|By Morgan Housel, The Collaborative Fund, 09/23/2016|
MarketMinder's View: Here is a delightful antidote to worries about secular stagnation and the end of innovation. Most people think technological advancement is all about some big-bang invention, like the PC or Internet. But like growth, innovation compounds over time, and small gains add up to a much better world: “Growth follows the same exponential road of compound interest. One person sticks their neck out and does X. The next generation starts with X and says “I can do X + 1.” The next starts with X+1 and shoots for X+1+1, and so on. These are often tiny improvements. But, as compound interest teaches us, tiny improvements built upon a base that’s generations in the making can add up to something remarkable. This all may seem obvious. But a lot of pessimism about the future comes from being incredulous that today’s generation is producing, say, another Bill Gates, Henry Ford, or Tony Hawk. This misses a critical point: We now get to use all of those people’s discoveries as a starting point, a foundation to build off of. Never underestimate the power of someone armed with the accumulated trial and error of every genius who came before them.”
|By Barry Ritholtz, Bloomberg, 09/23/2016|
MarketMinder's View: What was that titular trade? Letting fees, not investment process, drive their investment management hiring decisions. After alumni and donors complained about “too high” compensation for the Harvard endowment’s investment managers, who happened to be delivering stellar returns that all of academia (nevermind the investing world) envied, the powers that be sacked that high-earning management team and replaced them with cheaper talent that built a portfolio “festooned with expensive private equity, hedge funds and commodities holdings.”* The result is (ironically) a fee-laden, perpetually underperforming pile of illiquidity. Folks, fees matter, but they aren’t the only or most important consideration when selecting an investment manager. Nor is historical performance. How any manager generated their returns is paramount. The past doesn’t predict the future, but you can at least assess whether a process is sound, which generally increases its likelihood of future success. In other words, you have to take a holistic approach, evaluating qualitative as well as quantitative factors. (*We could have paraphrased this easily, but we so enjoyed the use of “festooned” that we felt we would have done you, dear reader, a disservice if we didn’t highlight it.)
|By Jason Zweig, The Wall Street Journal, 09/23/2016|
MarketMinder's View: Required reading for anyone who has ever read, been forwarded, or been tempted to read an investment newsletter boasting how you can earn sensational returns if you pay them money to show you this One Weird, Simple Trick. They are nearly always peddling slop or fraud, and it is very easy to spot the signs if you put on your skeptic’s hat and do about two and a half minutes of independent Googling. Yet so few readers bother. How come? “Robert Cialdini, a social psychologist at Arizona State University and author of the new book ‘Pre-Suasion,’ is an expert on how people convince others to trust them. ‘The mindset that you put people into when they encounter your material,’ he says, ‘leads them to prioritize their attention and behave in ways that are consistent with that focus.’ In other words, a consistent message can elbow your skepticism aside; clever marketing can administer a kind of investing lobotomy, numbing you to the most obvious warning signs.”
|By Jeremy Warner, The Telegraph, 09/23/2016|
MarketMinder's View: Indeed, it does. How great will it be when DUIs and texting-while-driving accidents are a thing of the past? Think how much better off society will be! There will probably be scores of good investment opportunities along the way, too, as new firms arise to provide and service self-driving cars, while others compete for all the spare cash consumers gain from not paying a boodle on car maintenance over time if we do indeed shift to a “sharing” model in the long run. This is all very cool and, as the article notes, a crushing counterargument against “those who still cling pessimistically to a Malthusian view of history, believing our ever-growing appetite for energy and other apparently dwindling supplies of natural resource to be an unsustainable catastrophe in the making.” The potential for technology to improve quality of life here is vast, But also, it’s very far off, and speculative. Stocks usually don’t look more than 30 months out, making it too early for investors to be able to handicap the potential winners and losers today. Keep an eye out, and celebrate the amazing potential, but be patient with your portfolio.
|By Tim Wallace, The Telegraph, 09/23/2016|
MarketMinder's View: This makes way too much of one month—especially since it is a month that shows growth in line with the long-running trend. If eurozone purchasing managers’ indexes have registered in the low 50s, implying growth, over the 13 (and counting) quarters since the recovery began, we just don’t get why this reading should imply anything terrible. It’s more of the same, and the same is largely fine.
|By Gabriella Mulligan, BBC, 09/23/2016|
MarketMinder's View: Here’s your fun Friday read. Yesterday, we highlighted this nifty article about the amazing progress toward reducing global poverty over the past several decades. This article is sort of a companion, exploring how technology, property rights and contracts—three simple things we take for granted in the developed world—can work wonders for small-scale farmers in Africa. Simply getting documentation that they own their land can improve access to banking services, including loans—loans they can use to expand their farm and revenues. It also helps immunize them against seizure, historically one of the greatest risks. Meanwhile, mobile apps can help farmers draw “smart contracts” with the companies they sell to, cementing an enforceable agreement and improving the likelihood they get paid. Other mobile services can help farmers access instant advice on animal husbandry and crop maintenance, lowering the chances disease wipes out their entire herd, flock or harvest—that’s amazing progress from the days when they had to wait for irregular visits from local officials. Empowering workers and landowners with basic rights is step one toward development, growth and political freedom, something supranational organizations focused on top-down programs always miss. Europe and America developed from the bottom up, progressing from agriculture to industry, then service, then technology. There is zero reason Africa can’t follow the same path, and the developments here are wonderful and encouraging.
|By David Henderson, Econlog, 09/23/2016|
MarketMinder's View: Understanding economic history is pretty important to anyone who wants to understand what’s going on in markets now or in the future. Knowing, for example, what caused recessions historically can help you analyze current and future conditions and the likelihood of another downturn. Hence, we present this pithy, spot-on discussion of the early 1980s. The more you know!
|By Steven Dennis and Billy House, Bloomberg, 09/23/2016|
MarketMinder's View: The likelihood Congress forces a government shutdown in an election year is roughly nil. These guys and gals want to get re-elected in November, after all. But, on the outside chance it actually happens, it’s worth remembering a government shutdown has never caused a bear market, and returns during and afterward are positive more often than not. For more, see Todd Bliman’s 2013 column, “The Government Shuts Down.”
|By Javier Blas, Angelina Rascouet and Grant Smith, Bloomberg, 09/23/2016|
MarketMinder's View: Shocker: OPEC/Russia oil output freeze talks are faltering before they even begin. We’ve said it before and we’ll say it again: OPEC nations have opposing interests that will be hard to surmount. Whether or not they eventually succeed, this isn’t a quick fix to the global supply glut. Not when non-OPEC production is also sky high and exceedingly nimble.
|By Pamela Constable and Shaiq Hussain, The Washington Post, 09/23/2016|
MarketMinder's View: Rising tensions between India and Pakistan are most definitely not good news, and we hope this ends up being mere saber-rattling. At the same time, anything is possible, so it’s worth noting how global markets usually deal with regional armed conflicts. Volatility often rises as hostilities escalate and the fear and likelihood of actual fighting increase, but in the event conflict breaks out, markets usually recover quickly, well before the fight is over. While the conflict is devastating for those directly impacted, the relevant countries are usually a sliver of world output, and as life elsewhere carries on, so does the world economy and stocks. Generally, it takes a major, global conflict on par with the first two World Wars to cause a bear market (and even in WWII, a bull market began in 1942, years before the war’s end).
|By Bryan Garsten, The Wall Street Journal, 09/23/2016|
MarketMinder's View: We highlight this mostly because it’s fantastic and we love history. But also, it shows why investors shouldn’t expect to glean much from the upcoming debates: The likelihood the candidates have substantive policy debates that give actual insight into what they’ll do when in office rounds to zero. “Debates, at their very best, are the diamonds of democratic politics—crystal clear in argument, sparkling with wit, free from the discolorations of petty self-interest and shaped to focus light on the great issues of the day. But diamonds are rare, and no one is expecting a jewel on Monday night. The problem isn’t only that our candidates are lackluster, tempting as that explanation may be. Nor does the fault lie mainly in the quality of the questions or the skill of the moderator. The forum itself is flawed. How many ways are there to say, ‘Vote for me’? That line will always be more advertisement than argument.”
|By Nicholas Kristof, The New York Times, 09/22/2016|
MarketMinder's View: This article is in many respects pure sociology—it’s a super zoomed-out look at the world in the early 21st century, contrasting poll results about what people think of humanity’s progress in eliminating poverty and illness and humanity’s amazing progress in shaping a healthier, wealthier world. It is easy to see headlines as a constant stream of negativity and worries. Against that backdrop, it is worth pausing to reflect on the broader picture and wonder what that stream of attention-grabbing stories is causing you to overlook. That said, to an extent, investing requires an innate sense of optimism—after all, you are using your money to attempt to improve your future without any concrete sense of how it will look, or what the road there might be like. This article provides evidence justifying that optimism. Enjoy.
|By Walter Updegrave, CNN Money, 09/22/2016|
MarketMinder's View: Here is a decent article summarizing the complexity, expense and restrictions involved in buying an annuity, but it really is only a summary. After all, it doesn’t truly explore the following:
- What is and isn’t guaranteed? If the annuity is variable, ask the sales person point blank how you can lose money. If they tell you that you can’t, run.
- If variable, what are all of the expenses involved?
- If indexed, what is the performance calculation methodology, and what index is it tied to? (The chances you get a remotely equity-like long-term return in these products are extremely small.)
- If fixed, is the rate a teaser that will revert?
- Are promised lifetime income benefits inflation adjusted?
|By Allan Sloan, The Washington Post, 09/22/2016|
MarketMinder's View: This article could easily be subtitled, “And Why You Can’t Outsource Due Diligence to Third Parties, Even Well-Known Mutual Fund Rating Firms.” You see, it seems an ETF sponsor fired the fund’s manager and replaced him with another. However, since the ticker and strategy were loosely similar, and the ETF kept the fund’s performance history and rankings, which were good. But those, quite obviously, don’t actually reflect the history of the firm now managing the fund! While this exact situation is a little uncommon, it’s worth noting that fund management turnover is common, so you must know whose performance you are looking at when considering a fund or manager.
|By Greg Ip, The Wall Street Journal, 09/22/2016|
MarketMinder's View: This article, which argues central banks are at the limits of their ability to stimulate growth and inflation, is near entirely off base. It presumes unconventional monetary policy tools like negative interest rates and quantitative easing (QE) are actually stimulus—despite there being quite literally no evidence globally that’s true, and there being a pre-existing century of theory suggesting it’s wrongheaded. Fact: When the central bank buys bonds, it depresses long-term interest rates. That is generally what policymakers refer to when they say QE accomplished its goals, because they operate on the demand-side theory that lower rates will mean more borrower demand. The trouble with this logic is that it doesn’t take into account the fact that banks aren’t charities and will want to be compensated for the risk of lending. When you reduce long rates (particularly without lowering short rates equivalently), the resulting smaller spread makes lending less profitable. Less profitable lending means less plentiful lending—hence, QE doesn’t mean money is “easy.” This policy meant slow loan growth—which dampens economic growth rates—in the countries that used it. We’d suggest taking a far more skeptical and sober view of central bankers’ claims of success than this article does. Contrary to the thesis here, if central banks just came to their collective senses, stopped QE and were a heck of a lot less active, in all likelihood, the economy would benefit.
|By Luke Kawa, Bloomberg, 09/22/2016|
MarketMinder's View: A day after the Bank of Japan slightly tweaked its monetary policy, claiming to target a 10-year yield of 0.0%, the punditry is still up in arms trying to interpret the move. Some, as documented here, see the BoJ’s policy as bringing higher long-term rates and a steeper yield curve, a fillip to the banks. Others see it as no real change. In reality it is kind of both, but mostly the latter. It is a verbal nod to the banks, but when you consider that 10-year yields were at -0.3% before the announcement, it’s pretty apparent this isn’t a huge gamechanger. Japan’s yield curve was flat before Wednesday’s announcement, and even if the BoJ has “success” in achieving its stated goals, it will be flat after. For more, see Research Analyst Tim Schluter’s commentary, “Bank of Japan Beefs Up Policy With Three More Letters.”
|By Georgi Kantchev, Summer Said and Benoit Faucon, The Wall Street Journal, 09/22/2016|
MarketMinder's View: This article is a mish-mosh of sensible skepticism about OPEC “production freeze” talk and overstated hype about OPEC’s historical ability to “control” oil prices. To the former, we agree that talk is overdone here, although we question whether OPEC national leaders are really doing so intending to put a floor under prices or if they are just expressing their view. No way to know for sure, but what we can say is this: The idea of installing a production freeze would lock in high levels of output presently, and it would be exceptionally difficult to reach, given opposing national interests. To the latter, OPEC has never been able to effectively act as “an oil-price maker, able to swing the market up or down by regulating its own production to match global demand.” The cartel has influence, to be sure. But members do not have clear insight into demand, and non-OPEC supply growth has often befuddled them. Consider 1986 and the mid-1990s. In both cases, oil fell massively due to non-OPEC factors. Like now, the cartel struggled to deal with it. This isn’t a new world, it’s the latest cycle.
|By Steve Goldstein, MarketWatch, 09/22/2016|
MarketMinder's View: Not a stellar August for the US Leading Economic Index, according to The Conference Board, but it’s worth remembering that: “In the six-month period ending August, the leading economic index increased 0.9%, equivalent to about a 1.8% annual rate — roughly in line with the slow growth reported in gross domestic product reports. ‘While the U.S. LEI declined in August, its trend still points to moderate economic growth in the months ahead,’ said Ataman Ozyildirim, director of business cycles and growth research at The Conference Board.”
|By Ian Wishart and David Gura, Bloomberg, 09/22/2016|
MarketMinder's View: Sorry, but no. What this refers to is the US President’s claim that America isn’t interested in bilateral trade deals, preferring larger, multilateral ones—hence, a post-Brexit Britain isn’t likely to reach a trade agreement with the US on its own. Here is the thing: 1) This administration is out of office in a whopping four months. Britain may not have even begun formal exit negotiations with the EU by then, and the incoming administration could have somewhat different (or very different) aims in trade talks that could favor bilaterals. 2) Multilateral deals are hard to complete, as the US is discovering with the Trans-Pacific Partnership and the Transatlantic Trade and Investment Program talks. It isn’t as though Brexit really risks more restricted trade with America; it is no change, in all likelihood. 3) It isn’t as though major nations and blocs can’t walk and chew gum at the same time—we’re pretty sure Britain could negotiate more than one deal at a time.
|By Robin Harding, Financial Times, 09/21/2016|
MarketMinder's View: We award half a point to the Bank of Japan for publicly acknowledging that its quantitative and qualitative easing (QQE) program flattened the yield curve, sapping banks’ profitability and discouraging lending—and, by extension, slowing growth. However, the bank’s purported solution—targeting a 10-year rate of 0% (versus the current -0.3%)—strikes us as feckless tail-chasing. The mechanism might work (the bank will stop buying bonds with maturities between 7 and 12 years, while the Finance Ministry will issue more bonds in that range), but market forces might counteract the BoJ’s efforts. Even if the BoJ meets its target, the shift in the yield curve would be incremental, limiting bank profit margins. Moreover, the BoJ’s new attempt at monetary accommodation ignores the elephant in the room: Japan’s economy remain structurally uncompetitive. Unless officials pass measures to meaningfully reform Japan’s antiquated labor code and improve poor corporate governance, monetary policy likely won’t move the economic and inflation needles all that much, if at all.
|By Jeremy Warner, The Telegraph, 09/21/2016|
MarketMinder's View: This presents a twist on an old, tired argument: That central banks have propped up stock markets with quantitative easing and its many variants, and when they stop, the market will crash. The twist? In addition to flooding the system with cheap money, it argues, some central banks have resorted to directly buying stocks and corporate bonds, inflating a bubble. But think about it for any length of time, and it falls flat. The BoJ has been buying Japanese ETFs for years and is now a major shareholder of many Japanese firms. Yet Japan’s stock markets lag the world by a substantial margin. Central bank buying just isn’t that powerful a force. As for the allegedly destructive buildup of corporate debt, what matters is affordability, and corporate bonds are extremely affordable for issuers right now. As interest rates fell, many firms bought back outstanding bonds, replacing them with even cheaper, longer-dated yields. Balance sheets, overall and on average, are in great shape. The Fed ended QE in 2014 yet the US economy has kept chugging along. The Bank of England stopped asset purchases in 2012 and the UK has been one of the strongest developed market economies since. The QE sequel announced in August is small and needless. At some point QE in Japan and the Eurozone may end, but there is no evidence that this will cause a rout in stocks.
|By Stephen Bierman, Dina Khrennikova and Elena Mazneva, Bloomberg, 09/21/2016|
MarketMinder's View: As OPEC nations and Russia gear up to discuss a potential freeze in oil production levels, Russia is pumping more oil than it has in decades: “[Russian] output in September has been about 11.09 million barrels a day, the highest monthly average since the Soviet era.” This is likely because Russian government revenues rely on oil rents. The lower prices fall, the more it must pump just to maintain revenue and public spending. While Russia and some OPEC nations discussed freezing output at current levels earlier this year, conflicts of interest thwarted these efforts. But even if Russia and OPEC member nations manage to freeze production at current levels, a freeze isn’t necessarily an outright cut—production from these countries would remain at very high levels. So would non-OPEC output. As next week’s meeting approaches, you may see stories touting a potential output freeze, but regardless of what these countries do or don’t agree to, it’s unlikely oil prices mount a sustainable and sizable rally, as global supply remains higher than demand.
|By Robert J. Barro, The Wall Street Journal, 09/21/2016|
MarketMinder's View: This piece argues weak labor productivity largely explains why GDP growth has been sub-par since 2009, based on a study of past recessions and the strength of subsequent recoveries. The study showed that from 1949 through 2009, GDP growth per worker averaged 1.5% per year, far more than the 0.5% / year achieved from 2010 – 2015. The difference is supposedly due to efforts to increase transfer payments in the wake of the Great Recession—which don’t boost worker productivity—instead of enacting measures that encourage private investment, such as “eliminating inefficient regulations and other constraints on market activity.” While there are grains of truth in this analysis, in our view, it mischaracterizes that last seven and a half years by using a quirky definition of economic recovery. Whether an economy recovers doesn’t depend on whether post-recession per-capita GDP grows half the magnitude of the decline (i.e., GDP per capita falling -4% during the recession, then growing 2%). While this might be the historical trend, it is an interesting observation, not a requirement. Generally, a recovery is the period in which real GDP is catching up with its pre-recession high, while expansion is what comes after, when the economy charts new highs. Using that traditional definition, the US emerged from recovery in 2011 and has been in expansion ever since. GDP per capita surpassed its pre-recession high in Q4 2013. The non-recovery is a myth. Growth is growth.
|By Sam Ro, Yahoo Finance, 09/21/2016|
MarketMinder's View: Some believe expectations for 2017 S&P 500 earnings—which currently see profits rising 13.4% over 2016—are too high. Their evidence: Expectations for 2016 were also high once upon a time, but analysts ratcheted down their estimates as the year progressed. So, they reason, analysts will likely do the same for 2017. And hey, maybe they will! But that doesn’t mean stocks must fall. Stocks don’t move on expectations. They move on the gap between reality and expectations. If analysts crank down their estimates, that gives reality an easier hurdle to clear—in other words, it’s bullish, not bearish. Also, valuations are by no means “stretched” just because they are a little higher than their 5- and 10-year average (both arbitrary numbers, and neither of which encompasses even one full market cycle). The S&P 500’s average forward-looking P/E ratio going back to just 2000 (including two market cycles and counting) is 16.26, just slightly below current levels. Besides, valuations aren’t predictive anyway.
|By Heather Long, CNN Money, 09/21/2016|
MarketMinder's View: Some fear uncertainty over the US presidential election—and how either President Clinton or Trump will impact the economy—is causing consumers and businesses to tighten their belts, crimping growth. And if Americans don’t get comfy with the next administration soon, pundits warn, they’ll stop spending and investing, and we’ll get a recession. Look, we get that the proverbial “animal spirits” do have some influence on growth, but it would be extremely odd for people’s feelings to flip an entire economic cycle. That hasn’t happened once in modern history. For all the talk about consumers potentially tightening the purse strings, most spending goes to basic expenses consumers have little leeway to pull back on. As a result, overall spending doesn’t vary all that much during recessions. As for businesses, their investment decisions depend more on their expectations of future profitability, which has little do to with which politician lives at 1600 Pennsylvania Avenue. They tend to retrench more when credit tightens, as that usually is a telltale sign of trouble. Credit tends to tighten after the yield curve inverts, and the yield curve is steepening these days. Hence, recession appears highly unlikely over the foreseeable future. Reality should continue surpassing dismal expectations, keeping stocks happy.
|By Jim Puzzanghera and Don Lee, Los Angeles Times , 09/20/2016|
MarketMinder's View: Get ready, party people! Tomorrow is another Fed Meeting Day, which means a deluge of speculation about their possible actions. This is the rare Fed article in the days before a meeting that isn’t engaged in those feckless attempts to forecast whether a hike is coming or not. Rather, this offers a glimpse into the Fed’s history of policymaking around elections, which often means holding off on hikes until elections are over and allegations of bias fade. To us, this speaks to the fact central bankers are people too, with jobs they’d prefer to keep. Appearing to favor one party over another would jeopardize their chances, and inactivity is a good way to signal neutrality. Now, again, it’s impossible to say how this batch of central bankers will interpret the data or read the tea leaves or convert incomprehensible public statements into dots on a plot, and their ultimate decision is unlikely to prove pivotal for the economy anyway.
|By Matthew Lynn, The Telegraph, 09/20/2016|
MarketMinder's View: Let’s start by cleaning house a bit: Toss out the discussion herein of the Dow Jones—a tiny, skewed index that decidedly isn’t “a pretty good proxy for what happens across the rest of the world”—and the alleged reasons why a dull market is good for portfolios and businesses, which are mainly unfounded assertions. The small portion that remains nicely captures the tepid state of sentiment in this seventh year of the bull market. “[T]here is no real excitement around equities. Ordinary people are not talking about the killing they have made, no one is launching TV shows on how to play the markets, and there are no stories of flash young brokers waving cash around in lap-dancing clubs. If bull markets are meant to have a manic phase where it all gets a bit crazy, we have not reached that.” Now, not all bull markets reach euphoria before petering out—some, like 2002 – 2007’s bull, end on a huge, ugly shock. But given optimism’s scarcity today, overheating sentiment is unlikely to end the current expansion soon.
|By Cecilia Kang, The New York Times, 09/20/2016|
MarketMinder's View: Federal guidelines released yesterday on self-driving cars were mainly notable for what they didn’t include—heavy-handed restrictions or requirements that might stifle experimentation and innovation surrounding the technology. “We left some areas intentionally vague because we wanted to outline the areas that need to be addressed and leave the rest to innovators,” a spokesman for the National Highway Traffic Safety Administration explained. This is nice, and automakers seem content with the result. But guidelines aren’t rules—the rules are forthcoming (possibly in several waves over several years), and could be much more limiting. Just look at the FAA’s foot-dragging on drones. For now, though, it looks like federal regulators are giving the self-driving car industry some space—a fine beginning. We’ll see where it goes, but we hope this proves true: “‘We envision in the future, you can take your hands off the wheel, and your commute becomes restful or productive instead of frustrating and exhausting,’ said Jeffrey Zients, director of the National Economic Council, adding that highly automated vehicles ‘will save time, money and lives.’”
|By Jeffry Bartash, MarketWatch, 09/20/2016|
MarketMinder's View: Ah yes, the 1960s, the decade (as the article helpfully reminds us, despite its complete irrelevance) of the Cuban Missile Crisis, when the economy stagnated and markets leapt from freefall to crash. Actually, no. GDP growth mostly hovered between 3-8%, and the S&P 500’s annualized total return was nearly 8%. The link between interest rates and economic growth is extremely tenuous—both the economy and stocks have performed well and poorly in a variety of rate conditions. More important is the interest rate spread—the difference between short and long-term rates that drives bank profitability—as measured by global yield curves, which are steepening today. Reading years of stagnation into the ever-changing interest rate forecasts of Fed members is silliness of the highest order.
|By Bob Veres, Financial Planning, 09/20/2016|
MarketMinder's View: A useful guide to understanding the vast differences between providers in this industry. Read up to see the differences—they can hugely influence the odds you reach your financial goals.
|By Sam Brodbeck, The Telegraph, 09/20/2016|
MarketMinder's View: In the aftermath of Brexit, several UK real estate mutual funds halted withdrawals, sparking comparisons to the financial crisis, when “redemption gates” on mortgage-related funds presaged much worse to come. Not so here: After Leave’s victory, UK property funds limited redemptions to avoid selling illiquid real estate assets for a pittance at a panicky point—the heart of the Brexit volatility. Others imposed steep discounts on any sales. A couple months later, with sentiment calmer, they’re lifting the gates and removing discounts. Investors may have been taken aback when their money was locked up—and indeed, this is a great reminder of the drawbacks of illiquid investments and the importance of reading the fine print—but this was a fine response to a short-term potential liquidity squeeze. More broadly, barriers’ lifting in response to recovering property prices indicates the dip was sentiment-driven, not a harbinger of businesses fleeing the UK (which they haven’t).
|By Anjli Raval, Financial Times, 09/20/2016|
MarketMinder's View: If you’re running a failing, energy-dependent socialist state with a hungry and increasingly displeased populace, putting on a brave face about the odds of an oil price rebound is as good an option as any. This, we think, pretty well explains Venezuelan President Nicolás Maduro’s blithe pronouncement that “We had a long bilateral meeting with [Iran’s president Hassan] Rohani. We’re close to a deal between OPEC producer countries and non-OPEC.” This falls somewhere between wild speculation and wishful thinking: Rohani had also reiterated Iran’s demand that any deal be “fair,” which probably means “permit significantly higher Iranian output.” That suggests a production freeze isn’t close at hand, and even if it were, it would freeze at high levels of output. Moreover, non-OPEC producers like the US, Canada, Russia and Brazil also plan to keep pumping, further bolstering supply. The oil cartel will meet in Algiers later this month to discuss the state of the oil market, but its secretary-general now calls it an “informal gathering,” with no major decisions expected. Overconfident predictions by an embattled wanna-be dictator change little.
|By Gabriel Wildau, Financial Times, 09/19/2016|
MarketMinder's View: The Bank of International Settlements tracks countries’ corporate and household debt as a percentage of GDP, and compares it to their long-term average. The BIS says any gap between the two greater than 10% suggests the banking system is overstretched, and China’s gap now stands at 30.1%. The BIS claims (and this article repeats without testing) this gauge “… has been found to be a useful early warning indicator of financial crises.” We checked. In the history of the series, the US gauge exceeded 10% only once—around 2008. Korea’s has multiple times, but they tend to spike above 10% after GDP falls in a recession. Australia has seen gaps exceeding 10% in 35 of the 100 quarters since 1991. During that span it has seen zero recessions. Besides, fundamentally, why would this indicate much? The economies cited herein are hugely different in structure, including the banking system. Why would it be fair to compare a liberalized market like the US, with hugely developed credit markets, to one like China’s, where, to a large extent, the government directs credit? It is reasonable to wonder whether that government is allocating credit efficiently, and this issue is clearly worth watching. Thing is, markets have been watching for years: China breached the Scary 10% Threshold in 2009 and mostly remained above it since, all while worries about its debt swirled. This BIS report simply attaches another metric to a long-running fear that hasn’t materialized. If you thought the BIS’s 10% trigger was so threatening, you’d have sold and sat in cash for the entirety of this bull market.
|By Ben Eisen, The Wall Street Journal, 09/19/2016|
MarketMinder's View: This article correctly points out that the recent uptick in long-term bond yields has been met with handwringing—an odd sentiment quirk, considering a steeper yield curve (spread between short- and long-term interest rates) generally foretells faster growth ahead. This article attempts to explain away this disconnect, but doesn’t really take a broad enough view in its myopic focus on just the last few weeks. Then again, considering policymakers and pundits have broadly forgotten the yield curve’s predictive powers throughout this cycle as they celebrate wrongheaded policies like quantitative easing, that’s unsurprising. This sentiment quirk has existed since 2010, clouding investors’ views of monetary policy.
|By James Hamilton, Econbrowser, 09/19/2016|
MarketMinder's View: Here is an interesting look at a development we don’t find all that surprising: the fact hugely cheaper oil and gas didn’t turbocharge US GDP growth. Feel free to quibble with the part about consumer spending, as that category includes spending on gasoline, technically making cheaper gas prices a drag. They do free up more money to spend on other goods and services, but they don’t increase the total amount we have available to spend, so we’d suggest there are other forces driving the acceleration in spending since late 2014. That said, the second half, which addresses the impact on business investment, is pretty great. As it notes, it isn’t so easy to redirect capital equipment from the shale oil industry elsewhere. “Idealized economic models treat capital as if it’s a big fungible lump that you can use wherever it’s most productive. But it turns out to be not that easy to try to carry milk in an old tanker rail car.”
|By Alan Reynolds, Cato at Liberty, 09/19/2016|
MarketMinder's View: This critique of a recent, widely referenced study attributing US job losses to Chinese imports raises some good questions: What about the jobs created by the US’ services export surplus with China ($29.5 billion in 2015)? What about “spillover effects of China’s soaring imports from other countries (such as Australia, Hong Kong and Canada), which were then able to use the extra income to buy more U.S. exports”? Even simply including manufacturing jobs data from 2012-2015 (instead of stopping at 2011) would halve the apparent losses, despite Chinese imports’ 21% rise during that time. For us, these quibbles illustrate a broader point: Statistical analyses assessing the impact of a single economic trend in isolation are usually imprecise at best, and grossly incomplete at worst. The universe of global commerce is too vast, too complex and too interconnected to account for every relevant factor. Seemingly insignificant differences in how models are set up—data sets, timeframes or definitions of key terms, for example—can have dramatic effects on the result, turning what look like objective measurements into subjective guesses. For investors, the principle is most important: Markets prefer freer trade, and despite some high-profile setbacks, global trade is comparatively free today. However, arguments like this one abound in election years—they certainly do today—and it is worth being educated on them and the issues raised due to the threat they send protectionism surging.
|By Mark Thoma, CBS Moneywatch, 09/19/2016|
MarketMinder's View: There is a lot of sociology in this article that we won’t opine on—like the discussion of income inequality, for example. For investors, consider the following points while you read this piece, which offers two opinions attempting to explain slow GDP growth in this cycle (Robert Gordon’s theory of slower productivity growth and Larry Summers’ take on basically the same thing, dubbed “secular stagnation):
- These are only two opinions. Many economists happen to think GDP may not be optimal for estimating growth in a services-and-information heavy economy. Read this for more on that.
- It is equally possible slow growth stems from policies like quantitative easing, which eschews 100 years of history by arguing a flatter yield curve stimulates growth.
Finally, the argument that “returns will be lower” due to slow growth overestimates the link between GDP and market returns. Moreover, it seems odd to argue “returns will be lower” and yet “risk of creating financial bubbles increases” in a slow-growth environment. The two are pretty hard to square with one another, considering financial bubbles are usually a reaction to big returns.
|By Roger Bootle, The Telegraph, 09/19/2016|
MarketMinder's View: Two questions about this article, which calls for the pound to stay weak in order to “fix” the UK’s current account deficit. 1) If a weak domestic currency is such a boon, why is Japan among the economic laggards of the developed world? 2) If a negative current account balance is a recipe for disaster, why is the US—which has had a negative balance for over three decades running—still at the world’s economic forefront?
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Market Wrap-Up, Thursday, September 22, 2016
Below is a market summary as of market close Thursday, September 22, 2016:
- Global Equities: MSCI World (+1.1%)
- US Equities: S&P 500 (+0.7%)
- UK Equities: MSCI UK (+2.2%)
- Best Country: Norway (+4.0%)
- Worst Country: Japan (-0.1%)
- Best Sector: Materials (+1.7%)
- Worst Sector: Information Technology (+0.7%)
Bond Yields: 10-year US Treasury yields fell 0.03 percentage point to 1.62%.
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.