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.

China’s PMI Dip: Another Brick in the Wall of Worry

Thursday brought the first look at how China’s electricity shortage is affecting the economy, and the results weren’t exactly pretty: The government’s official manufacturing purchasing managers’ index (PMI) sank to 49.6 in September, implying contraction. Caixin’s PMI, which includes a host of smaller private firms, technically broke even at 50.0, but its production subcomponent remained in contractionary territory, according to the press release from Caixin and IHS Markit. These survey results were all pundits needed to conclude that China’s energy crisis is adding to economic pressures, jeopardizing the global recovery from lockdowns. In our view, that is just a tad hasty, and the likelihood that global markets will have to reckon with a hard landing in the world’s second-biggest economy remains low.

Interpreting PMIs correctly requires a clear understanding of both their quirks and their history. They do not measure—or even attempt to measure—how much activity increases from month to month. That responsibility lies with output measures like industrial production. PMIs, by contrast, are surveys. Businesses report on whether output, new orders, employment, supplier delivery times and sentiment rose or fell versus the prior month. Then the agency producing the PMI compiles all the results and computes them into an index. The index’s reading, roughly, is the percentage of businesses reporting increased economic activity overall. If it exceeds 50, a majority of firms reported expansion, which implies the sector grew. If it is below 50, it implies contraction. So September’s 49.6 manufacturing PMI means a slight minority of firms reported expansion.

But because the PMI doesn’t measure how much businesses grew, the relationship between PMIs and output is fuzzy at best. If only 49.6% of businesses reported growth, but they grew by more than the others contracted, then output can still rise in a given month. So while we think PMIs are handy, as they are generally the first economic indicator released for a given month, we think it is best to take them with a grain of salt. Don’t get too excited by incremental moves down or up, especially when they are very close to 50, like China’s latest figures.

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Sunset on Reform Hopes in Japan?

Editors’ Note: MarketMinder is politically agnostic. We favor no politician nor any party and assess political developments for their potential economic and market impact only.

Japan officially has a new prime minister (PM) in waiting, and it is … not the person observers expected. Heading into today’s Liberal Democratic Party (LDP) leadership vote, reform minister Taro Kono was the apparent favorite, but former LDP Research Council chair Fumio Kishida pulled off an upset with unexpectedly strong support from LDP lawmakers. Presuming he wins a confidence vote in Japan’s parliament (known as the Diet) on October 4—a foregone conclusion, considering the governing coalition’s supermajority—he will become the next PM and form the country’s 100th government. Japanese stocks fell sharply on Wednesday, dipping -1.9% on the day, perhaps partly due to this news.[i] We wouldn’t be surprised to see a bit of Japanese lag persist, either. To us, investors seemed to get too far out over their skis on economic reform hopes when Kono looked like the heir apparent. But now it is Kishida and reality is setting in.

When former PM Yoshihide Suga announced on September 3 that he wouldn’t seek re-election as LDP chief in today’s election, Kono swiftly emerged as the likely successor. While stocks in the rest of the world hit a speedbump, Japanese markets rallied on the prospects of change. In his short tenure as PM, investors mostly saw Suga as a classic safe pair of hands—a name well known in Japan and a PM who would focus on shepherding the country through COVID rather than rock the boat with contentious reforms. In most developed countries, that sort of gridlock and status quo is generally bullish, as “reforms” create winners and losers. But Japan remains plagued by a number of structural issues that stifle competition and domestic demand, including a byzantine labor code and complex web of cross-shareholdings among the major conglomerates. Throughout Japan’s post-War history, this system has kept bloated, hopeless companies afloat and stifled competition from new challengers. It is a big reason for the country’s infamous lost decades in the 1990s and 2000s.

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Energy Prices, Interest Rates and Volatility: Our Thoughts on a Rocky Tuesday

It’s baaaaaaaaaack. The volatility monster, that is. After months of calm, the S&P 500 has delivered more big daily moves of late, including more big negative ones. Last Monday brought a -1.7% drop as the world freaked over a Chinese property developer’s potential default.[i] Today, it was a -2.0% fall as a mooted oil supply crunch and an uptick in 10-year US Treasury yields spooked many.[ii] When markets were calmer, we reminded you that volatility would return and, when it did, we think the best thing to do is stay cool-headed, assess the situation carefully and think beyond the next week or month. That holds today, in our view.

With markets rocky again, we think this is a good time to reiterate some advice we gave at September’s outset: “While they are regular occurrences, substantial pullbacks draw reams of attention—and pundits’ explanations about why more trouble must lie in store. But letting this influence your portfolio decisions generally isn’t beneficial.” We are seeing this phenomenon everywhere now, making it critical to put your emotions to the side and assess their arguments carefully. If they are right and a lasting downturn lies ahead, there will likely be plenty of time to move strategically to avoid the worst of it. If they are wrong, then you will have saved yourself the financial setback (and heartache) of selling after a sharp drop, then missing the recovery.

So with that said, let us take on today’s central fears. The first: oil. Or more specifically, energy, as oil and natural gas prices are spiking in tandem. The central fear is not that high oil prices will hamper consumption, but that they represent severe shortages that will crunch global energy supply this winter—particularly if more countries start relying on oil-fired power plants to compensate for shortages at natural gas-fired plants and wind farms. Supposedly, we are already seeing the first signs of this with mile-long lines at gas stations in the UK and electricity rationing in China. Yet in our view, a closer look shows neither of these situations is representative or terribly forward-looking for global energy markets. In the UK, the shortage stems from panic-buying, akin to 2020’s great toilet paper freakout. But the root issue isn’t a shortage of gas itself, but a shortage of truck drivers to transport said gas to filling stations. When BP warned of temporary closures at some gas stations due to the lack of drivers, it triggered a classic run, making a nationwide shortage a self-fulfilling prophecy. While we won’t hazard a guess at when this acute problem will end, UK hauling companies—like their global counterparts—are already raising pay packages in an effort to entice new drivers, and there is some anecdotal evidence that this is starting to work. In time, like the world’s many other logistical bottlenecks, this should ease.

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Germany Gets Gridlock Again

Editors’ Note: MarketMinder is politically agnostic. We prefer no politician nor any party and assess political developments for their potential economic and market impact only.

The results are in, and German voters have elected—wait for it—gridlock. No party took a majority in Sunday’s federal election, and it is far from clear which party will head the next government and who will replace Angela Merkel as chancellor—as we (and most observers) expected. Coalition negotiations could very well take months. Yet for markets, this all amounts to political stability and the extension of the status quo, which has long been a fine backdrop for German stocks.

Heading into the vote, the center-left Social Democratic Party (SPD) was polling just ahead of Merkel’s center-right Christian Democratic Union (CDU) and its Bavarian sister party, the Christian Social Union (CSU). Those polls proved more or less right, with the SPD winning 25.7% of the vote and the CDU and CSU combining for 24.1%. The SPD took a small plurality of the Bundestag’s 735 seats.

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What Pundits’ PMI Pessimism Says About Stocks

“The September PMI data will add to worries that the UK economy is heading towards a bout of ‘stagflation.’”[i] Across the English Channel, pundits bemoaned that “the Delta variant of coronavirus hit demand and supply-chain constraints pushed input costs to a more than two-decade high.”[ii] Japan’s results allegedly “underscor[ed] the protracted impact of the coronavirus pandemic,” while America’s showed “persistent supply-chain problems hit activity.”[iii] Reading those takes on September’s flash purchasing managers’ indexes (PMIs), you might think these business surveys point to contraction in many parts of the developed world. But if so, you would be wrong. Why the dour reaction, and what should investors make of it? Here we put pundits’ latest PMI pronouncements into perspective.

September’s flash PMIs did broadly tick down from August. But all remain well above 50, signaling expansion—except Japan, which hasn’t posted an expansionary reading since April (and, before that, January 2020). So for the US, UK, eurozone, Germany and France, September’s downticks don’t imply contraction—they just suggest growth wasn’t quite as broad-based as last month’s. (Exhibit 1)

Exhibit 1: Major Economy PMIs

Source: FactSet and IHS Markit, as of 9/23/2021. Flash PMIs are preliminary estimates based on 85% – 90% of responses.

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A Comprehensive Guide to the Debt Ceiling

Editors’ Note: MarketMinder favors no party nor any politician. We assess political developments solely for their potential impact on markets, economies and/or personal finance.

Predictably, as time passes without legislation to lift it, angst over the US debt ceiling seems to be growing. As normal, headlines speculate about possible “financial Armageddon” and, frankly, many articles in the financial press seem downright confused about the whole shebang. Here we will go through everything from the basics of the debt ceiling to the details as to why we think those “financial Armageddon” claims are a stretch, to put it mildly.

What is the debt ceiling, anyway?

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The Knee-Jerk Lesson From This Week's Evergrande Story

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

Here is a tidbit so run-of-the-mill it seemingly shouldn’t merit mention: Stocks were flattish Friday and finished the week up 0.5% in price terms.[i] Seems typical, even boring. But typical, boring weeks don’t start out with -1.7% routs and warnings that a too-big-to-fail Chinese property developer is about to default, allegedly sparking China’s “Lehman Moment” and sending shockwaves globally.[ii] Indeed, the events so many feared actually came closer to happening—yet markets shrugged it off. In our view, this is the latest example of the dangers of reacting to negative headlines.

At the week’s outset, pundits globally argued the world was on the precipice and that a default by Evergrande—a massive Chinese property developer—would cause a mainland financial crisis, wrecking markets globally. Some saw pure financial risks, via developed-world banks’ potential exposure to Evergrande’s roughly $300 billion in debt. Others warned the company’s collapse would implode Chinese real estate markets, spurring the long-feared economic hard landing. When the company announced on Wednesday that it had reached an agreement to pay the roughly $36 million in interest owed to onshore investors in yuan-denominated bonds, the general reaction was, yah but just wait for that $84 million payment due to overseas investors on dollar-denominated bonds Thursday. Meanwhile, the central government indicated it had no plans to bail out the company and directed local governments to step in with targeted support for local businesses and homeowners only if absolutely necessary to prevent protests and other undesirable disorder.

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Ponzi Schemes, Identity Thieves and NFT Fraud, Oh My!

Recently, the UK’s Financial Conduct Authority reported British consumer losses to fraudulent activity have tripled over the last few years to £570 million (at least according to official records).[i] Similarly, America’s Federal Trade Commission logged 2.3 million fraud cases in 2020, totaling $3.4 billion in losses, up bigtime from 2019.[ii] Notably, younger folks reported falling prey more often than older people (although the latter’s median loss was much higher). Financial ploys that make off with investors’ cash are, sadly, a constant. The particulars change, as do the tools employed, but the overarching themes basically hold true over time. Here we run through some of the latest approaches criminals have used to abscond with people’s funds—and offer some lessons on how to protect yourself against this rising tide.

Plain-Vanilla Ponzi: Last month, the SEC uncovered an alleged Ponzi scheme that swindled over $110 million from more than 400 investors in 20 states. It seems just as Bernie Madoff’s mega-con collapsed more than a decade ago, another was taking off. While there isn’t anything particularly “innovative” about this investment scam, as Ponzis date back decades and regularly crop up, it suggests they remain all too prevalent despite society’s repeated opportunities to learn better.

Apparently, as the SEC complaint goes, one John J. Woods hatched the vehicle for his Ponzi—Horizon Private Equity—in 2007. But what really seemed to get it rolling was in 2008, when he bought an investment advisory firm, Southport Capital, from a wealthy Chattanooga, Tennessee family, and took advantage of trust and relationships there that he hadn’t built himself. Southport then began peddling Horizon, Woods’ fictitious fund, which advisers told clients would guarantee them 6% to 7% returns. The SEC alleges Woods used Horizon as “his own personal piggy bank.”[iii]

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Don’t Put Too Much Stock in Central Banks’ Forecasts

Will the European Central Bank (ECB) raise interest rates sooner than expected? Some pundits think so, based on a recent Financial Times report. The paper reported the ECB anticipates hitting its 2% y/y inflation target by 2025 based on internal, unpublished research. According to some pundits, if this projection lands true, that would fulfill the ECB’s purported conditions for considering raising interest rates—which means an ECB rate hike could be coming by the end of 2023. That may sound distant, but to hear pundits tell it, it is much earlier than most analysts expect, sending some scampering to recalibrate. However, we caution investors against putting too much stock into central bankers’ forecasts—they aren’t blueprints for future monetary policy.

An ECB spokesperson promptly refuted Financial Times’ conclusions, saying, “The conclusion by the FT that a lift-off of interest rates could come already in 2023 is not consistent with our forward guidance.” [i] The spokesperson added that ECB chief economist Philip Lane—the person who disclosed the internal findings on a private call—refrained from specifying a particular date the ECB would reach its target. However, the ECB’s comments seemed to just add more fuel to the fire. Following the revelation, a former ECB official argued any internal research should be taken with a “pinch of salt,” while an industry expert suggested the findings implied ECB wasn’t as transparent as they claimed—potentially unsettling to investors.[ii]

In our view, this hullaballoo reveals monetary policy decision-making isn’t a clear-cut process. Rather, central bankers are considering a host of information, including internal research. The ECB’s economists are likely running through myriad scenarios and hypotheticals that could influence policymakers’ thinking. However, these additional inputs don’t necessarily make the ECB any better at forecasting.

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Canadians Pick the Status Quo

Editors’ Note: Our political commentary is intentionally nonpartisan. We favor no politician nor any political party and assesses political developments for their potential economic and market impact.

Well that was anticlimactic. Five weeks after Canadian Prime Minister Justin Trudeau dissolved Parliament and called a snap election in hopes of his Liberal Party winning an outright majority, the results are in: The Liberals remain in power, but they still have a minority government and will have to rely on help—chiefly from the leftist New Democratic Party (NDP)—to get anything done. Moreover, three of Trudeau’s cabinet ministers lost their re-election bids, and many onlookers are grousing about the indecisive campaign, potentially leaving the government with less political capital than they had going in. Most coverage is focusing on the political optics and Canadians’ overall frustration with being asked to vote during the middle of the Delta variant’s surge. For stocks, that is all sociology and beside the point—what matters for returns to an extent, in our view, is that political uncertainty has eased and gridlock persists for the foreseeable future.

Exhibit 1 shows the latest tally of the results and how they compare to the last parliament. With 98% of votes counted, the Liberals have gained just three seats in the House of Commons, while the Conservatives have no net change. The real losers, we guess, were independents, who had five seats in the previous Parliament and have none now. Close on their heels are Green Party leader Annamie Paul, who came in fourth in her race as her party lost support nationally, and the People’s Party of Canada—a right-leaning party started by former Conservatives frustrated with party leadership—which won zero seats.

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