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 Dollar’s Reserve Currency Status Means a Lot Less Than Many Think

When Western leaders effectively cut off Russia’s access to its foreign exchange reserves as part of the economic response to Vladimir Putin’s invasion of Ukraine, it was only a matter of time until people started speculating that this could trigger the dollar’s demise as the world’s preferred reserve currency. After all, if holding dollars overseas turned out not to be a financial fortress for Putin, it might logically inspire China and other nations to move away from the greenback. We don’t think this outcome is terribly likely, although only time will tell. Regardless, this seems like a good time to issue a friendly reminder: The US gets very, very little from the dollar being the world’s preferred reserve currency, and losing that status won’t be the end of the dollar as we know it.

Conventional wisdom says the dollar’s in-demand status gives the Treasury an “exorbitant privilege” that, among other things, keeps US Treasury yields low. Allegedly, reserve currency status is the only thing standing between Uncle Sam and a debt crisis. If foreign governments were to diversify away from the dollar, the logic goes, demand for Treasurys would plunge and borrowing costs would soar.

If this were actually true, then one would logically expect US Treasury yields to be much lower than sovereign yields in nations that don’t play a large role in forex reserves. So put it to the test. The IMF publishes quarterly data on global foreign exchange reserve composition, telling us the amounts of dollars, euros, British pounds, Japanese yen, Swiss francs, Canadian and Australian dollars, and Chinese renminbi in governments’ official reserves. (Amusingly, they convert all of these figures to US dollars.) So, we grabbed the last few quarters’ worth of data, then pulled all of these countries’ total outstanding government debt levels in local currency, converted those figures to dollars at today’s exchange rates, and calculated the percentage of outstanding bonds that are held as forex reserves. We couldn’t do this for euroland, unfortunately, since the IMF doesn’t report the issuer of these securities (i.e., there is no way to know which portion of euro-denominated reserves are German bunds versus French OATs or what have you). We also omitted China, as its bond markets have major accessibility issues. But for everything else, see Exhibit 1.

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Dividends Are Nice, but They Aren’t Safety Blankets

Editors’ Note: MarketMinder doesn’t make individual security recommendations. Those mentioned below merely represent a broader theme we wish to highlight.

Global stocks enjoyed a nice rally last week, but it hasn’t much calmed investors’ nerves. Headlines continue warning of worse to come, and there is a cottage industry in articles featuring investment tactics for uncertain times. One supposed tactic getting a lot of ink: dividends. This isn’t unusual. In our experience, interest in high dividends tends to spike whenever markets get rocky—largely because the dividend payments offer perceived stability. In our view, this is a short-sighted and flawed viewpoint. We like dividend stocks just fine, but they aren’t safe havens.

Much of dividends’ allure during volatility stems from a fundamental misperception about what dividends are. You can hear it in sentiments like, stocks may be down, but at least these dividends get me a nice yield. Problem is, this statement presumes dividends are a return on your investment, which isn’t true. Dividends are a return of capital. Unless you reinvest them, they don’t add to returns.

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‘Narrative Confusion’ Is New Only If You Shun History

In recent days, we have seen a rather novel twist on the this time is different mentality that often surges during stock market corrections (sharp, sentiment-fueled drops of -10% to -20%): the claim that investors have to deal with a multitude of competing market-related narratives, and that this is somehow new. One Wall Street Journal piece positing this called it “narrative uncertainty.”[i] Supposedly until now, stocks have had only one big story at a time—making the conflux of Ukraine, oil prices, inflation, rate hikes and China’s latest regional lockdown a perplexing conundrum.[ii] Competing, colliding narratives, the story goes, mean heightened volatility and struggling stocks. And, well, we agree shifting headlines are probably contributing to stocks’ yo-yoing this week—that is par for the course during corrections, when emotions run hot. But take a trip with us down memory lane, and you will see this time isn’t different—there are rarely periods in which investors have only one narrative to grapple with.

For instance, consider 2013. The eurozone was still in recession when that year began, with headlines shrieking over possible defaults of sovereign nations like Italy leading to the euro currency’s splintering. That was also the year the US and UK briefly flirted with intervening in Syria’s civil war and the Fed signaled its plans to taper quantitative easing bond purchases (QE). Cyprus endured its banking crisis and bailout, terrorists bombed the Boston Marathon, and the US had a government shutdown and a pretty hyperbolic debt ceiling standoff. That is a heck of a lot of narrative uncertainty! Yet global stocks topped 25% that year, and the S&P 500 topped 30%.[iii]

Or, how about 2012? That was the year Greece defaulted twice, terrorists struck America’s Libyan embassy, MERS erupted and the Fed felt compelled to roll out a third round of quantitative easing—such was sentiment about the allegedly weak US economy still needing life support. There was also a contentious US presidential election, which came amid frequent handwringing over the expiration of Bush tax cuts and automated “sequester” spending cuts—a frightful combination none other than then-Fed head Ben Bernanke dubbed a “fiscal cliff.” The UK was flirting with a double-dip recession, the eurozone was still contracting, and Japan was struggling to find economic momentum. Pundits now portray this as a year when Fed bond purchases made stocks an easy, one-way decision, but we have receipts! We tracked developments on these very pages throughout! Sentiment was the polar opposite at the time, and stocks endured a correction that spring. Yet even with that volatility and a drumbeat of bad news on the economic and geopolitical fronts, global stocks delivered 15.8% and the S&P 500 rose 16.0%.[iv]

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The ECB’s Latest Words Are Nothing to Fear

For months, European Central Bank (ECB) President Christine Lagarde and other officials rebuffed speculation the bank would tighten monetary policy in response to elevated inflation rates. They pushed back on the possibility of interest rate hikes in 2022—though that stance seemed to shift somewhat last month. Then last Thursday, the ECB announced plans to accelerate the wind-down of its asset purchase program (quantitative easing, or QE), surprising many. The news spurred speculation about what the ECB sees going forward—and whether the bank will hike rates much sooner than most analysts anticipated. In our view, this is yet another reminder central bankers’ plans aren’t set in stone, so investors should refrain from treating their words and forecasts as roadmaps for future action.

The ECB’s QE efforts have topped headlines in recent years. The bank’s first program lasted from March 2015 – December 2018. Despite claims of QE’s purported stimulus power, eurozone GDP was already rebounding nicely from the 2011 – 2013 recession before the program’s implementation—and the slowing (i.e., tapering) and ending of bond purchases didn’t derail expansion. However, many (wrongly, in our view) see QE as critical economic support, so when eurozone GDP growth slowed in mid-2019, the ECB’s Governing Council voted in September to resume bond purchases at a clip of €20 billion a month beginning in November—to last as long as the bank deemed necessary. Several months later, in March 2020, the ECB launched the pandemic emergency purchase programme (PEPP) in response to COVID and its economic fallout, mirroring other central banks globally. This “emergency” QE combined with regular QE amounted to monthly bond purchases of around €120 billion.

As the eurozone economy recovered, Lagarde and Co. set the stage for slowing bond purchases—while vehemently denying it was a taper. At a September 2021 press conference, Lagarde declared, “The lady isn’t tapering,” after the ECB decided it would conduct emergency QE purchases at a “moderately lower pace” for the last three months of the year.[i] At its December 2021 meeting, the ECB said emergency QE would end in March 2022 and recalibrated the monthly pace of regular QE: €40 billion in Q2 2022, €30 billion the following quarter and €20 billion starting in October, which would continue “for as long as necessary.”

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It Still Isn’t Easy to Pass a Global Minimum Tax

Editors’ Note: This article touches on politics, so we remind you that MarketMinder favors no politician nor any political party and assesses developments solely for their potential impact on markets, economies or personal finance.

Last fall, when 137 nations including tax havens Ireland, Estonia and Hungary agreed to sign onto a global minimum corporate tax deal, many observers presumed the years-long process had taken its toughest step—the path to passage was now clear! We never really agreed, though, and have long harbored doubts that this process will deliver results. If it does, it won’t happen fast, limiting the market impact. We got more evidence supporting that skepticism Tuesday.

For the uninitiated, the global corporate minimum tax is an Organization for Economic Cooperation and Development-led initiative to ensure countries get a slice of revenue generated within their borders and arrest “a race to the bottom” in which countries try to lure large corporations to domicile within their borders using lower and lower tax rates. The deal signed last fall has two prongs, or “pillars.” The first aims to resolve fairness disputes about which country gets what tax revenue. It exclusively governs companies with global sales exceeding €20 billion ($22 billion) and “profitability” above 10%, transferring taxing rights over these firms from their home countries to those where the sales actually took place.[i] Given the parameters, “Pillar One” would presently affect about 100 companies globally, half of which are US-based.

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The Big Fed News That Surprised Next to No One

They did it! The Fed, we mean—they finally raised the fed-funds target range by a quarter point Wednesday, in perhaps the most telegraphed monetary policy decision of all time. And in response, stocks fell … and then jumped, taking the S&P 500 from about flat on the day an hour and a half before market close to a 2.2% full-day rise.[i] If that isn’t a sign markets already priced the Fed’s action and moved on, we don’t know what is.

Now, don’t read into that short-term wiggle—it reeks of algorithms and traders teeing off on the news. It is just the funky goings-on that stock markets experience daily. Trying to interpret one hour’s worth of movement is bad for your mental health and highly unlikely to yield any useful conclusions. More importantly: Stocks pretty clearly took the news in stride, when all was said and done. We think that is the right reaction. Moving the target range from 0.0 – 0.25% to 0.25 – 0.5% is not exactly draconian tightening. With 10-year Treasury yields also up in recent days, it doesn’t much flatten the yield curve. Interbank liquidity should remain abundant. Annoyingly, savings and checking account rates will probably remain pitiful, as banks are flush with deposits—they don’t need to attract more. Anyone looking at a long-term chart of the fed-funds rate would be hard pressed to even see the change.

Some argued the rally was one of relief that the Fed is still focused on containing inflation despite some stirring fears that the economy is weakening. There, too, we won’t try to interpret two hours’ worth of sentiment, but conceptually, it falls flat. Today’s elevated inflation rate comes from factors outside the Fed’s control. A rate hike won’t increase oil and gasoline supply, straighten out supply chain kinks, fabricate semiconductors or achieve peace in Ukraine. It probably won’t even tamp down demand. At these levels, it is pure symbolism. On the bright side, as we discussed earlier this week, many of those inflation drivers are already sorting themselves out, which points to the inflation rate moderating over the foreseeable future regardless of what the Fed does. But we have a hard time believing the market’s collective wisdom really views the Fed as moving the needle on prices today.

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Energy Inflation, Gas Taxes and Markets’ View

Editors’ note: While inflation is a politically charged subject, our commentary addresses its economic, market and personal finance impact only.

Driven by gas, the US consumer price index (CPI) accelerated to 7.9% y/y in February.[i] Moreover, that read preceded March’s energy spike tied to Russia’s escalating war in Ukraine, which temporarily sent oil as high as $139 per barrel—and US national average gas prices to a record-high $4.33 per gallon.[ii] Many Americans, especially those who drive a lot for work and other responsibilities, may be feeling a pinch. It is also fueling fears of further inflation ahead, prompting some to call for action—like temporarily waiving gas taxes. But for investors, we think it is important not to overrate the effect—or staying power—of these higher prices.

Month-over-month, February’s CPI rose 0.8%, with gas’s 6.6% monthly gain responsible for a whopping one-third of the headline figure.[iii] That is a huge contribution, considering gasoline’s share of the CPI basket is just 3.7%.[iv] With gas now up 18.2% in March, expect a much larger contribution—and further bump in CPI—if pump prices stay elevated.[v] Exhibit 1 shows how much energy has contributed to monthly inflation.

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China Offers a Little Regulatory Clarity

Editors’ Note: In the course of discussing a broader topic, this article touches on a couple of individual companies. As a reminder, MarketMinder doesn’t make individual security recommendations. Those mentioned are merely to support the broader discussion.

What a difference a day makes! On Monday and Tuesday, as investors digested news of a lockdown in Shenzhen—a high-tech manufacturing powerhouse—Chinese stocks fell -13.3%, extending a slide that began over a year ago.[i] This also followed a selloff last week, when a few small, US-listed Chinese firms were put on delisting watch by the SEC. Yet Wednesday was very different. In the early morning US time, the Chinese State Council’s Financial Stability and Development Committee (FSDC) announced several new measures to help calm markets, some of which hit the chief causes of the last year’s slide. Now, the last time they tried a large intervention, in January 2016, it stoked fear, causing a drop. Yet today, markets leapt, suggesting officials have learned from prior mistakes and seem aware of the issues impacting investors’ confidence. Time will tell if this recovery holds, but for now, the direct response to investors’ concerns is encouraging.

By definition, Chinese stocks are in a bear market. Their peak-to-trough decline breached -20% and is now over a year old. But its shape is more correction-like, as the decline occurred in a series of panicky plunges as investors reacted first to some regulatory changes, then defaults of distressed property developers, and now the latest COVID lockdown. Also more correction-like, in our view, sentiment seemed largely detached from reality throughout, with rumors and fears far exceeding the scope of the actual regulatory changes. For instance, as we wrote last year, when Chinese officials disrupted private tutoring firms and jawboned about tightening the strings on giant Tech-like companies, investors responded with a big sell-off in the latter—even though actual measures taken ended up quite small and didn’t much disrupt earnings. But the unpredictability and lack of transparency around the measures stoked many and varied fears. Draconian policies didn’t follow, but the impact on sentiment was understandable.

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Putting China’s ‘Acceleration’ in Proper Context

If ever you needed proof that economic data are backward-looking, China delivered it in spades today. The country’s official economic data for January and February, which the National Bureau of Statistics (NBS) combines to remove skew from the Lunar New Year holiday week’s shifting timing, accelerated and beat expectations across the board. Yet there wasn’t much cheer: Investors remained much more preoccupied with COVID’s resurgence in the country, which has caused stiff new lockdowns in Shenzhen—a high-tech manufacturing hub—and seemingly renewed negative sentiment toward Chinese stocks. Now, we don’t think this is likely to be a huge headwind for the Chinese or global economy over a meaningful stretch of time, but we do think it helps put the latest data in context.

In a vacuum, the January/February numbers were encouraging. Retail sales growth accelerated from 1.7% y/y in December 2021 to 6.7%, while industrial production sped from 4.3% y/y to 7.5%.[i] Fixed investment, measured on a year-to-date, year-over-year basis, sped from December 2021’s 2.3% increase from 2020 to 12.2% versus 2021’s first two months.[ii] The latter is probably easiest to interpret: As growth slowed last year, Chinese officials ramped up fiscal stimulus efforts. That infrastructure spending shows up rather quickly in fixed investment, which is a nice early boost, but it remains to be seen how much fruit this will bear in the real economy. That depends on how the new spending recirculates, which takes time.

As for industrial production, the acceleration from autumn’s figures likely stems partly from the easing of China’s electricity shortage. Back in October, when European wind and natural gas were in short supply, it triggered a run on energy inputs globally, which cut into China’s supply. The resulting brownouts hampered local factories. But those problems have largely evened out, thanks in part to Chinese coal companies’ swift response, which enabled factories to return to their normal production schedules as 2022 kicked off. The easing semiconductor shortage also helped factories that assemble final products. Additionally, the Omicron-related regional lockdown in Xian ended in January, enabling people there to get back to work. It is also noteworthy that the sharp acceleration occurred despite the factory closures associated with the Beijing Olympics.

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$100+ Oil Isn’t a Tipping Point

With the tragic events unfolding in Ukraine right now, financial market and budget impacts may seem small in comparison. Nevertheless, the conflict and the international community’s response have spurred oil prices to climb, and with them, gasoline prices—a real financial concern to many Americans as oil sits above $100 and some outlets forecast the national average gas price will soon hit $5 per gallon. As we wrote a few weeks ago, oil’s latest spike seems mostly sentiment-driven, and longer-term supply and demand drivers still suggest prices should stabilize sooner rather than later, even with uncertainty surrounding Russian oil supply roiling markets. However, some pundits speculate elevated oil prices will tip the economy into recession. While oil’s record prices did coincide with 2008 – 2009’s recession, coincidence isn’t causality. Oil’s hitting any level has no direct bearing on broader economic activity. Oil’s rise and recent surge don’t automatically foretell weaker growth.

The US economy doesn’t have a set relationship with oil prices. When oil spent much of 2011 – 2014 above $100, no recession ensued. Conversely, while high oil coincided with recession in 2008 – 2009, the issue then was mark-to-market accounting rules’ incinerating bank capital unnecessarily and the government’s haphazard, panic-sowing response—not oil. Counterintuitively, falling oil prices created a US economic headwind in the last decade. When oil prices collapsed in 2014, it caused US producers to cut back. One of the largest GDP detractors over the next two years was oilfield machinery investment. In 2015’s second half, it caused GDP’s sharp slowdown. Higher oil prices have the opposite effect on GDP, incentivizing more investment.

Second, the popular reason why oil allegedly dictates the economy’s direction is flawed. High oil prices hit households in the pocketbook, diverting consumer spending from more fun destinations—but from an overall economic perspective, fuel costs still count as spending. That means they contribute positively to GDP. Not that GDP is the be-all, end-all, but it shows casting high oil prices as an automatic economic negative isn’t accurate. High gasoline prices create winners and losers within consumer spending and can shift activity, but non-fuel spending is pretty resilient. Exhibit 1 shows personal consumption expenditures (PCE) excluding energy and retail sales excluding gasoline stations (a narrower measure focused on goods). They hit record highs in January, even with oil’s climb to $89 that month from $48 per barrel starting 2021.[i]

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