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.

The Mathflation Jump

We don’t often tip our hat to mainstream financial news coverage, but in the spirit of good sportsmanship, let us give credit where credit is due: The vast majority of financial outlets got inflation right. Instead of freaking out about CPI’s acceleration from 1.7% y/y in February to 2.6% in March and warning of runaway inflation ahead, they calmly explained the jump came from a math quirk known as the “base effect.”[i] We think that is a point worth reiterating here, as inflation isn’t the only data showing bigtime math skew right now—a key concept for investors to understand as they sift through economic results this spring and summer.

We first highlighted this early last month, after Fed head Jerome Powell started sprinkling base effect warnings in his public comments. Inflation rates, as we explained then, are calculated on a year-over-year basis. So March’s inflation rate is the percentage difference between CPI in March 2020 and March 2021. The “base” is that March 2020 level.

Last year, as lockdowns halted commerce in March, CPI started falling. It fell again in April and May, then started recovering in June. By August, it was back at pre-pandemic levels. Overall, prices surrounding that blip are in line with their long-term trend. But you will not know that from the inflation rates for the next few months as those year-ago bases bounce around. When you divide a given numerator (like March 2021’s consumer price index level) by a smaller denominator (March 2020’s), the result increases—just simple math. The denominator got smaller in March. It will get smaller still in April and May. That will boost annual inflation rates even if prices don’t change month to month. Then the annual inflation rates will probably slow significantly as the denominator gets larger again over the summer.

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Why Stocks Don’t Mind Widely Watched Forecasts

Tuesday, the IMF unveiled its latest World Economic Outlook, which revised its projections for global growth this year upward to the fastest-expected pace in decades. Yet the fast growth isn’t evenly distributed—the IMF expects America and China chiefly to drive the acceleration. Pundits had two general reactions to these forecasts. One camp celebrated the fast growth, thinking it has economically sensitive stocks set to soar. The other fears a divergence between America and China versus pretty much everyone else stoking instability and a world of equity market haves and have-nots. But in our view, extrapolating anything from such forecasts is a stretch.

The IMF’s upward forecast revision was its second in three months. It now expects annual GDP for the whole world to rise 6.0% in 2021, up from January’s 5.5% projection. For a bit of perspective, global GDP hasn’t grown this fast since 1973, according to World Bank data. Big components of that: the IMF’s forecast for 6.4% and 8.4% US and Chinese GDP growth, respectively. While it has only been about a decade since China eclipsed 8.4% GDP growth, America hasn’t topped 6.4% since 1984.[i]

Many take economists’ brighter outlook—not just the IMF’s—as a fresh sign markets will boom, favoring economically sensitive value stocks. The trouble? The fact so many expect fast growth means it likely has little power over markets. Beyond the IMF, private forecasts also show 2021 US growth surging. Presently, the median of 67 forecasts puts this year’s GDP growth at 5.8%.[ii] But this isn’t a new development. A year ago, several were already publishing 2021 US growth forecasts above 6%. The same is true for China. Many private forecasters penciled in upwards of 8% Chinese growth last April.

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The Global Minimum Tax: Tough Sellin’ for Yellen

Editors’ Note: This piece touches on politics, and as such, we remind you that MarketMinder favors no political party nor any politician. We assess developments solely for their potential market impact.

On the heels of President Joe Biden pitching and stumping for his infrastructure plan—and its embedded corporate tax hike from 21% to 28%—Treasury Secretary Janet Yellen has been doing some related stumping. Yellen, it seems, is championing a 21% global minimum corporate tax rate. Wednesday, the G-20 said they will discuss her idea this summer, which has pundits treating her plan as if it is—or is soon to be—a fait accompli. But, friends, whether you love or loathe this plan, we suggest keeping your emotions in check. This is going to be some very difficult sellin’ for Yellen.

The rationale behind Yellen’s proposal is straightforward enough. A central tenet of economic theory holds that people (and businesses) respond to incentives. Taxes are one such incentive. The more you tax something, the more you incent a business to find ways around it. Worldwide, nations’ approach to taxing corporations varies pretty widely. Hence, multinational corporations have long sought to domicile in nations with friendlier systems. Yellen and Biden, perhaps rightly, fear hiking US corporate taxes could lead some US multinationals to seek friendlier shores elsewhere.

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Nearing the Topps? How a Baseball Card Company Illustrates Sentiment Now

Editors’ Note: MarketMinder does not provide individual security recommendations. The below merely represent a broader theme we wish to highlight.

On Saturday afternoon, I wandered into Target to complete a normal springtime ritual: buying a few packs of Topps Heritage baseball cards. It is usually easy. You just walk in around Opening Day, head to the trading cards rack by the cash registers, grab what you need and hand over your  hard-earned cash. But this time, no such luck. All I found was a bunch of empty shelves, some dusty Pokémon packs and a tumbleweed. The rumors were true: Baseball cards were back, resellers had cleaned out the inventory, and longtime hobbyists like me were shut out. Then my mind flashed to the two new card shops in town. It felt like 1993 all over again. But this article isn’t about the Junk Wax Bubble that wrecked baseball cards in the mid-1990s. Nope, it is about something more interesting that happened on Tuesday: Topps, the age-old trading card company, announced it was going public via Special Purpose Acquisition Company (SPAC). To assuage would-be investors worried that the company is a one-trick baseball card pony at the mercy of the hobby’s weird ups and downs, it hyped its many new forays into the weird world of non-fungible tokens (NFT). With that, the newly public company put itself at the center of a Venn Diagram depicting pretty much all of today’s investment fads.

Exhibit 1: A Venn Diagram of Fads

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Economic Data Are Springing Higher, but Stay Level-Headed

Spring has sprung, and so has the US economy. Last Friday’s employment report showed non-farm payrolls jumping by 916,000 in March, dropping the unemployment rate to 6.0%.[i] ISM’s Services Purchasing Managers’ Index (PMI), released Monday, jumped to a record-high 63.7, far above 50 (the dividing line between growth and contraction) while the Manufacturing PMI rose to 64.7.[ii] IHS Markit’s PMIs, which have less history but include more companies, put Manufacturing at 59.1, Services at 60.4 and the composite of the two at 59.7.[iii] Headlines from coast to coast are hyping these results. Consistent with recent trends, pundits aren’t looking for gloom buried under the hood. Nor are they couching this as a temporary boom. Instead, they see much more in store, with stimulus and hiring sure to fuel a lasting surge. While it pains us to be party poopers, we think a reality check is necessary, lest hot expectations prompt you to chase returns in corners of the market unlikely to do well amid slower economic growth.

After years and years of widespread skepticism, sentiment’s optimistic turn is a refreshing change. But questioning prevailing sentiment is always one of investors’ key tasks, whether the universal emotion is more fearful or greedy. So when we see an abundance of cheer over data, we think it is time to apply some tests. Is the cheer rational? Are people missing something? Making logical errors?

In the realm of unemployment, we think they are, for a simple reason: Labor markets are late-lagging indicators. In this case, March data reflect a rush of businesses reopening as restrictions eased throughout the country. From Texas lifting basically all restrictions to California restarting limited indoor dining and movie theaters—and everything in between—services businesses finally had cause to bring back many employees furloughed over the past year. That is what they did, adding 597,000 to payrolls.[iv] Judging from public sector payrolls’ 136,000-person jump, non-essential government workers are also trickling back to the office.[v]

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Volatility Strikes China

Editors’ note: This article touches on political matters, which MarketMinder takes no sides on, favoring no party or politician anywhere. We assess political developments solely for their potential market impact—or lack thereof.

Volatility has struck Chinese stocks,[i] leading many globally to question: Is this the start of something bigger and longer-lasting? Most coverage associates China’s market volatility with familiar concerns in the developed world: prospects for monetary policy tightening, slower economic growth and a regulatory crackdown on Tech and Tech-like sectors crippling recent high-fliers. We don’t disagree that some Chinese companies are facing some regulatory uncertainty on both sides of the Pacific, but the key consideration is how much negative surprise power remains from here. In our experience, markets are pretty efficient at dealing with things like this, and we think the surprise power from here is more likely to be positive than negative. 

In US dollars, the MSCI China Index—a broad gauge of Chinese shares listed in the mainland, Hong Kong and America—is in a deep correction, off -16.7% from its February 17 high.[ii] Now, it may be worth noting the index isn’t entirely accessible for global investors, as 20% of its market cap represents A shares, which are restricted mostly to Chinese mainland investors. But its largest shares by market cap are ADRs—Chinese companies that list and trade in the US. These have encountered trouble thus far this year, tied largely to escalating delisting talk.

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Keep COVID Relief Payment Expectations in Check

In one sign of today’s widespread optimism, February’s bigger-than-expected consumer spending dip—reported late last week—didn’t trigger the usual handwringing and grousing over American consumers’ health. Most coverage rationally noted the weakness was likely temporary. However, the brighter outlooks didn’t stop there, as many turned their gaze forward to a coming spending surge, buoyed by federal COVID relief. Many pundits suspect that will push economic growth to a higher plateau. While a short-term bounce wouldn’t shock us, we don’t think a lasting boom is likely—worth keeping in mind, especially when it comes to monitoring how expectations align with reality.

February personal consumption expenditures (PCE)—a broad gauge of US consumer spending—fell -1.0% m/m, slightly worse than expectations for -0.6%.[i] As many economists observed, the month’s severe weather likely knocked spending. Winter storms forced many retailers and restaurants to temporarily close and kept many Americans home, particularly in the Northwest, Midwest and South. But as many financial outlets sensibly noted, it is now spring. Winter storms probably aren’t a future headwind. Less rational, in our view: the broad anticipation of a stimulus-fueled spending surge forward.

We have seen many extrapolate COVID relief payments now rolling out to many nationwide into huuuuuuuge new consumer spending, but these projections have some holes. For one, it is tough to peg how exactly recipients will use their payments, as survey data reveal. A National Bureau of Economic Research (NBER) survey found nearly 60% of the first direct payments were either saved or went to pay off debt.[ii] A Federal Reserve Bank of Philadelphia survey reported a similar development: COVID relief checks had multiple uses, including going to savings or debt payments.[iii] That trend didn’t abate with the second round of checks, either. According to the Census Bureau’s Household Pulse Survey, which aims to track the pandemic’s impact on American households, about half of recipients reported using their second check to reduce debt.[iv] Now, surveys can’t provide exact breakdowns, but these findings throw cold water on the notion relief payments turned immediately into new spending.

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Bullish or Bearish, Keep Expectations of Biden’s Infrastructure Plan in Check

Editors’ Note: As always, our political commentary is non-partisan by design. We favor no politician nor any political party and assess political developments for their potential economic and market impact only.

The US finally got a look at President Joe Biden’s much-ballyhooed infrastructure plan on Wednesday, and the reactions were predictable. Proponents hyped its breadth and claimed it would turbocharge the recovery from lockdowns—even shift the US onto a higher plateau of growth for years to come. Opponents primarily took issue with the corporate tax hikes and debt penciled in to pay for it. We will save our discussion of taxes for another day. But love the plan or loathe it, we think there is a big risk of investors overrating the impact of all this on market returns to come. Perhaps most particularly, those projecting swift economic growth on the back of all this spending are likely to end up disappointed—as are those projecting an accompanying boom for value stocks.

Headlines call Biden’s plan a $2 trillion infrastructure package. That is mathematically true, depending on your definition of infrastructure, but it is incomplete. The administration’s fact sheet states plainly: “The plan will invest about $2 trillion this decade.” The boldface is ours, to draw your attention to the fact that this decade ends in just under nine years. $2 trillion in projected investing over eight-plus years isn’t stimulus hitting the economy today. It isn’t a $2 trillion demand boost in the here-and-now. It isn’t pump priming. It doesn’t multiply economic activity this year and next. It is simply an advertisement of the new administration’s preferred areas of budget focus, with most funds deployed over the medium to long term.

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The Real Lesson From Archegos’ Missed Margin Call

Editors’ Note: MarketMinder does not make individual security recommendations. The below merely represent a theme we wish to highlight.

Welp, it happened again: Another hedge fund made some leveraged, concentrated, speculative moves that didn’t work out, and wound up getting hit with margin calls it couldn’t meet. That forced sales of about $20 billion in assets on Friday and saddled its prime brokers with billions of dollars in losses. Fears of forced selling were everywhere before markets opened Monday, with plenty of pundits warning of contagion and drawing comparisons with the demise of Long Term Capital Management (LTCM) in 1998. But the widely feared storm never really materialized. US markets finished down just -0.09% Monday—a placid day by virtually anybody’s measure.[i] Hopefully, this is the first step in folks realizing markets aren’t likely to prove fragile enough that one failing fund starts a cascade of forced selling.

The firm in question today is Archegos Capital Management, which is known in industry jargon as a family office—an investment shop that exists to manage family wealth. In this case, the wealth belongs to a former hedge fund tycoon who earned some notoriety a few years back, which you can read about on any financial news site you like. The firm, under his direction, had what most would probably consider excessive margin loans, using borrowed money to take huge positions in a handful of old-line media companies and large Chinese Tech firms.[ii] When those hit some speedbumps earlier this week, it forced margin calls, which Archegos lacked liquidity to meet. That triggered the aforementioned $20 billion in security sales, which drove the affected stocks even lower. That all happened Friday, which is why the masses anticipated a wave of forced sales on Monday.

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A Q&A on Inflation

The Fed’s preferred inflation gauge—the Personal Consumption Expenditures (PCE) Price Index—hit the wires Friday morning, showing inflation ticked up from 1.4% y/y to 1.6% February.[i] That is below the Fed’s 2% target. But if we have learned anything in our many years of covering economic developments, it is that this won’t do a thing to quell inflation chatter. Many still think rapid inflation is inevitable as more businesses reopen, especially with fiscal stimulus talk picking up again. This week, we have seen a fair few pieces arguing we are seeing the initial signs of this, which we think makes it worth a look at what is—and isn’t—inflation. Mind you, we don’t think rising inflation is inherently a risk for stocks, which have actually done quite well during such spells in the past. Trouble generally stems from the Fed being too late to rein in prices and then over correcting, an event we think defies prediction. Still, having a better understanding of the supposedly inflationary news today can help you keep a level head when making portfolio decisions, so off we go.

First off, what the heck is inflation, really?

Glad you asked. Inflation is a general rise in prices across the entire economy. Inflation measures use broad baskets of goods and services in hopes of capturing broad trends accurately. These include the aforementioned PCE index as well as the Consumer Price Index (CPI) and private-sector gauges like MIT’s Billion Prices Project. At any time, some items in these inflation baskets will rise while others will fall, but those outliers cancel each other out and let the broader trend emerge.

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