Charles Dornbush and Timothy Schluter
Monetary Policy

The Curious Case of Japan’s Stealth QE Taper

By, 09/20/2017
Ratings64.833333

In the last year, the BoJ has been most notable for its quiet. Publicly, the bank hasn’t shifted policy at all from its large-scale asset purchases. No surprise expansions or new assets targeted. No forceful forward guidance. No new letters. Nevertheless the BoJ’s asset purchases slowed noticeably over the past 12 months—a “stealth taper,” if you will. Meanwhile, loan growth ticked higher, just as it did in America and Britain when the Fed and BoE tapered quantitative easing (QE). Whether intentionally or unintentionally, it seems to us the BoJ may have stumbled onto more sensible monetary policy.

The BoJ and Governor Haruhiko Kuroda have arguably been the leading proponents of long-term asset purchases—quantitative easing. They added a second “Q” (quantitative and qualitative easing) back in 2013, aimed at rapidly building up the monetary base with an aim to reach a 2% annual inflation growth rate. They also cut short-term interest rates into negative territory in 2016, in another misguided attempt to stoke inflation. At its peak, the BoJ bought ¥80 trillion in Japanese government bonds (JGBs), ¥6 trillion in ETFs and ¥90 billion in REITs, annually. These efforts have largely fallen short of their goal.

In September 2016, the BoJ changed course yet again and added three more letters to its monetary alphabet soup: YCC, or yield-curve control. The BoJ expressly targeted a 10-year JGB yield of 0%—at the time, up from -0.1%. This was intended to ease the pain on bank profitability brought by negative rates and the flat yield curve BoJ asset purchases wrought. Accomplishing this allowed JGB purchases to fluctuate. Over the past 12 months ending in August 2017, the BoJ purchased just ¥65 trillion in JGBs—a marked slowdown from the past couple years. For comparison’s sake, over the same timeframe ending in August 2016, the BoJ bought ¥81 trillion in JGBs.

Christo Barker
Into Perspective, Debt

Is China Experiencing the World's Biggest Credit Bubble?

By, 09/05/2017
Ratings754.16

China credit bubble concerns are one of the oldest, most recycled false fears of today’s bull market. Bubble-warning headlines from seven years ago could run today with minimal changes. However, despite numerous examples of Chinese credit not being properly allocated—a side effect of the government’s centralized control—no bubble has burst yet. Unless a massive negative surprise creates a wallop or euphoria creeps back into markets, the likelihood a Chinese credit bubble pops and roils the economy—with ill effects spreading globally—in the immediate future is low, in my view.

To understand why Chinese credit bubble fears are overwrought, investors must first understand some critical differences between how credit works in China’s centralized, government-steered economy and a typical free market economy (like the US). China’s Communist Party exhibits heavy control over economic areas like capital flows, currency strength, interest rates and money supply. This desire for control—particularly over money supply—means China relies on banks to provide the majority of credit access (67% compared to 17% in the US[i]). In comparison, entities in the US have more options thanks to America’s deep, robust capital markets (e.g., bond, asset-backed security, short-term commercial paper and repo markets).

While bank-driven credit gives the government more control over money supply, Chinese banks must make loans that capital markets would typically underwrite in the US. For example, Chinese banks make lots of loans to the government, but in the US, the federal government can issue Treasurys while states and cities float muni bonds. Also in the US, mortgage and asset-backed securities comprise a nearly $11 trillion market—in China, this secondary market doesn’t exist. China’s bank dependency inflates the size of those institutions’ balance sheets, making them look scary and bubblicious. However, aggregating the total outstanding credit—the sum of all debt from capital markets and loans—for China and the US gives a better apples-to-apples comparison. When scaled to GDP, China’s total outstanding credit is actually lower than the US’s. (Exhibit 1)

Fisher Investments Editorial Staff

Market Insights Podcast: North Korea Update – August 2017

By, 08/30/2017
Ratings243.854167

In this podcast, Communications Group Manager Naj Srinivas speaks with Content Analyst and MarketMinder Editor Elisabeth Dellinger about recent tensions between the US and North Korea and our current outlook.

Time stamps:

Fisher Investments Editorial Staff
Into Perspective

Market Insights Podcast Emerging Markets Update-June 2017

By, 06/23/2017
Ratings273.925926

In this podcast, Communications Group Manager Naj Srinivas speaks with Research Analyst Scott Botterman about recent developments within Emerging Markets and our current outlook.

0:50 – MSCI announces Chinese A shares to be included in Emerging Markets index

Christo Barker
Into Perspective

Victory to En Marche!

By, 06/19/2017
Ratings104.15

The fourth and final round of French national elections concluded over the weekend, clearing a major milestone in the year of falling political uncertainty. President Emmanuel Macron’s centrist La République En Marche! party and its ally, the Democratic Movement (MoDem), gained a clear majority in the National Assembly after winning 61% of the seats (350 of 577) in the second round of the French parliamentary election. (Exhibit 1)

At a surface level, this result technically reduces political gridlock in France. However, the En Marche party is itself an exercise in gridlock, as it is essentially a blend of center-left and center-right politicians. It includes lawmakers that defected from both of the traditional Socialist and Republican Parties. A centrist coalition likely pursues more moderate policies aimed at incremental change rather than broad, sweeping legislation with the potential to really shock markets. For example, the party’s primary policies likely include reforming labor laws, cutting corporate taxes, reducing a bloated civil sector and promoting entrepreneurship. Yet none of the proposals unveiled thus far appear terribly radical. Labor market reforms, for example, appear to dance around third rails like France’s 35-hour workweek. Plus, En Marche is also just over a year old, and over half of its National Assembly members haven’t held any political office before. How well these political novices work with the old guard—and how well the center-right and center-left can agree on policy details—will be worth monitoring, but intraparty gridlock likely creates additional hurdles to legislation.

While one could argue French gridlock could dash hopes for big pro-business reforms, potentially setting up stocks for disappointment, Macron’s relatively watered-down agenda is already widely known. Moreover, having less potential for radical legislation means less chance for new laws to create winners and losers, which reduces one source of risk for markets.  

Fisher Investments Editorial Staff
Into Perspective

Market Insights Podcast: Energy Sector - June 2017

By, 06/13/2017
Ratings323.5625

In this podcast, Communications Group Manager Naj Srinivas talks to Research Analysts Luis Casian and Brad Rotolo about the Energy sector’s recent developments and our current outlook.

00:56 - Major Energy stories
01:48 - OPEC vs. US production
03:50 - What could cause oil to venture out of its recent norm near $50?
05:30 - Recent globalized nature of oil production
07:03 - Technological improvements in fracking
09:15 - Natural gas byproducts
10:13 - US production meets demand

Fisher Investments Editorial Staff
Into Perspective

Market Insights Podcast: Market Update - May 2017

By, 05/15/2017
Ratings623.830645

In this podcast, we talk to US Private Client Services Vice President Erik Renaud about some recent client questions on the market and our current outlook. Topics include all-time market highs, Trump Administration tax and trade policy, European elections and bear market causes. We also discuss some of the economic fundamentals supporting Fisher Investments’ bullish outlook.

Fisher Investments Editorial Staff
Into Perspective

Market Insights Podcast: A Re-Introduction to The Ten Roads to Riches

By, 05/11/2017
Ratings754.06

In this podcast, we talk to Content Analyst Elisabeth Dellinger about the recently released second edition of The Ten Roads to Riches.

Fisher Investments Editorial Staff
Into Perspective

Market Insights Podcast: Adviser’s Corner - April 2017

By, 04/28/2017
Ratings393.871795

In this podcast, Fisher Investments' US Private Client Services Vice President K.C. Ellis discusses our clients’ common questions from around the country, including retirement planning, homegrown dividends and dollar cost averaging.

Fisher Investments Editorial Staff
Into Perspective

Market Insights Podcast: 2017 Market Outlook

By, 03/13/2017
Ratings203.925

In this podcast, Fisher Investments’ Investment Policy Committee discusses their views on capital markets and the economy in 2017.

Fisher Investments Editorial Staff
Reality Check

Market Insights Podcast: Talking Trump and Trade

By, 02/15/2017
Ratings373.27027

In this podcast, we interview Content Analyst Elisabeth Dellinger on recent talk of protectionism, border taxes and trade.

Scott Botterman
Into Perspective

2017: The Year of Falling European Political Uncertainty

By, 01/31/2017
Ratings734.171233

Falling uncertainty gave stocks a tailwind in 2016 as investors moved past the Brexit referendum and US presidential election. By year end, persistent skepticism gave way to budding optimism, and the proverbial “animal spirits” stirred. This year, it should be continental Europe’s turn. France, Germany and the Netherlands all hold national elections, while Italy is expected to call snap elections as well. Many fear populist, non-traditional, anti-EU parties on both the far right and left are on the rise and will grab national power. Though these parties are gaining in polls and winning local elections, they still lack the political infrastructure to meaningfully impact policy or make the market’s most-feared scenarios—like another country’s exit from the EU or even the eurozone—a reality. Thus, when the “worst-case” scenario doesn’t come to pass, the likely result is relief.

European politics are factionalized and scattered. In the US, the two-party system dominates, with minor third party movements cropping up occasionally. But in the parliamentary system—used often in Europe and elsewhere around the globe—there is room for more parties and more platforms. Lately, parties with minority support have popped up across Europe, forcing fragile coalitions and muddying the legislature’s ability to take decisive policy action. This feature alone screams more gridlock than widely imagined, reducing legislative risks for stocks.

Italy

Ben Thistlethwaite
Reality Check

Infrastructure Isn’t Always Industrial Grade

By, 01/23/2017
Ratings1274.03937

In the wake of Donald Trump’s election, many attributed Industrials stocks’ rise to expectations for increased US infrastructure spending—one of Trump’s big campaign promises. However, that doesn’t make it wise to pile into infrastructure-related sectors solely based on Trump’s pledges. It’s still too soon to say exactly what the administration focuses on as the new president formally takes the reins, but expectations for an outsized infrastructure impact have likely outpaced reality.

Already moderating his promises a bit, Trump has lowered his infrastructure spending plan from the campaigned $1 trillion to $550 billion—roughly 3% of GDP. Now $550 billion worth of spending could be impactful if spent all at once (and presuming it didn’t crowd out private investment in the process). However, it’s likely spread out over many years—muting its stimulative power—and probably wouldn’t start until 2018, just in time for midterms. It’s also unrealistic to expect an infrastructure bill—or any bill— to pass through Congress undiluted or without bringing up other political landmines like raising taxes or deficit spending. In other words, there is a lot of potential for gridlock to get in the way.

Updating infrastructure has benefits, but the economy doesn’t need a massive infrastructure bill to keep growing—the private sector has done fine driving most of the growth this expansion. Past infrastructure spending bills haven’t moved the needle because they require years of planning, and spending typically gets bogged down across myriad national government agencies—not to mention conflicts with state and municipal needs. Consider the 2009 American Recovery and Reinvestment Act, which lacked readily available projects and drove little meaningful revenue for Industrials companies. And 2015’s five-year, fully funded (by the Fed’s dividends) $305 billion Highway Bill has thus far had a muted effect, going almost unnoticed.

Fisher Investments Editorial Staff
Into Perspective

Market Insights Podcast: How to Read the Modern Financial News

By, 01/19/2017
Ratings363.458333

In this podcast, we talk to Content Group Manager Todd Bliman on how investors can navigate the modern financial news media.

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Recent Research

Charles Dornbush and Timothy Schluter
Monetary Policy

The Curious Case of Japan’s Stealth QE Taper

By, 09/20/2017
Ratings64.833333

The BoJ’s latest policy shift is so surprising they may not even realize they are doing it.

read more
Christo Barker
Into Perspective

Is China Experiencing the World's Biggest Credit Bubble?

By, 09/05/2017
Ratings754.16

Nope—and here is why.

read more
Fisher Investments Editorial Staff

Market Insights Podcast: North Korea Update – August 2017

By, 08/30/2017
Ratings243.854167

In this podcast, Communications Group Manager Naj Srinivas speaks with Content Analyst and MarketMinder Editor Elisabeth Dellinger about recent tensions between the US and North Korea and our current outlook.

read more
Fisher Investments Editorial Staff
Into Perspective

Market Insights Podcast Emerging Markets Update-June 2017

By, 06/23/2017
Ratings273.925926

In this podcast, Communications Group Manager Naj Srinivas speaks with Research Analyst Scott Botterman about recent developments within Emerging Markets and our current outlook.

read more
Christo Barker
Into Perspective

Victory to En Marche!

By, 06/19/2017
Ratings104.15

The passing of Sunday’s French parliamentary elections adds to Europe’s streak of falling political uncertainty.  

read more

Global Market Update

Market Wrap-Up, Wednesday, September 20, 2017

Below is a market summary as of market close on Wednesday, September 20, 2017:

  • Global Equities: MSCI World (+0.1%)
  • US Equities: S&P 500 (+0.1%)
  • UK Equities: MSCI UK (+0.3%)
  • Best Country: New Zealand (+1.8%)
  • Worst Country: Belgium (-0.9%)
  • Best Sector: Energy (+0.9%)
  • Worst Sector: Consumer Staples (-0.7%)

Bond Yields: 10-year US Treasury yields rose 0.04 percentage point to 2.28%.

 

Editors' Note: Tracking Stock and Bond Indexes

 

Source: FactSet. Unless otherwise specified, all country returns are based on the MSCI index in US dollars for the country or region and include net dividends. S&P 500 returns are presented including gross dividends. Sector returns are the MSCI World constituent sectors in USD including net dividends.