t declared an end yet. In our view, this all illustrates a crucial point for investors to bear in mind: Markets are forward-looking. They lead economic data, while descriptions of those data as “recessions” or “expansions” are backward-looking assessments. Stocks didn’t wait for NBER to declare last year’s contraction a recession in mid-November. They began falling in late February and bottomed on March 23, weeks before NBER declared a recession, and they have long since eclipsed pre-pandemic highs. That, in our view, also speaks to the main theme of this article’s second half: “I think way back in March of 2020 there was a question of: 'Should we call this a recession?' said Tara Sinclair, an economist at George Washington University who studies business cycles. ‘Or if this is something that is going to last a few weeks, then the economy bounces right back, should it be treated as a recession or as the equivalent of a natural disaster?’” Indeed, a typical recession resets the business cycle as banks and companies from coast to coast batten down the hatches, getting lean and mean to weather anticipated tough times ahead. This time, we didn’t see that normal grind in business investment and inventories, which we think is a strong indication that the economy and markets are behaving more as if we are in the maturing stages of the bull market and expansion that began in March 2009, not a brand new cycle. Viewing last year’s contraction as a sharp pause, rather than a full reset, can help put that in perspective—and help investors keep rational expectations as the world gets more optimistic and greedy.

Trade Figures Show Just How Wrong Project Fear Really Was

MarketMinder’s View: “Project Fear” refers to the UK government and BoE’s warnings that Brexit would destroy Britain’s trade with other EU member-states and take the UK economy down with it. Four months in, with April’s trade data now in the books, that thesis looks flat-out wrong. “After some sharp falls in January and February, when both the transition period came to an end, and we went into a fresh lockdown, our exports to the EU are now rising again. We shipped £12.9bn of goods to Europe in April - £300m  more than in March. But we sold more to the rest of the world - £13.6bn - and we imported more from countries outside the EU as well. Overall, our imports from the rest of the world hit a record high, and are continuing to rise strongly, while our imports from the EU are struggling to recover.” But slower-growing imports from the EU are part of a longer-running trend, as the article demonstrates, and not necessarily a bad thing. Before the UK became an EU member-state, trade with nations that now comprise the EU ranged from about 20% to 30% of total trade (exports plus imports). That spiked to 55% several years ago. Not because EU membership was some magic elixir, but because as an EU member-state, the UK “signed up for all its tariffs and quotas.” In other words, the UK signed on to the EU’s protectionism toward the rest of the world, creating barriers to trade with the Americas and Asia. Now those barriers are gone, freeing the UK to pursue deals of its own, boosting trade overall even as EU trade struggles a bit. That, in our view, is a net benefit and a big reason Brexit hasn’t been the disaster so widely feared. For more, see Monday’s commentary, “The UK Is Lining Up Trade Deals.”

Multinationals Shrug Off G7 Tax Assault

MarketMinder’s View: In the course of explaining why markets have seemingly shrugged off the G7’s “global” tax plans and the big Tech companies allegedly in their crosshairs have even sort of welcomed the potential changes, this piece discusses a few individual companies, so we remind you MarketMinder doesn’t make individual security recommendations. Rather, those mentioned here illustrate a key point: The G7’s proposed global minimum and digital services taxes are highly unlikely to materially hurt large Tech firms’ profitability. For one, low-tax nations (e.g., Ireland, Cyprus, Hungary and others) are almost certain to veto an OECD-wide effort, and as other coverage has detailed, ratifying a tax treaty would require a filibuster-proof majority in the US Senate, which the current administration seems very unlikely to muster. But even if the plans overcome all these obstacles, the new tax burden is likely a tiny share of these companies’ earnings and are probably easily avoidable. Companies operating in nations with digital taxes have already proven adept at passing them to consumers. Others have only one or two business units that would meet the threshold for being subject to the new tax, making their profits easy to shelter even if OECD decided to try taxing divisions rather than whole companies. “That would lead to a cat-and-mouse game that the tax authorities would find hard to win, some experts warn. Any attempt to tax individual units within companies would prompt them to restructure to get around the taxes or try to place their most profitable divisions in low-tax countries, said Bob Willens, a US tax analyst.” Meanwhile, smaller upstarts would likely have a harder time passing on tax costs to customers and staffing up their armies of corporate tax advisers, entrenching Tech giants’ position that much more. For more, see our commentary, “The G7’s Global Deal Is Less Than It Seems.”

Norway Sticks to Guns on Oil Even While Boosting Green Energy

MarketMinder’s View: We won’t argue there are ginormous investment implications here, and it suffers from hinging on a long-term forecast. But we see this piece as a counterpoint to the widespread thesis that a global “green” energy push will automatically create sudden threat to the viability of oil, oil-reliant nations, Energy stocks in general and banks with credit extended to oil firms. “Despite increased pressure from smaller parties to change oil policy and a warning from the International Energy Agency that new oil, gas and coal fields need to be scrapped if the world is to reach net-zero by 2050, [Norway’s] government isn’t willing to halt developing new fields. … The oil-rich Nordic Nation, which produces most of its electricity from hydro power, earlier this week announced that it will start a process to find more areas for developing offshore wind. There are currently two open for development — one dedicated to floating wind projects and the other to bottom-fixed farms — and the government sees the technology as a way to make the most of its offshore oil know-how.” But offshore oil exploration and production will continue, with projects in the works to power new installations with renewable energy. This is sort of how these things always work—as long as demand for something persists, producers will compete to fill it, even if political incentives influence how they do so.

Cheap Dollars Attract Foreign Investors to Treasurys

MarketMinder’s View: Setting aside the short-term market forecasts, which seem based more on widely known, backward-looking information than anything markets actually care about, this is a good look at something that has surprised a lot of observers this year: strong demand for US Treasury bonds, which keeps yields (read: borrowing costs) low even as issuance skyrockets. “Recent Treasury bond auctions have seen an uptick in demand from foreign investors. A 5-year debt sale on May 26 received the most bids from overseas investors since August at over 64% [of the bids received]. A 7-year issuance in the same week saw the most since January. The latest data from the U.S. Treasury Department showed that major foreign investors upped their holdings of longer-maturity U.S. government bonds in March.” There are a few reasons for this. One, even when you factor in currency hedging costs, Treasury yields still exceed their main European competition, and all else equal, money tends to flow to the highest-yielding asset. Two, pension funds globally have had to increase fixed income holdings in order to return their asset allocation back in line with their long-term needs and mandates after a huge rally in stocks. These underappreciated demand sources probably keep yields from skyrocketing, keeping US debt affordable for the foreseeable future.

Lower Returns and Greater Turmoil to Test Stock Investors

MarketMinder’s View: The crux of the argument here: Thanks to the loooong 2009 – 2020 bull market, investors may expect similarly big and smooth gains in the years to come—a mistake, according to this article, as certain metrics (e.g., high valuations) imply lower future returns. This thinking is off base for a several reasons, in our view. For one, we don’t think anyone can forecast returns a decade into the future, no matter the metric. While it is of course possible returns are below average, valuations won’t reveal much on that front, as they tell you only what happened in the past—not relevant for stocks, which care about economic conditions in the next 3 – 30 months. That goes double for any projection using the cyclically adjusted price-to-earnings (CAPE) ratio, which averages the past decade’s returns and bizarrely adjusts them for inflation. If what recently happened means nothing to stocks, we fail to see how ancient history is more telling. We also disagree with the notion that the 2009 – 2020 bull market was a smooth ride that buoyed investors’ resolve to stick with volatile equities. The S&P 500 may have registered just one negative calendar year during that period (per FactSet), but investors also had to deal with flat periods, pullbacks and several corrections throughout—all of which challenged their discipline. There was nothing easy about participating in what Fisher Investments founder and Executive Chairman Ken Fisher has called “history’s least-loved” bull market, and the implication that the past 12 years were solely “good times” seems like revisionist history to us.

As Fed Taper Looms, Global Central Banks Eye Their Own Exits From Stimulus

MarketMinder’s View: This spends many words fretting over the possible negative fallout from the Fed’s eventual tapering of its quantitative easing (QE) program. In particular, many experts fear a 2013-style “taper tantrum” that could roil some Emerging Markets—an overstated false fear both then and now, in our view. But rather than speculate about when the Fed will taper (unknowable) or how other central banks will react to one (also unknowable), we share this article to make a higher-level point: Pundits worldwide are monitoring monetary developments closely. This likely forces markets to pre-price taper fear to a great extent, lowering the bar reality needs to clear to positively surprise. Given tapering’s historical lack of impact, we think a better-than-feared reality is quite likely. Of course, short-term volatility can hit for any or no reason. But we doubt anything stemming from a QE taper would be material or lasting.

Switzerland Plans Subsidies to Offset G7 Corporate Tax Plan

MarketMinder’s View: Over the past couple weeks we have highlighted several stories that show why approving a global tax plan was always going to be tough sledding (namely, some low-tax countries don’t want change). Yet even if a global minimum tax plan passed, it doesn’t mean big businesses everywhere will automatically face higher taxes. As this article details, Switzerland has a long history of safeguarding its economic model—which employs low corporate taxes—despite ongoing tax reform pressure from the international community. The latest example: “Bern is consulting its own cantonal governments—which set their own corporate tax rates—to examine how measures such as research grants, social security deductions and tax credits could create a ‘toolkit’ to offset any changes to headline tax rates, officials told the Financial Times.” This shows you why there is a lot less to a 15% minimum statutory rate. Nothing here is finalized, and a global minimum corporate tax may not actually happen. But these types of country-specific tweaks further illustrate why any global tax change likely lacks the bite many fear.

With Moderation, German Greens Seek to Reignite Election Campaign

MarketMinder’s View: After an April opinion poll showed Germany’s Greens overtaking outgoing Chancellor Angela Merkel’s conservative bloc, the upstarts’ luster appears to be fading a bit. Besides a couple of embarrassing gaffes—e.g., Greens’ chancellor candidate Annalena Baerbock failed to declare bonus payments from her party to parliament, which is required under German law—the party is now tempering some of its climate policies (e.g., plans to hike gas prices) to broaden its appeal to the German electorate. “The fuel price debate has left Baerbock and Habeck keen to show ‘social balance’ in the election platform to be agreed this weekend and to project moderation and maturity as they seek to reignite their stumbling campaign. … The upshot is that the leadership will resist a motion to raise the CO2 levy for oil and gas, for example to 80 euros per tonne in 2022, instead of the 60 euros in 2023 proposed by the party brass. The leaders will also stress that revenues from the higher CO2 price would be channelled back to poorer people.” As always, MarketMinder is nonpartisan and favors no party over another, but in our view, this is a shining example of politicians’ tendency to moderate when votes are on the line—worth keeping in mind whenever charged rhetoric and promises of sweeping change make headlines.