Daily Commentary

MarketMinder’s View: Please note, MarketMinder doesn’t make individual security recommendations, and we aren’t inherently for or against most asset classes. And while this piece looks at one bank’s attempts to create a liquid market for private credit, the theme here is less about the bank and more about why private credit doesn’t want to be liquid. Investors thinking from a goal-oriented, rational perspective correctly consider illiquidity a drawback, as it means they risk being unable to sell when they want or need to. But to the private credit industry, “the opacity and illiquidity aren’t bugs; they are the asset class’s essential features. The main reason why private credit’s risk-adjusted returns look so enticing to institutional investors that have chucked over a trillion dollars at it in recent years is the lack of volatility.” Now, we would cast that a little differently, as it isn’t that private assets lack volatility. Rather, they lack frequent pricing data, which masks volatility and, as the article goes on to note, perhaps provides some opportunities for creativity. For instance, looking at 2022, the article questions how private credit managed to earn positive returns in a “year when equities and bond markets were getting brutalized—with every major segment suffering double-digit losses”—a fair observation that investors interested in the private credit space should consider, particularly when there was so much well-documented stress in that space as the Fed hiked rates. “This stress can be masked by quietly extending loans, simply adding interest payments to a loan’s principal, or by using some of all that money raised to extend new loans to keep the show on the road.” We aren’t saying shenanigans are afoot. But for investors interested in private credit, it is essential to do your due diligence—past hot returns alone are a poor thesis to buy, in our view. For more, see our recent commentary, “Inside Wall Street’s Private Equity Push.”

MarketMinder’s View: Orders for US durable goods (items meant to last three years or more) jumped 16.4% m/m—close to doubling consensus estimates—after April’s -6.6% contraction. The major contributor: transportation equipment orders, which benefited from a 230.8% m/m surge in commercial aircraft orders. As the article explains, that was likely the fruit of diplomatic efforts between Qatar and the US, which benefited one major American aircraft manufacturer in particular. (As a reminder, MarketMinder is nonpartisan and doesn’t make individual security recommendations. The companies mentioned here are coincident to the broader theme we wish to discuss.) Excluding the volatile aircraft category, orders were muted—though they still exceeded expectations. “Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, rebounded 1.7% in May after an upwardly revised 1.4% decline in April. Economists had forecast these so-called core capital goods orders edging up 0.1% after a previously reported 1.5% drop in April.” The article argues tariff uncertainty is constraining business spending, which is likely true to a degree. But consider: May’s “core” capital goods orders gain trounces the measure’s average monthly gain of 0.2% over the past 10 years (source: FactSet). Some of May’s strong number likely reflects companies’ moving to take advantage of the Trump administration’s 90-day pause on Liberation Day’s reciprocal tariffs. But looming levies aren’t the only reason for orders. Businesses don’t invest just to hold product—there must be some return on their investment, too. Perhaps some of this business spending reflects plain ol’ economic expansion—a positive sign for the US economy.

MarketMinder’s View: When the Trump administration pushed back reciprocal tariffs for 90 days in early April, many were relieved, hoping the delay would lead to compromise and watered down—or scrapped—duties. However, with the July 9 deadline looming and few deals made, officials are pondering their next moves. As this article details, EU leaders are mixed. Some (e.g., Germany and its influential manufacturing sector) want to reach a deal quickly while others (e.g., Spain) seek a tougher response. Interestingly, “Diplomats are increasingly pessimistic about negotiating away the 10% baseline tariffs. As this reality sinks in, two approaches are emerging: a quick deal that would mean certainty for business, or retaliation to press for something better. ‘Do we go into aggressive retaliation mode or are we less vocal and do a quick deal,’ said one source.” May’s US – UK “trade deal” was the first sign the universal 10% tariff was an immovable object, and EU diplomats seem to be expecting as much today—indicating US trade will be less free than it was before Liberation Day. We think that is a negative, but it is a well-known one at this point. We will continue monitoring trade talks, but for investors, unless you know something others don’t, the surprise power in this widely watched space is minimal, in our view.