Daily Commentary

Providing succinct, entertaining and savvy thinking on global capital markets. Our goal is to provide discerning investors the most essential information and commentary to stay in tune with what's happening in the markets, while providing unique perspectives on essential financial issues. And just as important, Fisher Investments MarketMinder aims to help investors discern between useful information and potentially misleading hype.

Lionel Messi and the Fan Coin Fad

We need to talk about Lionel Messi. Not the widely scrutinized transfer from Barcelona to Paris St. Germain (PSG). Not all the goals and trophies. Not even the reported $41 million annual salary he will rake in over the next two years, although you are getting warmer. You see, PSG announced today that their “welcome package” for the 21st century’s greatest soccer player includes an undisclosed number of “$PSG fan tokens.” Yes, you read that correctly, part of Messi’s pay is in cryptocurrency. This seems like a good time to stroll down memory lane to the last time superstar celebrities’ unorthodox compensation packages made headline news—and what it showed about sentiment toward high-flying assets.

The year was 2007. Back then, euros were the talk of the town. By mid-November, the newfangled currency was up over 70% versus the dollar since January 2002.[i] Supermodel Gisele Bundchen was reportedly demanding payment in euros. The Wu-Tang Clan, which gave the world “dolla dolla bill y’all” in the mid-1990s, had also switched allegiance, pricing their album in euros if you bought it off their official website. Outshining them all was Jay-Z, who flashed stacks of €500 euro notes in a music video. All the celebrity interest had financial headlines sure the dollar was dead and the euro would rule global currency markets for all of time and space.

Half a year later, the party ended. The euro’s exchange rate versus the dollar plateaued in spring 2008 before plunging late in the summer as collapsing hedge funds hogged headlines and money flew back to the world’s favorite “safe haven” in times of crisis. The euro staged a brief recovery in 2009, but the eurozone debt crisis truncated it. For the next seven years it slid jaggedly lower, nearly reaching parity with the dollar by late 2016. A partial recovery since hasn’t returned it even close to its late-2007/early-2008 heyday, when one euro equaled nearly a buck fifty. At last look, it was just $1.17, making one hope Gisele and the Wu-Tang Clan had either excellent market timing or a good currency hedging strategy.[ii]

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The Cool Down in July’s CPI Data

In what now seems like a monthly ritual, headlines went nuts for July’s Consumer Price Index report on Wednesday. It showed the headline inflation rate remaining at 5.4% y/y, leading a number of outlets to bemoan inflation’s apparently digging its heels in.[i] Other outlets noted month-over-month price gains slowed to 0.5% from June’s 0.9%, acknowledging recent hot inflation rates seemed to be moderating.[ii] Yet many still went fishing for reasons to argue we are a long way from “normal.” We do still see some signs of post-lockdown weirdness in the data, but in some ways, we are already back at normal. Stocks and bonds saw this coming months ago, but perhaps a quick look at the data will help you have more confidence that rising stocks and falling bond yields haven’t been wrong.

Last month we highlighted the major categories driving June’s big increase: food, energy, hotels, used cars and transportation services. The first three of those remained sizable contributors to CPI’s month-over-month increase in July, rising 0.7% m/m, 1.6% and 6.8%, respectively.[iii] Used cars stalled[iv], however, decelerating sharply from June’s 10.5% m/m gallop to July’s 0.2% crawl.[v] Transportation services detracted, falling -1.1% m/m as car rental prices fell -4.6%, car insurance slipped -2.8% and airfares inched down -0.1%. So the surge of pent-up demand post-lockdown is still affecting travel-related items, and shipping headaches still appear to be hindering the food supply chain and driving prices up. Yet the auto-related hiccups appear to be evening out, as July’s data suggest rental car companies have largely finished rebuilding their fleets, allowing them to slash fares and cease contributing to the upturn in used car prices.

This month, what really jumped out at us was the shelter component, which rose 0.4% m/m and contributed over one-fourth of CPI’s monthly rise.[vi] Hotels contributed about half of that. The other half came from rent. Not rent of primary residences, which is what you actually think of when you think of rent. That figure rose 0.2% m/m, and it is only 7.6% of the total CPI basket, making its impact on headline inflation negligible.[vii] The real culprit: Owners’ equivalent rent (OER), which rose 0.3% m/m and is a whopping 23.6% of the CPI basket.[viii] Yes, you read that right, nearly one-fourth of the CPI basket is imaginary. Owners’ equivalent rent isn’t real—it is the hypothetical amount homeowners would pay to rent their own home, if they rented instead of owning it. It is not something anyone ever pays. It is instead a crude stand-in for home prices, which are an investment, not a capital good, and therefore excluded from CPI. We will leave it to you whether it is sensible to put this made-up service in CPI, but it is there nonetheless.

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On the Big Bipartisan Breakthrough

Editors’ Note: MarketMinder favors no politician nor any political party and assesses developments solely for the likely impact on markets, economies and personal finance.

After years of chatter, months of debate and, more recently, day after day of watching for a floor vote, the US Senate passed the bipartisan infrastructure plan on Tuesday by a fairly decisive 69 – 30 margin.[i] With the vote came a torrent of headlines presuming the passage meant the much-delayed “stimulus” was now rolling—with big implications for growth and productivity. But there are still hurdles left to clear, and even if this bill does pass, we doubt the implications for the economy or stocks are as huge as many think.

Depending on what source you read, the Senate passed a $1.2 trillion infrastructure bill,[ii] a “roughly” $1 trillion bill[iii] or a $550 billion one.[iv] Why the wide disparity? While the bill itself allocates $1.2 trillion in funding, only $550 billion is actually new spending—the balance, some $650 billion, is funding annually slated for infrastructure under previously approved spending plans. Obviously, no matter how you size this up, it is a significant reduction from the Biden administration’s early proposal, the $2.3 trillion American Jobs Plan offered in March—one example of how narrow margins, internal policy divides and looming midterms can water down legislation.[v]

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Friendly Reminder: Stocks Are Forward-Looking

Befitting the month of August, Monday was an overall slow news day in the financial realm, leaving headlines with the unenviable task of trying to get you to care about very small things. Most of these items aren’t significant enough to warrant full commentary here, but we did notice a common refrain worth discussing: But earnings are great. High-frequency and real-time economic indicators show the recovery is losing steam—but Q2 earnings were great, so be bullish. COVID cases are spiking—but Q2 earnings. The delta variant is in China—but Q2 earnings. Oil and commodities markets may be pointing to weakening economic growth—but the earnings! Look, we like the overall good cheer, and we are bullish! But Q2 earnings results are not a valid reason for that, in our view.

Since we highlighted S&P 500 earnings growth last week, the estimated growth rate has inched up to 89.0% y/y, and the ability to round that to 90% seems to be generating today’s earnings-related bullishness.[i] Whether you round up or not, Q2’s earnings growth rate is marvelous—that we don’t dispute. But the logic in using it to justify bullishness now doesn’t hold up.

Q2 earnings reports, in case the name didn’t make it obvious, cover April, May and June 2021—and how those compare to the same three months in 2020. Today is August 9, nearly a month and a half after Q2 ended. Those allegedly creeping negatives are happening now. They will show up in Q3 and maybe Q4 earnings. You can’t use corporate profitability in Spring 2021 to debunk fears about autumn and winter.

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No Mystery in Falling Bond Yields

Since mid-May, eurozone long-term interest rates have plummeted. In Germany, the entire yield curve—interest rates across the range of German government bond maturities—is below zero out to 30 years. This is occurring as eurozone (and German) economic growth has accelerated. Is there a disconnect—a cause for concern—as some coverage suggests? We don’t think so. Let us explain.

The recent move is largely a reversal of volatility earlier this year, when so many thought reopening would juice economic growth and inflation for a long time to come. Bond yields’ rise was global, dubbed the “reflation trade.” Long-term eurozone yields climbed into positive territory in February as vaccinations ramped up and countries began reopening.[i] Deflation late last year turned into inflation this year with the headline rate speeding to 2.0% y/y in May (finally hitting the ECB’s target after years below it).[ii] Pundits saw this as just the tip of the iceberg, warning supply constraints and rising raw materials prices would make prices soar and stay there. Eurozone GDP has since accelerated to 2.0% q/q growth (8.3% annualized) in Q2 from Q1’s -0.3%, with economists presently projecting 2.4% growth in Q3.[iii] Q2 GDP stands -3.0% below its late-2019 peak, so a couple more quarters of rapid catch-up growth could lie ahead.[iv]

But after the rebound back to pre-pandemic GDP levels, more pedestrian pre-pandemic growth rates should follow. Countries that reopened earlier—and regained their pre-pandemic peaks—like China and America, are already experiencing this. Meanwhile, economists are penciling in similar, with quarterly eurozone GDP growth estimates falling back to sub-1% q/q next year—its typical rate range.[v] Inflation also seems to be leveling off, with June’s reading decelerating to 1.9% y/y.[vi] Inflation fears have tapered off as well, and most pundits now presume this year’s inflationary pressures are temporary anomalies. Falling eurozone bond yields are perfectly consistent with the economic outlook many see: slower economic growth and milder inflation than they initially expected.

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What Investors Can Learn From 2021’s Frothy Pockets

Editors’ Note: MarketMinder does not make individual security recommendations. Those mentioned in the below simply help illustrate a broader theme we wish to highlight.

An app-based brokerage at the center of January’s “meme stock” chaos made its trading debut last Thursday … and promptly laid an egg, before its share price soared this week. That seesaw action typified the price movement of the “hot” investments—e.g., cryptocurrencies and special-purpose acquisition companies (SPACs)—from earlier this year. While many of those categories have since imploded, global stocks have continued to climb and register record highs. In our view, that suggests frothy euphoria hasn’t spilled over to stocks—a sign that we aren’t yet at a market peak.

Take a stroll with us down memory lane, dear reader, to early 2021, when bitcoin’s pandemic boom went nuts: It soared from $29,001 to $40,797 in January’s first eight days—and then gave back most of those gains by month end.[i] The coin’s volatile ascent continued over the next several months, closing at an all-time high of $63,503 on April 13.[ii] Proponents declared bitcoin and its crypto brethren’s moment had arrived—an irrational excitement perhaps best exemplified by dogecoin, a joke cryptocurrency that jumped over 800% in 24 hours in late January.[iii]

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The BoE’s Confused QE Kerfuffle

Ah, August. Long known in the news world as “the silly season” for being the time when everyone important is on vacation and reporters have nothing of substance to work with, today it gave the world a treat: actual silliness. As you might have seen when perusing financial news, there is a wee dust up between the Bank of England (BoE) and House of Lords, which published a report recently questioning whether the BoE’s quantitative easing (QE) program was “a dangerous addiction.” This choice of words triggered BoE Governor Andrew Bailey, who spouted off in a press conference today. Most coverage focused on his taking issue with the word “addiction” in light of very real societal problems in that arena. In our view, everyone focusing on that war of words misses the real curiosity: a bigtime central banker stating he thinks flattening the yield curve is stimulus.

The saga started in January, when a Lords committee including former BoE Governor Mervyn King determined QE “has not been subject to sufficient scrutiny, including in Parliament, given its size, longevity and economic importance.” So they conducted an investigation, taking testimony from numerous witnesses—BoE officials, economists and other noted experts. We found this amusing from the start, as we think QE does more harm than good—as we will discuss shortly—and King was responsible for launching it in the UK back in 2009. How fun, we thought, if he led the committee that determined the whole thing was a fruitless exercise!

Alas, while the report (available here), wasn’t glowing, it didn’t get all the way there. It concludes that QE wasn’t stimulus and that central bankers seem to like it more than experts do: “The evidence shows quantitative easing has had limited impact on growth and aggregate demand over the last decade. To stimulate economic growth and aggregate demand, quantitative easing is reliant on a series of transmission mechanisms that operate primarily in and through financial markets. There is limited evidence to suggest that these increase bank lending or investment, or boost consumer spending by wealthy asset holders.” On a second question—whether QE bond purchases amounted to the BoE monetizing UK government debt, the BoE got poor marks for bad communication and the uncanny timing of its policy announcements and the Treasury’s evolving debt financing needs. While the report stopped short of an outright accusation of backroom skullduggery in violation of the BoE’s apolitical mandate, it warned the appearance of deliberate debt financing risked the BoE’s credibility.

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Lessons From America’s Decade-Old Downgrade

10 years ago today, Standard & Poor’s made a $2.1 trillion math error, fought with the Treasury for several hours, then downgraded America’s credit rating from AAA to AA+. Not because America’s debt was problematic, but because they didn’t like how politicians were squabbling over the debt ceiling. They thought it would undermine the stability of America’s debt and scare off investors. Headlines globally agreed, warning debt costs would soar absent the AAA rating. How wrong they were. Yields fell in the immediate aftermath … and kept on falling. Over the next few years, debt got more affordable as buyers competed to own the world’s deepest, most liquid government asset. If ever you needed proof that credit ratings are inconsequential to markets, the events of a decade ago are required reading.

S&P’s original press release, which is archived in full here, is a tour de force in rhetorical gymnastics and grasping at straws. Early drafts focused on deficit projections. But the corrected math error negated that line of reasoning, so the final draft focused on politics. It had a little bit on the “sequestration” budget cuts and a whoooooooooole lot on the debt ceiling standoff, which took up most of the word count. We guess they had to do something to heighten the drama since their headline debt-to-GDP forecast was a rather tame 78% by 2021 and they had to justify downgrading the US while keeping other nations whose present debt exceeded that long-term forecast at AAA. To that end, they cooked up an entertaining “downside scenario” purporting to show how a second downgrade could jack debt up to 101% of GDP by 2021’s end instead—amusingly, roughly in line with their pre-math-flub forecast. Combine that flight of fancy with “the political brinksmanship” making financial policy “less stable, less effective and less predictable,” and you get a downgrade.

Now, we have always enjoyed poking fun at long-term forecasts’ notorious inaccuracy, but here is the funny thing about all of this: S&P was right! They lamented that “the statutory debt ceiling and the threat of default have become political bargaining chips.” Our elected representatives have doubled down on that tactic over the last decade. As for debt projections, they shoulda stuck with that math error! It was far closer to reality! Before Treasury Official John Bellows pointed out their “basic math error of significant consequence,” S&P estimated net Federal, State and Local Government Debt would be closing in on 100% of GDP by this year’s end.[i] Folks, that was too optimistic! Net federal debt alone finished Q1 at 99.9% of GDP.[ii] Add in state and local, and you get well over 100%. Granted, it took a totally unforeseeable pandemic and astronomical fiscal response to get there, but still. What gives? Why hasn’t Uncle Sam gotten a few more downgrade notches?

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Wednesday Wrap-Up: Services Data, Earnings and Biden’s ‘Big’ Decision

What do corporate earnings, services PMIs and Fed head Jerome Powell have in common? Nothing! Except that all hit headlines on Wednesday, inspiring us to bring you a roundup of financial news you can use. Off we go!

Services PMIs Are News, Not New

If you like economic data, then the third business day of the month is always your friend, because it brings us services purchasing managers’ indexes, or PMIs. These monthly surveys show the percentage of businesses reporting increased activity across a range of categories and whether getting goods to market is easier or harder. Readings over 50 indicate more firms reported growth than contraction, and the biggest PMIs all topped 50 by a mile in July—like their manufacturing counterparts, they clustered around 60. The US ISM Services PMI (formerly known as the Non-Manufacturing Index) rose to an all-time high of 64.1.[i] New orders were robust, and overall, services industries seem to be firing on all cylinders. But demand remains far above supply, creating shortages and bottlenecks for retailers, echoing Monday’s manufacturing report.

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PMIs, Supply Hiccups and Stocks

Is the party ending? That is the question pundits asked as manufacturing purchasing managers’ indexes (PMIs) rolled in Monday. They showed continued growth on both sides of the Atlantic, with some nations even accelerating a tick. But they also showed the strain of severe supply shortages, prompting pundits to warn the economic recoveries from lockdowns are about to hit a harsh speedbump—particularly in Britain and manufacturing powerhouse Germany. We don’t doubt some businesses will have problems fulfilling orders in the near future, and that will weigh on output. But derailing the recovery seems a stretch, and markets have already signaled as much, in our view.

Overall, July PMIs were strong. As Exhibit 1 shows, the headline results clustered around 60—well above 50, the line between growth and contraction. New orders also grew at a fast clip, based on the commentary in IHS Markit’s press releases. That is ordinarily a great sign, as today’s orders are tomorrow’s production. But these days, rip-roaring new orders can be a headache. Supplier deliveries are on par with lockdown-era disruptions, complicating manufacturers’ ability to keep up with demand. Many are hoarding resources and components, fearing even greater supply disruptions later, and instead fulfilling orders by drawing down stockpiles of finished goods. Even so, order backlogs are growing at or near record rates in most major nations.

Exhibit 1: Dissecting July’s PMIs

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