Daily Commentary

MarketMinder’s View: While there isn’t a direct investment takeaway here, the theme—that China has supplanted America as the leader of building and innovation—is worth addressing. (Because the article refers to specific Silicon Valley and Chinese firms, please note MarketMinder doesn’t make individual security recommendations.) “The old American model—we innovate, we build, we export—collapsed after the United States outsourced much of its manufacturing capacity. Now America mostly designs while China increasingly embodies that earlier American model of building and producing. In a tense geopolitical environment defined by supply chains, the ability to manufacture has become both strategic and existential.” But while this may affect political discourse, does it matter for the global economy or markets? As the article notes, “The current narrative risks swinging from underestimation to overestimation. ... China’s rise is real, but it’s not boundless. Its achievements coexist with deep structural flaws, just as America’s weaknesses coexist with enduring strengths.” Take manufacturing. While the bustling factories of the mid-20th century may be a thing of the past, America still builds a whole lot—it hasn’t “collapsed.” The economy has also evolved, and America’s services sector now drives growth. Flip this around, too, for the titular envy. China appears to be trying to emulate America’s development path in many ways, as its leaders have been guiding a long-term transition from industrial and export-driven expansion to services and consumption growth. In our view, markets largely reflect this reality already based on market capitalization and sector composition (America remains home to the world’s largest Tech companies, for instance). So from an investment standpoint, we think the narrative is more politics than economics—something to be aware of in how it affects sentiment, but nothing inherently market moving.

MarketMinder’s View: This article is half right in calling the Fed’s “neutral” or “natural” rate of interest (the hypothetical point where monetary policy neither stimulates nor constricts) “unhelpful.” It is correct to say: “You can define that idea in many different ways; however you define it, it’s hard to measure. Put simply, it’s the interest rate that balances saving and investment with stable inflation and no transitory shocks. ... In short, the neutral rate is no help in fine-tuning monetary policy, and it’s probably a downright nuisance in explaining where the Fed stands.” So, one cheer for that. Where we disagree is with the claim that the natural rate is “indispensable to thinking intelligently about fiscal policy. [It] determines whether any given fiscal path is manageable or calamitous. ... Recall that it’s the interest rate that balances savings and investment. Fiscal excess is therefore a big factor. Budget deficits reduce national saving, which pushes up the natural rate, which in turn makes the debt more expensive to service, adding further to budget deficits.” This amounts to a whole bunch of speculation about the possible or theoretical, which is our main objection with the entire concept of natural or neutral rates. They ... don’t exist. Our interest is in the probable. Hence, as with monetary policy, don’t overate rates for fiscal policy either. What matters for markets is whether the government makes its debt payments. Sure, prevailing interest rates affect debts’ carrying costs, but when revenue covers debt service several times over, rates’ swing on affordability is marginal. Especially because whatever today’s prevailing interest rate is or isn’t, it won’t matter to servicing costs until Uncle Sam goes to refinance maturing bonds. No need to tie yourself in rate knots—or fret fiscal doom.

MarketMinder’s View: Here is a helpful spotlight on the vague terms of the Trump administration’s trade deals it cut with Japan and is still negotiating with South Korea. (As the article references some specific companies, please keep in mind they are for illustrative purposes only; MarketMinder doesn’t make individual security recommendations. Since this also delves into politics, we are nonpartisan, favoring no party nor any politician, and assess developments for their potential market ramifications only.) As simplified here, in return for reduced US tariff rates (from 25% to 15%), Japan agreed to invest $550 billion in America and South Korea is promising $350 billion. “But these aren’t investments by private companies ... These are government-to-government investments that will be entirely at the discretion of the U.S. government—meaning the President and his deputies. These are de facto sovereign-wealth funds administered without an appropriation or legislation from Congress. ... The Administration will set up a special-purpose vehicle for each investment to be chosen by and controlled by the President or his preferred manager. Japan will have 45 days to pony up the cash. If Japan refuses, it could be hit with higher tariffs.” The problem with this arrangement, which the piece explores, is simple reality: “Japan spends 1.8% of GDP annually on defense, and South Korea 2.3%. They have pledged two to three times as much to Mr. Trump’s funds. Where are they going to come up with the money?” We would add that these trade deals are only “memorandums of understanding,” which aren’t legally binding, even if signed. So while trade uncertainty has fallen since April’s Liberation Day, a lingering haze still remains.