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.

Into Perspective: America and Russian Oil

Editors’ Note: This article addresses some political developments, so please note that MarketMinder is intentionally nonpartisan, favoring no party or any politician. We assess such matters solely for their potential economic, market and/or personal finance impacts.

While the West’s response to Russia’s war in Ukraine so far lets the world continue buying Russian energy, a bipartisan coalition led by Senators Joe Manchin and Lisa Murkowski is attempting to change this. New legislation, if passed, would ban US imports of Russian fossil fuels, including crude oil, refined petroleum products, natural gas and coal. Beltway observers think the legislation has a decent shot of passing and—while the vast majority of the country is probably behind this from a humanitarian and geopolitical standpoint—there has long been concern that the US, like Europe, now relies on Russian energy. If that is indeed true, then banning Russian oil would potentially cause a severe shortage, driving prices even higher. Yet a quick look at some US oil production data should quash this fear.

Now, much of this fear stems from politics, tied to some outlets’ over-simplified portrayals of the Biden administration’s energy policy. As the story allegedly goes, the US was energy independent[i] until January 2021, when Executive Orders canceling the Keystone XL pipeline and halting leases and permits to drill on Federal lands quashed US oil production, leading to high imports from Russia to fill the shortfall. That is the background, which we present so that all of you, dear readers, are on the same page.

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January Pointed Positively for the US Economy

In some non-Russia-Ukraine financial news, January numbers came out for several widely watched US economic datasets last Friday. Despite worries ranging from rising prices to Omicron, the results largely exceeded expectations. January’s growthy figures suggest the US economy is on solid footing and remains more resilient than many appreciate—useful perspective given all of today’s alleged economic headwinds.

The latest personal consumption expenditures (PCE) price data led most headlines, as the Bureau of Economic Analysis’s (BEA’s) headline price index is the Fed’s preferred gauge. That measure rose 6.1% y/y in January, its fastest rate since 1982.[i] The “core” PCE price index (which excludes volatile food and energy prices) accomplished a similar feat, rising 5.2% y/y—its quickest pace since 1983.[ii] On a monthly basis, the PCE price index climbed 0.6%, in line with its growth rate over the past three months.[iii] Now, the BEA’s price data don’t reveal much new since other gauges, including January’s CPI and PPI, paint a similar picture.

However, the BEA did find January consumer spending held up despite rising prices. January retail sales (3.8% m/m) hinted at this, though some questions remained. The Census Bureau doesn’t apply inflation adjustments to retail sales, and retail trade doesn’t include most services spending, which comprise the lion’s share of household expenditures.[iv] PCE rounds out the picture. January’s real (i.e., inflation-adjusted) PCE rose 1.5% m/m, with goods spending (4.3%) stronger than services (0.1%).[v] The split isn’t a big surprise, given the Omicron variant kept workers and consumers home. That weighed on people-facing services industries in particular, including restaurants and bars (-1.3% m/m), hotels and motels (-3.5%) and air travel (-0.9%).[vi] While one month of data, positive or negative, doesn’t make a trend, growth in the face of higher prices reveals strong consumer demand—and counters worries elevated prices are an automatic negative for a large swath of US economic activity.  

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Big Speech, Little News

President Joe Biden delivered the State of the Union address last night, and if we are judging purely on the mechanics, we must give his speechwriters demerits for committing a cardinal offense: saving the thesis for the end of the speech.[i] But aside from taking an hour to say the state of our union is strong, the message was overall what most observers expected. It started with a rousing statement of support for Ukraine and ode to the fearless people defending their country and way of life, which earned thundering—and well-deserved—bipartisan applause. We, too, were moved when Americans stood as one to support courageous people fighting for freedom. Yet that first section was really about the only fresh content. Everything that followed—the traditional, homeland-focused discussion—was a rehash of old initiatives and stalled legislation. Whether you find the proposals beneficial or counterproductive, there was nothing new, nothing markets haven’t already chewed over to death—and nothing that looks likely to become law anytime soon. In our view, nothing in this speech should be jarring—or rocket fuel—for stocks.

As always, whenever we discuss politics, please bear in mind we are approaching the issue as markets do. Stocks aren’t partisan and don’t focus on personalities, tone or any of the other subjective trappings. They also don’t really deal in “good” and “bad,” which are often just opinions anyway. For stocks, we think there are generally two main questions. One, do policies that risk creating winners and losers have a realistic chance of passing? Two, are they likely to pass in a form that is more extreme than what markets have already priced in? In other words, is there any surprise power? This is the lens through which we examine the State of the Union’s economic discussion.

It started with a verbal victory lap over last year’s American Rescue Plan and bipartisan infrastructure bill, touting all the money the latter will inject into the US economy and the long-term fruit improving roads and bridges will bear. Fair enough, but stocks are already quite familiar with this, and as we showed last year, the funds deploy too slowly to have much of a cyclical economic impact. Whatever your opinion of its merits, we don’t think it qualifies as economic stimulus.

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Ukraine’s Fog of War and the Correction

Filtering information is one of investors’ most important tasks. It is hard enough in the best of times, but right now, the fog of war is making it all but impossible—and we aren’t talking about the myriad reports of fake images and video footage coming out of Russia and Ukraine. The fog is also engulfing a lot of the economic commentary, obscuring a clear assessment of developments’ impacts over the weekend and on Monday and stoking a lot of this time is different-style commentary. But as tough as it may be to see, we don’t think much has changed for investors since our discussion of sanctions late last week. The latest measures still don’t inflict enough damage to wallop global markets.

Yes, we know the US, UK and EU agreed to expel some Russian banks from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) network, which facilitates international financial transactions. We know this theoretically complicates Russian banks transacting with the developed world, effectively freezing commerce and overseas assets even for entities that aren’t under sanctions. And we know several Western leaders have referred to this, however unfortunately, as the “nuclear option.” Now they are patting themselves on the back, promising their actions will create a deep Russian recession.

Perhaps. But there are reasons to doubt this outcome will be so clear. That isn’t an ideological statement, mind you, nor a political one. Rather, our job is to assess these things coolly and rationally, as markets do. Those who argue the SWIFT expulsion will kneecap Russia’s economy point to the deep economic pain in Iran after US sanctions effectively barred all Iranian banks from SWIFT. Thing is, those sanctions included measures targeting Iran’s oil and gas exports, which is what actually crippled Iran’s economy. So far, the West has done no such thing to Russia—the SWIFT ejection applies only to some (heretofore unspecified) banks, meaning there are other banks that still have access and can process oil and gas transactions. Some officials told the press Monday that they are doing so to avoid interfering with the oil trade.

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The Direct and Downstream Impact of the Latest Sanctions on Russia

In the aftermath of Russian “President” Vladimir Putin’s full-scale invasion of Ukraine, the free world’s leaders announced fresh—and much tougher—sanctions Thursday. What have the US and its allies announced thus far, which institutions are most exposed, and is there much risk of a downstream impact for the US and Europe? Read on for the details.

Now, to be clear, this article is a discussion of the intended effects of Western sanctions based on trade statistics and the announcements to date. However, sanctions’ real impact rarely matches the intent. Even rogues like Vladimir Putin will find some third-party nation willing to trade with them, avoiding the sanctions for a small fee. Hence, sanctions’ likely economic impact—on Russia and the world—is smaller than the estimates that follow.

Until Thursday, the Western powers and their allies had refrained from some of the toughest measures in their arsenal, including banning Russia from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) network, which facilitates international financial transactions, and cutting off semiconductor shipments. Instead, they opted for a gradual initial approach, promising to ratchet the punishment up if Putin didn’t back down. He didn’t, and now global leaders are starting to follow through on their earlier warnings.

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Weighing the Crypto Threat to the Global Financial System

Do cryptocurrencies threaten global financial stability? The Financial Stability Board (FSB), an international body of financial authorities and regulators, released a report last week voicing worries—adding to murmurs in the financial press. While the FSB’s findings aren’t a call to action, examining how the crypto space could impact broader global markets can help investors weigh the likelihood of the discussed fears actually coming to pass.

The FSB focused on vulnerabilities in private sector crypto assets, from “unbacked crypto” (e.g., bitcoin) and “stablecoins” (an asset-backed crypto with a fixed value) to decentralized finance (DeFi) and crypto-asset trading platforms. Think of unbacked tokens and stablecoins as your general cryptocurrencies—i.e., something trying to be electronic cash—while DeFi and crypto-trading platforms aim to provide financial services (e.g., lending) using private-sector crypto assets. With digital coins expanding rapidly and becoming a larger part of the financial system, the FSB worries more regulation and oversight are needed, or else cryptos’ problems could spill into global capital markets—with potentially dire consequences. For example, the FSB posits that a major stablecoin failure could roil short-term funding markets if the coin issuer had to liquidate its reserve holdings in a disorderly fashion—especially if it triggered a run on other stablecoins.

But as the FSB and many pundits have pointed out, to harm global markets, crypto markets need a transmission mechanism. Throughout cryptos’ limited history, no link existed: Hence, bitcoin’s busts in both of the bull markets occurring during its existence didn’t derail stocks. But with cryptos’ rising prominence, some see new potential transmission mechanisms.

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What to Do—and Not to Do—When Volatility Strikes

Between the escalating situation in Ukraine and stocks’ entering their first correction (short, sharp, sentiment-driven -10% to -20% decline) for this bull market, the urge to “do something” can beckon strongly. But for investors, reacting to these items is usually counterproductive—and costly. Your portfolio’s performance during (and your personal reaction to) volatile spells may reveal some positioning weaknesses that you would be wise to address, but this is best accomplished in a measured, forward-looking manner, not a knee-jerk move when stocks are falling. With that in mind, here are some dos and don’ts to help you get through a difficult stretch of headline worries and rocky markets.

Do: Above all, keep a longer-term perspective. We think your asset allocation—the mix of stocks, bonds, cash and other securities in your portfolio—should be based on your long-term goals, time horizon, ongoing needs and comfort with volatility. Bouts of negativity alone shouldn’t cause you to veer from it. Ideally, your asset allocation should be one with a high likelihood of reaching those goals over time regardless of the ups and downs along the way.

Keep in mind what your asset allocation’s components are there to do. If you hold some cash, it is probably there for cash flow needs, emergencies and known, upcoming purchases. Having some bonds can reduce the magnitude of portfolio swings and, therefore, the likelihood of having to take scheduled withdrawals after a large drop. Stocks are usually there for long-term growth, which is the reward for their higher expected short-term volatility. For most folks, these can work in concert toward long-term goals.

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The Likely Market Implications of Putin’s Latest Ukraine Gambit

Is the dam finally breaking? Over the long weekend, Russia disavowed Ukrainian sovereignty, formally recognized the country’s breakaway provinces—Luhansk and Donetsk—as independent states and sent troops into them. In response, the UK announced some sanctions, Germany officially abandoned its pursuit of the Nord Stream 2 pipeline, and the US is reportedly prepping new sanctions of its own. Oil prices jumped closer to $100 a barrel, and as we write, the S&P 500 is down about -1.7% on the day—in correction territory from early January’s high.[i] If markets close at present levels or lower, it will be this bull market’s first official correction—the first drop below -10% from the prior closing high. Stay cool. In our view, stocks are behaving as they normally do amid escalating geopolitical tensions. Regional conflict can hit sentiment and cause short-term declines, as it has this year. But there is a long history of regional conflicts, and none have been the proximate cause of a bear market. We don’t think this time is likely to prove different.

Not that any of the present situation is good—it isn’t. War is tragic. Our hearts go out to the many Ukrainian people whose lives and property are at risk, and we hope conflict doesn’t escalate from here. Yet markets are cold-hearted and rational, so when assessing conflict’s impact on stocks, we think it is vital to be more detached and assess the facts. One tough fact Western pundits seem to broadly overlook: Russian presence in Luhansk and Donetsk—the two eastern Ukrainian provinces “President” Vladimir Putin recognized Monday—isn’t new. Russian soldiers reportedly entered these areas back in 2014, in unmarked combat fatigues, earning the moniker of “Putin’s little green men.” As many in the region reported at the time, they were offering support to “pro-Russian” separatist forces in these provinces as Russia executed its annexation of Crimea. As with Crimea, Putin argued these areas were much more ethnically Russian than western Ukraine, seemingly attempting to justify his actions on cultural grounds. Many observers in the US and Europe were surprised when Putin didn’t annex Donetsk and Luhansk as well as Crimea, instead settling for fomenting chaos and severing them from Kyiv’s oversight. Diplomatic recognition of Luhansk and Donetsk is noteworthy, but it—and the official statement Russian troops are headed into these regions—is tantamount to Russia formally admitting to its stance from the last eight years.

Obviously, there are a lot of US political considerations to the above, as the current White House has a lot of overlap with the administration that dealt with this in 2014. We aren’t going to wade into any of that, and please understand that our analysis of this situation is nonpartisan—rather, we bring up the events of eight years ago to make a critical point for stocks: Markets move most on surprises, and nothing happening in Ukraine today is all that new or surprising. Stocks have known and dealt with the possibility of Putin carving up the country for many years now. Once official Russian troops amassed along the border, many started seeing formal activity in Luhansk and Donetsk as a foregone conclusion. The chief question was how much the West would stomach before applying economic pressure, and we are now getting some clarity on that.

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How P.J. O’Rourke Can Help You Invest Better

“What should I read?” That is a question we often get from our readers, colleagues, family and friends as they seek to hone their investing knowledge and skills. My default answer has always been, “people you don’t agree with.” After all, confirmation bias underlies many investing errors (and a whole lot of non-investing mistakes, for that matter), and the only way to fight it is to confront it head on. Read competing arguments, weigh the evidence and be open to being convinced. We are all human, and no human is right all the time. Reading a well-reasoned piece from your ideological opposite can help you spot the logical fallacies in your own thinking, expand your horizons and make you better. But this week, poring over the many tributes to the legendary P.J. O’Rourke, I realized there is another, perhaps even better answer: Read the humorists. They will teach you much more about observation, critical thinking and defying conventional wisdom—almost always the key to investing successfully—than the economists, sociologists and political pundits that dominate today’s landscape.

By “humorist,” I don’t mean comedian, although the two can overlap at times. A comedian’s job is to tell jokes and make you laugh. A humorist, by contrast, uses wit and satire to comment on life, society, current events and the human condition. They spot the funny, incongruous and absurd in the everyday and build stories around it. They write without taking an emotional stake in either side of an argument—rather, they are detached, on the sidelines and not beholden to any audience. They are Joan Didion plus directness and irony. The best ones think freely and deeply, sport a devil-may-care attitude and write with a razorblade rather than a pen. They take no prisoners and relish standing out from the crowd. They don’t cower at criticism but rather use it as fuel. If everyone agrees with them, after all, they probably aren’t doing their job correctly.

No, you won’t learn basic investing concepts from The Portable Dorothy Parker. Nor will H.L. Mencken’s Chrestomathy teach you to spot bear markets early on. P.G. Wodehouse offers no lessons in security analysis, and Robert Benchley won’t help you understand when and why growth stocks beat value. But in their writing, these and other great writers demonstrate the qualities that most successful investors share: an eagerness to challenge conventional wisdom. The wisdom to see that if Group A says one thing and Group B says the opposite, then the truth probably lies in some underconsidered third option. The ability to spot seemingly mundane, overlooked things of great significance. The clarity to identify potential downstream consequences—O’Rourke’s essays are a masterclass in that.

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Italy Doesn’t Need the ECB’s QE

A new theory about the ECB emerged on Wednesday, and it is a juicy one: Evidently, the ECB can’t hike rates aggressively because it has committed to not raising rates until it stops quantitative easing (QE) bond purchases. Which it can’t do, because it would risk restarting Italy’s debt crisis. While we won’t opine on the need or desirability of aggressive ECB actions, we have a couple of charts that disagree with the notion ending QE would trigger an Italian debt calamity.

Analysts have long argued the ECB alone is propping up Italian debt and keeping yields low. Never mind that Italy’s 10-year yield was well below crisis-era levels when the ECB started QE in January 2015. Never mind that in 2014, the average yield of all Italian bonds issued that year was just 1.35%, which was then the lowest on record.[i] And never mind that when the ECB stopped buying bonds in 2018, Italian yields fell on a cumulative basis. (Exhibit 1)

Oh, and never mind that even when the ECB stops buying Italian bonds whenever QE ends, it will still own over €650 billion (and counting) worth of them, and the Italian Treasury will still get back any interest paid on those holdings.[ii] As those bonds mature, the ECB will use the proceeds to buy replacements. The pile of debt Italy will actually have to pay interest on is smaller today than it was when the ECB started QE, as its total Italian bond holdings dwarf the amount of debt Italy issued since QE began. Those who dwell on the act of purchasing overlook that the stock of assets on the ECB’s balance sheet is probably more meaningful at this point.

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