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: Last month, a White House report argued that the 400 wealthiest American families paid an average 8.2% tax rate—a figure they arrived at by playing fast and loose with the definitions of income and the taxes they chose to include. On the income side, rather than just calculating adjusted gross income as per IRS rules, the White House economists counted unrealized capital gains and changes in wealth as “income.” That artificially inflated the denominator in the tax rate calculation. “The numerator in the White House study, like its denominator, is selective, a point the authors acknowledge. By excluding corporate and estate taxes, it drives the tax rate down and focuses the analysis on individual income taxes and the gaps in that part of the tax system. But corporate taxes can be important for billionaires. Warren Buffett, who supports higher taxes on the rich, often notes his own low income taxes. They would be higher if they included corporate taxes paid by his holding company, Berkshire Hathaway Inc.” Look, we are politically agnostic. We don’t prefer either party, we aren’t in the business of prescribing policy, and we think everyone is free to have their own opinion on taxes. But we also think all facts are friendly, and the White House report’s purpose was to rally support for taxing unrealized capital gains or ending heirs’ ability to move their cost basis on inherited investments to the date of the deceased person’s death. Understanding the flaws underlying the mathematic exercise, in our view, makes it easier to see why these ideas are encountering severe gridlock in Congress.
MarketMinder’s View: Illustrating how quickly markets price in widely known information, stocks have largely sighed since Chinese property developer Evergrande first missed a bond payment due to overseas investors last month. While a 30-day grace period means it isn’t technically in default yet, it has since missed another payment, and almost no one expects it to make the interest payments due this week. Now other smaller developers are missing or seeking to renegotiate payments, and stocks are still largely calm—a sign, in our view, that markets realize the Chinese government is taking steps to ringfence the trouble and, in any event, that Evergrande and other property developers’ debt issues are unlikely to roil markets globally. As the article notes, most expect Evergrande “will [prioritise] local Chinese creditors and completing the building of about 1.6m homes it has taken the money for but is yet to finish.” Local governments are reportedly aiding that effort. Forcing overseas investors to take losses while limiting the losses for mainland investors and homebuyers seems consistent with officials’ long-running efforts to inject more market forces into bond markets while ensuring economic stability, and markets seem to be pricing that in.
MarketMinder’s View: This piece basically debunks itself. It argues, as the headline suggests, that Ireland’s agreement to join the global minimum tax deal and raise its corporate tax rate to 15% will wreck the country’s competitiveness. Corporations will allegedly launch “a steady drift away from Ireland, and a gradual reduction of their presence there,” hurting the half a million Irish folks who work for multinationals. But then it goes on to show—rightly, in our view—that this tax deal is rather toothless. “The tax deal has been watered down so much as to be meaningless, except for a handful of low tax states that have been bullied into raising their rates. After all, most countries already charge a lot more than 15pc so it won’t make any difference to them. On top of that, the rules have become more and more complex as the deal has been torturously negotiated, and as tax lawyers know to their advantage the more complex a tax gets the more loopholes there are. Indeed, ironically, the deal may actually reduce corporate tax rates.” Ok, so doesn’t it stand to reason that—on the outside chance all participating nations pass the legislation necessary to make this agreement the law of the land—Ireland can beef up deductions and add loopholes to ensure businesses domiciled there don’t pay much more than they do now? Besides, a hike of 2.5 percentage points isn’t exactly massive, and 15% would still be the lowest possible rate globally, so the country still seems pretty competitive on the tax front to us. For more on why this deal is a lot less than advertised, see Friday’s commentary, “This Week in Debt and Taxes.”
MarketMinder’s View: This is one of the many long screeds we have seen this week arguing markets are too “complacent” in the face of inflation, supply chain crunches, reduced corporate earnings estimates, property market troubles and electricity shortages in China, potential US tax hikes and a host of other things. As it documents, many professional investors are less bullish than earlier this year and preaching reduced stock exposure accordingly, claiming stocks aren’t pricing in all of these headline risks—setting up a big drop once the market gets wise. We see two main flaws with this line of thinking. One, it presumes markets aren’t at all efficient. While we agree they can be inefficient in the short run, when psychology rather than fundamentals drives returns, many of these issues have hogged headlines for months. For markets to not have priced them would seemingly require locking nearly every investor on earth in a sensory deprivation chamber. Two, the implication is that bull markets need perfect fundamental backdrops. That isn’t true, and all bull markets have had their share of headwinds and obstacles. Those are the bricks in the proverbial wall of worry stocks climb. Things don’t need to be great or even good—just modestly better than the masses expect. This piece shows how low expectations have sunk, setting an easier bar for reality to clear. Even just ok or not as bad as expected would constitute positive surprise, in our view.
MarketMinder’s View: Hear ye, hear ye, the great Sausage War is over! Ending the row over whether meat from Great Britain can enter Northern Ireland without going through customs, the EU has agreed to an exemption for “national identity goods,” allowing Northern Irish stores to continue selling British bangers. Officials’ threats to wage a trade war turned out to be negotiating bluster, as these things often are. This likely won’t be the last spat as the UK and EU negotiate over the broader rules on trade among Great Britain, Northern Ireland and the EU, but the compromise sets a noteworthy precedent, in our view. As does this: “In another sign that Brussels is willing to compromise, it has dropped its demands for the UK to agree to Swiss-style alignment on food safety and animal health to minimise the need for border checks.” Keep that in mind when the grandstanding inevitably reaches comical heights again. Both sides have ample incentive to compromise and keep goods flowing across the English Channel and Irish Sea.
MarketMinder’s View: Illustrating that one of Chinese officials’ top priorities is to ensure the economy keeps humming enough to prevent social unrest, the government has ordered several dozen mines in Inner Mongolia to boost output by 100 million tons. They have also reopened scores of previously closed mines elsewhere in the country and approved permits for new ones—despite their stated long-term goal of curbing coal use—and signaled plans to raise coal imports. This won’t immediately address the country’s blackouts, which stem from utilities reducing output when high wholesale costs made it impossible to provide electricity without taking big losses, but it does show the situation is unlikely to last indefinitely. That should ease fears about Chinese manufacturing taking a severe long-term blackout-induced hit. In short, we see this as a prime example of reality being poised to beat dreary expectations.
MarketMinder’s View: As always, we are politically agnostic and comment on political developments for their potential market impact only. Markets don’t prefer either party, and neither do we—policies, not personalities, are what is important. To that end, next year’s midterms will determine what (if anything significant) passes in the second half of President Joe Biden’s term, and this piece does a great job illustrating the uphill battle Democrats face in their effort to hang onto their tiny majority in the House and tie-breaking Senate vote. It is also a detailed look at the divides within the Democratic Party and how they create deep gridlock despite the party “controlling” the executive and legislative branches. Analysts quoted here liken the stalemate over the $3.5 trillion spending bill to the standoff over former President Bill Clinton’s healthcare bill in the early 1990s, which led to the Democrats getting shellacked in 1994’s midterms. That seems like a reasonable precedent to us, too. Yet we also think it is a stretch to argue passing the reconciliation bill is key to Democrats’ success next year. If that logic were true, then the Republicans wouldn’t have taken the House and ended the Democrats’ Senate supermajority in 2010’s midterms, on the heels of the Affordable Care and Dodd-Frank Acts. It is too early to predict next year’s results, of course, but it does seem likely that the more both parties focus on that contest, the less incentive they will have to legislate, lest they rock the boat—particularly with redistricting looming. That already appears to be motivating some moderate Democrats to shy away from the reconciliation bill, especially with independents’ support for the president crumbling, per Gallup’s recent polls cited herein. Overall, we think it remains likely that this administration will do a lot less than people hope or fear, with intraparty gridlock remaining a tailwind for stocks as legislative risk eases.
MarketMinder’s View: This week New Zealand abandoned its “Zero Covid” policy (the attempt to contain COVID through closed borders and severe lockdowns). The Kiwis have joined Singapore, Australia and Vietnam in ditching the approach and instead finding less-restrictive ways to live with the virus. As this piece points out, though, “living with the virus” means different things in each individual nation. New Zealand and Australia don’t look close to a full reopening, and “As for Singapore, jitters are growing with rising cases. A rare public petition calls for mandatory quarantine for all overseas travellers. The government has reimposed local restrictions, including home-based schooling for children. One innovation, ‘vaccinated travel lanes’ allowing quarantine-free travel with certain countries, is likely to be expanded only slowly from the current jurisdictions of Germany and Brunei.” Moreover, since restrictions are human decisions that defy prediction, the possibility harsh lockdowns return remains. However, that Asia-Pacific nations seem to be following the approach of the US and Western Europe—i.e., adapting while staying largely open—is another sign the world is slowly but surely progressing to a post-pandemic normal. It also points to supply chain bottlenecks easing, particularly with Vietnam coming back online. That progress may not be smooth, but reopening fits and starts aren’t likely to deter stocks—they are well familiar with COVID-related setbacks at this point and have likely long since moved on.
MarketMinder’s View: Should the Fed and other central banks consider incorporating climate change into their stress tests and overall regulatory approach? We have observed a growing chorus of pundits saying yes, theorizing banks’ exposure to alleged climate risks (including natural disasters and wild fires) is a potential source of instability. Other central banks, including the ECB, have moved in this direction, and now it appears the Fed is following suit. According to Federal Reserve Governor Lael Brainard, the Fed “… is developing scenario analysis tools to model the economic risks of climate change and assess the resilience of the entire financial system. She also signaled the Fed will provide supervisory guidance on climate change to help banks mitigate their exposure.” Setting aside the sociology here, it just isn’t clear to us how this exercise will give investors a wealth of useful information or actually improve the financial system’s resilience. For one, no natural disaster in history has caused a financial crisis or recession, including Hurricane Katrina, which remains the most expensive on record. Two, stress tests are imaginary and have little relation to the real world. Real life often goes very differently from models. Three, de-risking the financial system is an unattainable goal. While trying to proactively identify things that could trigger chain reactions is a fine goal, the Fed has historically not proven terribly adept at this. Lastly, while we don’t think this is an issue now, adding to stress tests opens another door for potential unintended consequences if it results in regulators picking winners and losers among banks or the various industries banks serve, which risks inviting political interference in Fed policy. That is something to watch out for, in our view.
MarketMinder’s View: Today Ireland dropped its opposition to an OECD-brokered global tax deal, agreeing to give up its 12.5% corporate tax rate for large multinationals. While Dublin—one of the deal’s most prominent opponents—falling in line grabs headlines, the details matter, and this piece shares a couple notable tidbits. For example, “The [Irish] government said it had received assurances from the European Commission that Ireland can maintain the 12.5% rate for firms with annual turnover below 750 million euros ($867 million) and keep tax incentives for research and development. The Commission also promised it will stick faithfully to the OECD agreement and not seek a higher rate among member states, [Finance Minister Paschal] Donohoe said.” We wouldn’t be shocked if other nations attempted to carve out similar exceptions and workarounds. Note, too, that Ireland has inched up its corporate tax rate before—the government hiked the rate from 10% to 12.5% in 1997 to comply with EU rules. Tax rates are but one consideration for companies, and we agree with the analysts cited here that an Irish tax hike won’t automatically drive business away in droves. Finally, we would reiterate the point we made on Tuesday commenting on a similar global tax deal story: Individual countries must pass laws to change their tax codes, and Ireland basically said it would raise its rate if everyone else implements this agreement, which sounds like the world’s slowest game of chicken. That is no small task given the gridlock prevalent across developed nations’ legislatures right now.
MarketMinder’s View: We highlight this mostly as a snapshot of UK economic expectations, as it shows the degree to which high inflation and slow growth are baked into forecasts—potentially building more surprise power into this bull market’s wall of worry. As it discusses, a market-based indicator of the Retail Price Index (RPI)—an antiquated inflation gauge—projects it accelerating to 7% in 2022. RPI usually runs about one percentage point hotter than the Consumer Price Index (CPI), the UK’s official inflation gauge, which the BoE’s latest forecasts puts at 3.3% y/y next year and 2.1% in 2023—leading some to warn the BoE is far underestimating inflation. Meanwhile, the IMF’s head is setting expectations for the supranational organization to slash its economic forecast next week. If slower growth and high inflation are the baseline expectation now, that makes it even easier for reality to beat expectations—even things going just a bit better than feared can constitute a bullish positive surprise for stocks. Now, as it happens, we think inflation is likely to moderate much faster than pundits expect as supply bottlenecks ease, considering there are already several signs that producers are responding to higher prices by ramping up output. On the economic forecast side, we have long thought projections for a long boom were too rosy, and ratcheting them down is largely consistent with the return to pre-pandemic slower growth rates that we expected. Overall though, forecasts like these add bricks to the proverbial wall of worry stocks climb—and that wall looks like it still has a ways to go.
MarketMinder’s View: Please note, MarketMinder is nonpartisan and favors no party nor any politician. Our political analysis serves only to assess political developments’ potential market impact, if any. First, a quibble: We think this editorial overstates the actual risk of default. Even without a debt ceiling deal, the Treasury can refinance maturing bonds and make bond interest payments, as monthly tax revenues easily cover monthly interest payments. However, this piece also raises a critical point gutting concerns over the debt ceiling impasse: “... the Senate parliamentarian has told congressional leaders that they can increase or suspend the debt limit — it’s not yet clear which — using the budget-reconciliation process, which requires only a majority vote. Although doing so would be politically fraught and time-consuming, it would allow Democrats to dispense with the issue without imperiling their broader agenda or needing Republican votes.” We won’t opine whether they should or not, and we have no idea whether they will or won’t. We simply highlight this reality to show the supposedly imminent debt ceiling “crisis” is way more tractable than widely portrayed. Now, though default is off the table, the government may have to choose winners and losers among its other obligations if there is a long delay. But for markets, this is mostly akin to a government shutdown, which has never resulted in a recession or bear market. To see why, please see our 9/27/2021 explainer, “A Comprehensive Guide to the Debt Ceiling.”
MarketMinder’s View: As this article illustrates, the wheels of regulatory bureaucracy turn slowly, even amid an energy crunch. The titular undersea pipeline from Russia to Germany has the potential to double natural gas flows to Europe, but “Germany’s regulator, the Bundesnetzagentur, needs to be satisfied that operator Nord Stream 2 AG meets European Union regulations requiring the separation of gas transport from production and sales, known as unbundling. The country has until early January to make a draft decision on certification, which it must send to the European Commission for review. The EU then has two months to act, a timeframe that can be extended by another two months, potentially taking the process as far as May.” While that timeline suggests the pipeline won’t alleviate Europe’s energy supply issues in the here and now, extrapolating today’s situation into the future isn’t so wise, in our view. One possibility the article explores: “Some industry watchers, from Bank of America Corp. to ICIS, still see potential for Nord Stream 2 to start this year, especially if Europe’s energy crisis speeds up regulatory approvals.” We wouldn’t bank on it—human decisions defy prediction—but don’t overlook multiple paths for the situation to resolve without catastrophe. However this plays out, though, we think forward-looking markets, while cognizant of a winter energy crunch, see it as temporary. We don’t dismiss the negative fallout for households and businesses grappling with higher energy costs, but Europe’s energy woes would have to be much longer lasting and widespread to wallop this bull market—and that seems unlikely right now, in our view. For more, please see yesterday’s commentary, “Inside the Global Energy Price Spike.”
MarketMinder’s View: Factory orders can be volatile, so we wouldn’t read too much into August’s decline. Germany’s -7.7% m/m August drop followed strong 4.4% and 4.9% gains in June and July, respectively, which brought orders above pre-pandemic levels. As the article notes, “The Economy Ministry said that orders from inside Germany were down 5.2%, while those from non-eurozone countries were off 15.2%. Orders from Germany’s partners in the 19-nation eurozone were up 1.6%. The ministry said the drop may be due in part to big bulk orders in July and to the fact that summer vacations at some automakers fell in August this year. There was a 12% drop in orders in the car sector, while orders for machinery were off only 1%.” While some of this is probably some natural slowing from the post-reopening boom as businesses unleashed pent-up demand, it wouldn’t shock us if supply-chain bottlenecks also weighed on August’s number. However, none of this is a surprise to forward-looking markets. Resolving bottlenecks would reduce many firms’ headaches—and perhaps some uncertainty and negative sentiment—but businesses have also adapted to today’s supply constraints. Note, too, that industrial production doesn’t drive growth in most developed nations—even in “industrial powerhouse” Germany. Services output matters more.
MarketMinder’s View: “Retail sales rose 0.3 percent month-on-month following a 2.6 percent fall in July, which was revised from 2.3 percent. Economists had forecast 0.8 percent growth. ... Compared to the previous month, sales of non-food products increased 1.8 percent, while those of automotive fuel dropped 0.1 percent. Sales of food, drinks and tobacco decreased 1.7 percent.” Color us unsurprised that a slowdown followed a big reopening-driven jump over the summer that was led by food and drink sales, as many frequented bars and restaurants they might not have for a long while. Although retail sales are a backward-looking and limited household consumption snapshot—eurozone services spending is far larger—we also see this as more evidence of a return to normal. The trend of moderating growth rates follows other major economies—e.g., China and the US—and in our view, it suggests the eurozone is returning to its pre-pandemic, slower-growth environment. That is one stocks were fine with before and will likely be fine with for the foreseeable future.
MarketMinder’s View: “The Institute for Supply Management (ISM) said on Tuesday its non-manufacturing activity index edged up to a reading of 61.9 last month from 61.7 in August. A reading above 50 indicates growth in the services sector, which accounts for more than two-thirds of U.S. economic activity. Economists polled by Reuters had forecast the index falling to 60.” That seems great, and strong new orders (which rose from 63.2 to 63.5) suggest it should continue, but we suspect this isn’t the great news it appears to be on the surface. Slower supplier deliveries and elevated prices buoy the top-line number. Now, in our view, those factors are likely to prove temporary. But we do think the headline number here is likely somewhat overdone and should be set to cool off going forward. That is fine and all, as a reading over 50 indicates expansion, and readings over 60 indicate widespread growth. However, we think it is a factor worth keeping in mind.
MarketMinder’s View: Remember earlier this year when everyone seemed assured that a global 15% minimum corporate tax rate was imminent? Well, it still hasn’t happened, as some of the low-tax countries like Ireland have thrown sand in the gears. While it appears negotiators may have made some progress in getting the Emerald Isle on board (and we say may because they have inked nothing), this would require the country to raise its headline corporate tax rate from 12.5% to 15%. That said, there are still many open questions involving matters beyond headline rates—like tax rebates countries could offer firms on the back end, or other complex tax avoidance rules and structures. The main thing here: Even if a deal is reached, the countries must pass legislation to change their tax codes. Consider how much of the world is gridlocked, including the US—critical to this deal, as the article notes, because it is home to most of the world’s giant multinationals. If legislation fails to pass here or in another major country, this deal may fall apart—or just fall by the wayside.
MarketMinder’s View: While we agree with the notion that October’s reputation as the “Month of Crashes” is misperceived and overlooks the fact returns are generally positive, this doesn’t go quite far enough. You see, in emphasizing the typical average returns—and then going further to slice them into even-and-odd year October returns—it still promulgates the myth that seasonality drives markets. It adds to this late in the piece by arguing that fourth quarters are usually good tied to unbelievably predictable things like the holiday shopping season and businesses’ annual budgeting process. In our view, this is just about as unhelpful as fanning fear of a downturn tied to the calendar. Seasonality is all just trivia, not investible, and should be set aside as fun (perhaps) but useless.
MarketMinder’s View: Well, we aren’t so sure about the claim the current energy price spike in Europe constitutes the “first” energy crisis in the clean-power era (see California and South Australia’s blackouts, for example)—or that “many” more await. But this article does do a good job of discussing the current crisis in Europe via making a critical point worth weighing: Sources of energy like wind and solar are intermittent—they usually don’t run at the max of the installed capacity—and can be subject to external factors like weather and climate conditions. Storage is still lacking for electricity, which means that when those sources aren’t generating as much (like in Europe presently), it pushes demand toward natural gas, coal, nuclear, oil, etc. Right now, as this notes, COVID-related supply issues for gas are compounding matters, sending prices skyward. Now, where this piece veers a bit, in our view, is when it starts projecting these issues forward into the long term, based on a lack of investment in fossil fuels (on the part of exploration and production companies) and distant storage developments. Fossil fuel investment patterns are cyclical in nature, and we just went through a boom in the years from the financial crisis to roughly 2015 as shale oil and gas production mushroomed in America. Extrapolating the ensuing bust forward seems like a stretch to us. If there is demand and sufficiently high prices, activity will follow. The fact is that, as this notes, storage solutions like hydrogen and/or batteries are far flung and not anywhere near broad-based utility now (rendering pure-play companies in the space mere speculations, in our view). Point being: As storage technology develops, fossil fuels will likely remain part of the energy mix that powers the economy. Perhaps, in sufficient time, humans iron out technologies that change the story.
MarketMinder’s View: We aren’t inherently against bitcoin or other cryptocurrencies, but owning something just so that you can take losses on it for tax purposes seems like a terrible idea? Yet that is the bizarre sales pitch ricocheting around the industry right now, apparently. “Some financial advisers have a new sales pitch for investors: You win when bitcoin goes up, and you can win when it goes down. … Here’s the pitch: Investors can buy bitcoin, ether and other cryptocurrencies through their broker. If cryptocurrencies fall by a certain amount, the accounts are set to automatically sell the digital coins, generating a taxable loss that can be used to offset other investment gains. The accounts then buy the coins back in a short time for around the same price or even less.” Unlike stocks and bonds, cryptocurrencies are “property” for tax purposes, so that wash sale rule doesn’t apply to them, and investors don’t have to sit out for 30 days to be able to use the loss to offset gains. If Congress gets its way, however, that perk will go away and cryptocurrencies will be reclassified as securities. Even if that doesn’t happen, however, this tactic sounds to us like financial snake oil. One, it encourages speculation. Two, owning something with the expectation that it will decline sounds inconsistent with almost any meaningful investment objective. Three, there seems like a decent likelihood that the tax benefits and losses would offset each other, rendering the whole enterprise pointless. We do think harvesting tax losses can be beneficial, but there is a difference between temporarily selling something that didn’t perform as you expected and buying something on the thesis that it will plummet. Don’t let the tax tail wag the investment dog.