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.

What If the BoE Goes Negative?

For months, one question has preoccupied Bank of England watchers and British savers: Is the BoE about to take short-term interest rates negative in the UK? Monetary policymakers have admitted it is under discussion. Futures markets show it happening by early 2021. While BoE Governor Andrew Bailey recently said it wasn’t on the docket, his institution sent UK banks a letter on Monday asking them to explain their “current readiness to deal with” zero percent or negative rates. This, predictably, sent banks and commentators into a tizzy, with many warning about looming trouble for banks’ earnings and savers’ deposits if rates drop below zero. In our view, there is some merit to this criticism, however overstated it might be, and considering these risks can help folks set expectations. On the bright side, though, negative rates haven’t caused recession or bear markets in other countries using them in recent years.

In theory, negative rates’ purpose is to discourage banks from hoarding reserves at the central bank. If banks must pay the central bank to store their excess reserves instead of earning a tiny return on them, the theory goes, banks will find lending more attractive—stimulating the economy as banks dole out more funding to households and businesses.

It is a nice seeming theory, but reality hasn’t totally vetted this out. In the eurozone, the ECB adopted negative rates in June 2014. At the time, loan growth was negative—tied to the eurozone’s sovereign debt crisis-driven regional recession. It did improve from there, returning to positive year-over-year growth in February 2015 and accelerating in the months and years ahead. But relative to the eurozone’s history, loan growth in the negative rates era wasn’t robust, as Exhibit 1 shows—it was in line with the recovery from the financial crisis, before the debt crisis, but far below the prior bull market.

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Our Perspective on the UK’s August Slowdown

The UK released monthly GDP for August today, and with growth slowing from July’s 6.4% m/m to 2.1%, most headlines focused on the seemingly fizzling recovery dashing hopes for a V-shaped rebound.[i] With growth stalling and new restrictions in local hotspots already starting to bite—and GDP still -9.2% below its pre-pandemic peak in February—many fear the road ahead will be long and arduous.[ii] We won’t argue everything from here will be smooth sailing, especially with pubs and restaurants throughout England now facing new limits on operating hours. But digging into the data, we found some interesting tidbits indicating the UK’s economic foundation is a lot stronger than it gets credit for and—for better or worse—reopenings and restrictions remain the swing factor. That doesn’t necessarily make life easier for investors, since these are inherently unpredictable political decisions, but it does suggest “weak economic fundamentals” aren’t reason to shun UK stocks.

The first interesting nugget comes from page three of the Office for National Statistics’ press release: “The accommodation and food services sub-sector contributed 1.25 percentage points to the 2.1% growth in GDP for August 2020, as the combined impact of easing lockdown restrictions, Eat Out to Help Out Scheme and ‘stay-cations’ boosted consumer demand.” Now, pessimists could read this and scoff that GDP was artificially inflated by government largesse, and if it can’t even grow well without the government picking up the tab when folks eat out, then things must be dire indeed. As people who generally believe most sustainable growth comes from the private sector, we won’t try to talk you out of that general viewpoint. But there is another way to view this without casting judgment for or against Eat Out to Help Out: People went out, period. As the UK and other nations started reopening in late spring and early summer, the big worry was that society’s fear of COVID-19 would keep people home and out of restaurants, sapping reopening’s power to generate an economic recovery. Indoor dining was supposedly the most vulnerable to this at all. But August’s results prove that decisively false. Setting aside quibbles over who picked up the tab, the simple fact people actually felt comfortable leaving the house and lingering at their local watering hole suggests that whole notion of psychological scarring causing economic scarring was off base.

The second set of fun facts comes from page five of the press release, which looks at Services’ 14 sub-sectors. Of those 14, 12 remain below pre-COVID levels, which isn’t surprising. But we were rather struck by which industries are struggling the worst. As Exhibit 1 shows, that includes all the items we wouldn’t rationally expect to recover until the virus is old news and no longer threatens the masses. Stuff like air travel. Rail transport. Entertainment. Elective health care. Paid domestic work. These are all largely still offline. Whatever your opinion of the merits of this, until life on these fronts returns to normal, these areas will likely continue to be sore spots. But when they do reopen, August’s hospitality boom suggests they can recover a lot faster than people might expect.

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The Big GDP Bang Analysts Project

Twenty days from now, in what is sure to be a heavily covered release, the US Bureau of Economic Analysis will unveil its advance estimate of US Q3 2020 GDP. After a historic decline in Q2, expect the reverse: a historically huge surge. How large? Estimates tracked by FactSet run the gamut from 17.0% annualized to 39.0%.[i] The Atlanta, New York and St. Louis Fed’s nowcasts—attempts to estimate GDP growth in real time using incoming data throughout the quarter—put Q3 at 35.3%, 14.0% and 20.3%, respectively.[ii] The median of these 30 total forecasts is 26.1%. Similarly huge jumps—if not huger—are expected in most of the developed world. The takeaways from this for investors are limited, but we do think putting these data in perspective can help manage expectations.

The third estimate of US Q2 2020 GDP put the springtime contraction at -31.4% annualized, the biggest drop since … ever. Now, as we told readers (probably too often), that doesn’t mean GDP fell by roughly a third. That is the rate of decline if contraction lasted a year at that quarterly clip. Similarly, if the median Wall Street estimate holds, the 26.2% annualized jump wouldn’t mean that GDP grew by more than a quarter.

As for those estimates, Exhibit 1 plots 30 forecasts of US Q3 GDP, as tracked by FactSet, and the three regional Feds. For some perspective, America’s highest-ever growth rate since quarterly GDP data began in 1947 was Q1 1950’s 16.7% annualized.[iii] All of Wall Street’s current estimates exceed this. Only the bears over at the New York Fed estimate a weaker-than-record growth rate.[iv]

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Our Notes on the Vice Presidential Debate

Editors’ Note: MarketMinder is intentionally nonpartisan. We favor no political party or politician and assess political developments solely for their potential economic and market impact.

Last night, Vice President Mike Pence and Senator Kamala Harris engaged in a tour de force of lying with statistics, ducking questions and rambling off-topic—otherwise known as your typical vice presidential debate. Ordinarily, our only mention of a vice presidential debate would amount to jokes about that old Saturday Night Live skit where the great Dana Carvey and Phil Hartman spoofed Ross Perot and Admiral James Stockdale, respectively, debriefing after the 1992 veep debate while joyriding. “Ping pong match! It was a.” But we digress.

Many pundits claim this year’s vice presidential debate is far more consequential than normal, given President Donald Trump’s being 74 and having a recent brush with COVID-19, as well as former Vice President Joe Biden’s 78 years of age. Speculation that one of the people on stage may be president before the next four years are out is relatively common, more common than usual, we suspect. That allegedly makes voters extra keen on hearing what they had to say and, potentially, makes it more influential on the race than usual. We don’t buy it, and we offer this word of advice: Don’t look to this debate for hints of who will win, much less what will happen to stocks.

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A Mindset Shift for a Low-Yield World

In a world with 10-year Treasurys yielding below 1%, stock dividend yields around 2% and the Fed mulling an extension of its dividend caps even as the ECB considers lifting its own ban, where will investors get income?[i] This is a question we see a lot, with several pundits suggesting the so-called 4% Rule—which holds that diversified stock portfolios can support withdrawals of 4% of the starting value annually, adjusted for inflation, without depleting the assets—is obsolete. In our view, this question stems from a common misperception: that income and cash flow are equivalent. We don’t think they are, and once you lift that veil, the future of retirement withdrawals should look a lot brighter to you regardless of where interest rates and dividends go from here.

Portfolio cash flow, simply, is money withdrawn (usually) regularly to fund living expenses. It is easy to think of it as income since, for many retired people, it replaces income earned from their job. But in the investing world, “income” refers specifically to investment income—interest and dividends from bonds, stocks, CDs, etcetera, etcetera and so forth. Using these payments to fund living expenses is fine, but in our view, it introduces unnecessary limitations. If you live off of only interest and dividends, you could end up over-concentrated in sectors like Utilities and Financials and with an asset allocation that doesn’t quite match your time horizon and long-term goals. Beyond that, you are at the mercy of corporate boards who determine dividend payouts and the central banks that both regulate banks’ payouts and, lately, hoover up government bonds, reducing long-term interest rates. Call us crazy, but we don’t think it is wholly beneficial for people to let their day-to-day funding needs be vulnerable to such human (and occasionally misguided) decision making outside of their control.

Thankfully, there is another way to generate cash flow: sell stocks and distribute the proceeds. This is a tactic we call generating homegrown dividends. In our experience, some people have a mental block against this because they view their stocks as the investment principal that kicks off income, and touching your principal seems to violate Compound Interest 101. But that principal doesn’t just kick off (today’s meager) dividends. It also rises (and occasionally falls, temporarily) with the market. Homegrown dividends basically harvest that price return as cash flow.

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On Trump’s Positive COVID Test

Editors’ Note: MarketMinder is intentionally nonpartisan. We favor no political party or politician and assess political developments solely for their potential economic and market impact.

Thursday afternoon, news broke that a top White House aide, Hope Hicks, fell ill with COVID—leading many to worry the virus would have spread to other officials, including President Donald Trump. At about 10PM Pacific Daylight Time last night, tests confirmed it: Both President Trump and First Lady Melania Trump were COVID-positive and quarantining. Stock futures immediately dipped—which persisted when markets opened Friday—as this October surprise stokes uncertainty somewhat. It also fuels a tremendous amount of speculation about what it all means for the election—and, correspondingly, stocks. In our view, investors should avoid this vortex of speculation. The impact on the election is entirely unknowable and stocks’ dip Friday is likely a short-term sentiment reaction—fleeting. Making too much of this is a bias-laden minefield, in our view.

Given that the US election is only a month away, it is perhaps natural that the minute this news hit, political pundits went into overdrive trying to discern the infection’s possible impact. Among the most common theories we have seen:

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The Real Limits of Real-Time Data

After a rocky September for markets, some worry more trouble looms. Besides chatter about US presidential election-related volatility, ominous economic storm clouds are allegedly gathering. In some experts’ opinion, the latest spate of high-frequency data—timely but narrow economic indicators—are “flashing warning signs.” While they can be useful at times, in our view, high-frequency data have many limitations investors must consider before reaching large conclusions.

First up: Initial jobless claims for the week ending September 19 ticked up to 870,000 from 866,000 a week earlier.[i] Some blamed ongoing layoffs for the lack of improvement—perhaps signaling weak demand. Beyond this, the number of travelers passing through Transportation Security Administration (TSA) checkpoints is still way down from last year.[ii] Foot traffic at restaurants, gyms and other “close contact” businesses has stalled and estimates of seated diners at restaurants dipped for a second straight week.[iii] Improvement in small businesses’ new job openings and employee hours worked has slowed, too.[iv] Not all high-frequency data are flagging (e.g., hours worked at manufacturing firms continue to improve), but many economists worry the latest data showing either a stall or slower growth suggest the recovery is losing steam following a steep summertime jump—a sign of trouble on the horizon.[v]

In our view, these dour observations overstate what high-frequency data series show us. Yes, they reflect real-time conditions and can occasionally reveal turning points ahead of more detailed measures—as was the case earlier in the year. But like traditional economic indicators, high-frequency gauges have their shortcomings. If monthly and quarterly readings are subject to short-term wobbles, weekly and daily numbers are even noisier. Many high-frequency data series also aren’t seasonally adjusted, so they don’t account for usual skew related to the time of the year. You could look at year-over-year data in these series—which wouldn’t be subject to seasonal effects—but then the “timely” series becomes much more backward-looking. Events from a year ago could affect the calculation’s base.

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The Big Picture for Investors on the Debates

Editors’ Note: MarketMinder is intentionally non-partisan. We favor no political party or politician and assess political developments solely for their potential economic and market impact.

President Donald Trump and former Vice President Joe Biden went 10 rounds in the verbal boxing ring known as the debate stage on Tuesday night, officially kicking off the campaign’s home stretch. For 90 minutes, the contenders sparred with moderator Chris Wallace and each other over health care, the Supreme Court, taxes, COVID-19, foreign policy, trade and much, much more. As talking heads now weigh in on who landed which punches and theorize about how the debate will affect the results, we issue a timely reminder for investors: Presidential debates are good for cable news ratings and Saturday Night Live writers, but they won’t help you assess the election’s outcome or its influence on stocks.

We won’t delve into all the debate storylines—most are pure sociology, outside the realm of stock market drivers. Collectively, however, they illustrate what debates really are: political theatre. They are also reliable triggers for confirmation bias. Your opinion of who won the debate probably rests heavily on your personal opinions and the slant of coverage you choose. Pundits at right-leaning outlets will say Trump won. Left-leaning networks will give Biden the winner’s sash. Many cynics will say neither did. Both candidates know this and were playing to their chosen audiences, hitting all their talking points and applause lines. Triggering feelings to motivate turnout was the goal. In our view, that is a logical enough approach for them, since in all likelihood, people have already made up their minds about these candidates. Very few voters are genuinely undecided. Even those who claim to be so likely lean one way. Of those who are genuinely undecided, how likely is it that a debate like Tuesday’s changed anything at all? Ultimately, we suspect debates reinforce prior leanings, but the likelihood they flip anyone is exceedingly low. That is perhaps particularly true in this contest, given the extensive media coverage of Trump’s deeds and words and Biden’s long, long history on the national political scene.

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A Political Roundup Beyond America’s Borders

Editors’ note: In the US and internationally, MarketMinder is politically agnostic, favoring no party or politician. Our assessments here focus solely on political developments’ potential economic and market impact—or lack thereof.

With America’s election hogging attention, it could be easy to miss political developments elsewhere globally. But the world hasn’t stopped. To help you keep tabs, here is a quick roundup featuring Italian regional elections, scandal-plagued Canadian Prime Minister Justin Trudeau reopening Parliament and UK Chancellor of the Exchequer Rishi Sunak unveiling a new COVID fiscal response.

Italian Center(-Left) Holds

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What California’s Electric Vehicle Mandate Teaches Investors About Chasing Riches in Renewables

For eons now, politicians globally have had a noble dream: a wholesale shift to clean, renewable power. The sources getting most attention from headlines and investors alike are wind and solar, and for the better part of a decade, investors have tried to identify the big winners. Now traditional Energy companies are getting in on the action, with BP the latest to announce a big push toward wind and solar. Meanwhile, California has quietly poked holes in this as a viable long-term strategy, and counterintuitively, Governor Gavin Newsom’s announcement yesterday that all new cars sold in the state must be electric beginning in 2035 might just be the nail in the coffin. The story I am about to tell carries a timeless moral: Long-term visions aren’t a sound investing thesis.

At the most basic level, California’s forthcoming ban on sales of new gas and diesel-powered cars rests on an oversimplified notion of energy and emissions. The goal is to make California’s streets emission-free, which seems logical considering electric vehicles don’t have tailpipes. However, if you think beyond the immediate, you realize electric vehicles do generate emissions—at the power plants that generate the electricity they run on.

Wind and solar have made huge strides in California and now represent the state’s biggest source of electricity at 37.7%.[i] They don’t generate carbon emissions. But they have already proven ill equipped to handle California’s vast electricity needs. The grid operator has warned for years that as wind and solar gain more responsibility, the state will face power shortages due to their intermittent nature. While natural gas and nuclear plants can run 24/7, the wind doesn’t always blow and the sun doesn’t always shine. Due to the abundance of turbines and solar panels in the state, when the weather is sunny and breezy, renewable sources generate plenty of spare power. But the grid lacks storage capacity, so that power doesn’t get saved for a rainy day (pun intended). That forces natural gas-fired plants, which generate 37.4% of the state’s electricity, to fill the shortfall.[ii] That worked for a while, but as the state decommissions natural gas plants, the shortfall intensifies. In August’s heatwave, the grid was reportedly 4,000 megawatts short of power, triggering rolling blackouts.[iii] As more gas-fired plants go offline, the shortage will worsen—and, barring major new developments, when the Diablo Canyon nuclear plant shuts in 2025, it could get really bad.

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