Today's Headlines

By , MarketWatch, 08/23/2017

MarketMinder's View: “The [US’s] IHS Markit flash manufacturing purchasing managers index fell to a two-month low of 52.5 from 53.3 in July, while the services PMI rose to a 28-month high of 56.9, up from 54.7 in July. Any reading above 50 indicates improving conditions. The flash responses are based on about 85% to 90% of total PMI survey responses each month.” As this shows, the titular “split” isn’t real, since manufacturing and services PMIs both show expansion. Rather, the breadth of growth narrowed a notch for the former and widened for the latter. Moreover, considering services comprise about 70% of US GDP, continued growth in this sector indicates the broader expansion is humming along. Now, this is only one purchasing managers’ gauge for the US—the Institute for Supply Management publishes another, out after month’s end. We consider ISM’s gauge a little more telling, given it has decades and decades of history, while Markit’s is new in this cycle. But both are expected to be expansionary, so we guess that’s splitting hairs.

By , Bloomberg, 08/23/2017

MarketMinder's View: “A [eurozone] Purchasing Managers’ Index for manufacturing rose to 57.4 in August from 56.6 in July, according to IHS Markit. That’s the highest reading in two months and compares with a median estimate for a slowdown in activity. Momentum in services unexpectedly cooled to a seven-month low.” However, this services slowdown was from 55.4 to 54.9—still well above 50—and PMIs reflect growth’s breadth, not magnitude. The composite PMI—which combines manufacturing and services—ticked up to 55.8 from 55.7, beating expectations for 55.5. And manufacturing activity in the eurozone’s core economies—Germany and France—was robust. Despite fears a strong euro would dent factory output and exports, eurozone new export orders rose to a six-and-a-half-year high. Overall, chalk this up as more evidence the eurozone is humming.

By , The Wall Street Journal, 08/23/2017

MarketMinder's View: “Mexico chalked up its 16th consecutive quarter of economic growth in the April-to-June period as strong services output compensated for sluggish industrial production. Gross domestic product, a measure of output in goods and services, expanded 0.6% seasonally adjusted from the first quarter and was up 1.8% from a year before, the National Statistics Institute said Tuesday.” One interesting—and underappreciated—point: Services output is leading growth, averaging 3.4% since the beginning of 2015, while heavy industry has been weak. However, industry’s weakness is largely due to public sector retrenchment—not necessarily a bad thing as Mexico allows greater market influence in a historically government-dominated sector. Moreover, solid domestic demand suggests Mexican growth remains on firm footing. With NAFTA renegotiations now underway, trade-related fears may suggest Mexico’s economy could be in trouble. Considering we don’t even know how a new NAFTA would look yet, we aren’t going to speculate about its potential impact here. What’s more, those fears lower the bar data need to clear to positively surprise, a bullish backdrop that has benefited Mexican markets for most of 2017.

By , Associated Press, 08/23/2017

MarketMinder's View: “South Korea’s top trade negotiator said Tuesday that Seoul will not discuss renegotiation of the free trade agreement with the U.S. without first looking into what is really causing the U.S. trade imbalance.” Before entering negotiations, South Korea has proposed, “a joint study with Washington to evaluate the impact of the five-year-old bilateral trade deal.” While trade policy wonks may get a kick out of this, the broader implications are much less exciting: No major changes are forthcoming anytime soon. We aren’t complaining, by the way. In our view, this is a reminder that politicians’ bluster doesn’t override existing bureaucracy and processes—and why campaign rhetoric shouldn’t be taken as the new reality.

By , CNBC, 08/23/2017

MarketMinder's View: You can go ahead and nix the titular “Yet.” We agree tax reform faces high hurdles and investors shouldn’t hold their breath, but by the same token we doubt, “Stocks surged on the prospect that Congressional Republicans will approve changes in corporate and individual tax rates.” Tax reform tends to be drawn out and fraught because it creates winners and losers. And because potential losers feel losses more than winners might enjoy gains—prospect theory in action—they fight harder against reform. The frequent debate allows stocks to price in any changes long before reform becomes reality—and even that is no guarantee. (See Exhibits 1 – 3 here.) Supposedly Congress is making strides towards a deal, but we suggest investors wait and see before acting. More importantly, the market impact isn’t likely to be big either way.

By , Bloomberg, 08/23/2017

MarketMinder's View: Winter is coming. Oh wait, wrong story! Although widely watched, the economy isn’t a scripted cable show, yet most analysts cited here seem to think that markets follow a set script—that following asset correlations (or non-correlations) tells you something about the future. But they don’t—and can’t. There are myriad examples of technical analysis here, but all rely on a faulty premise: using past performance to divine future movements. That’s not how it works, folks. The economic analyses included here (regarding, say, profit margins, earnings beats and more) seem to presume those factors lead markets, when they actually lag. Besides, nothing here is much of a timing tool. While we may be in the latter stages of the bull, this has been an eight-plus year long bull. How long—and big—will those latter stages be? Nothing in here will help you determine the answers to those most meaningful questions. An inconvenient fact we noted in our commentary the other day: Trying to forecast or pinpoint a market peak before it occurs is a fallacy in action.

By , The Washington Post, 08/23/2017

MarketMinder's View: While this is about helping your kid(s) make better spending decisions, we’d also note this advice is useful for learning about investing as well! In personal finance matters for children, this article suggests learning through experience—guided by parental supervision—may leave the most lasting impression. “When they were spending our money, they didn’t pay attention to what stuff costs. They were all too busy complaining about how cheap we were and whining about where we were taking them to shop — discount stores. But when it was their money, all of a sudden it was, ‘I can’t afford that.’” Yup. Set an example, give them a budget—not cash or credit card per se—and within those limits let your kid(s) decide. Read on for how this improves kids’ behavior and, who knows, they might even talk to you more ... about their finances.


By , The Wall Street Journal, 08/22/2017

MarketMinder's View: Remember when the media hyperventilated about how Brexit and Donald Trump’s surprise win last year meant a wave of populism was set to crash onto Continental Europe this year—potentially even leading to the breakup of the eurozone or EU? Well, after elections in the Netherlands and France delivered resounding victories for centrist candidates—and with German Chancellor Angela Merkel holding a comfortable lead before September’s elections—we hear nary a peep involving any “eurozone country + exit” portmanteau anymore. Many anti-EU/euro populists are now backtracking on pledges to hold a eurozone or EU referendum because, as this piece notes, voters just aren’t feeling it anymore: “A survey of 10 EU countries published in June by the Pew Research Center found that Europeans remain critical of the bloc. A median of 46% disapproved of the EU’s handling of its long economic crisis, while 66% disapproved of its management of the refugee crisis. But dissatisfaction didn’t translate into support for leaving. The survey found that, outside the U.K., a median of only 18% wanted to quit the EU, while 77% wanted to stay.” While the political debates rage on, investors should note this is all part of the falling political uncertainty we expected on the Continent this year—and one of the reasons we are bullish toward the eurozone.

By , Reuters, 08/22/2017

MarketMinder's View: Are we about to relive Emerging Markets (EM) Taper Tantrum 2.0 once the ECB begins its long-awaited (but still undetermined) reduction in asset purchases? That is the concern explored here: Without the ECB’s quantitative easing (QE) depressing eurozone yields (and making Emerging Market (EM) assets more attractive), EM currencies will plunge, crippling firms and governments who have to repay euro-denominated debt. This is the exact narrative we heard about Fed/EM taper terror in 2013, which this article argues left “bad memories” by wiping half a trillion off the MSCI EM Index. Scary! But also blown way out of proportion. Taper terror did not cause an EM bear market. Nor did it fundamentally hurt EM economies or stock markets. We guess it’s fair to say it caused a correction, as the MSCI EM fell -15.3% between May 22 (when former Fed head Ben Bernanke first jawboned about tapering) and June 24, but by October the index was above pre-taper-jawbone levels (FactSet, using returns in USD with net dividends.) Moreover, EM stocks rose throughout the actual taper. If they held up fine then, they can do fine now, especially since EMs’ euro-denominated debt is peanuts compared to dollar-denominated debt. In our view, the sooner the ECB gets on with it, the better—it not only removes a small economic headwind, it would likely help sentiment by showing folks monetary policy isn’t propping up global growth.

By , The Wall Street Journal, 08/22/2017

MarketMinder's View: While this primarily discusses a one-day selloff, we highlight it as a friendly reminder that a country’s index classification isn’t innately bullish: “The struggle for Pakistani stocks has come despite leading index provider MSCI’s decision to upgrade the country to an emerging market from a frontier market. The official reclassification into the MSCI Emerging Markets Index took place June 1, which many expected would have been a boon for the country’s stock market. Instead, stocks have fallen, a pattern that Mr. Hashemy [chief economist and director of research at Topline Securities, a Karachi-based brokerage firm] said is similar to what transpired when the U.A.E. and Qatar were upgraded to emerging-market status in May 2014. Both country’s stock markets slumped in the subsequent months before bouncing back.” Color us unsurprised. Index providers typically upgrade countries in response to top-notch stock performance, and as every investment disclosure explains, past performance isn’t indicative of future returns. For more on what happens (or doesn’t) when countries enter or leave various indexes, check out our 6/27/2017 commentary, “Chinese Stocks’ Symbolic Emergence.”

By , Reuters, 08/22/2017

MarketMinder's View: “A vast majority of Japanese firms do not want any further radical monetary easing, even though they believe the central bank’s inflation goal will either take more than three years to achieve or is an impossible target, a Reuters poll showed. … The results of the Reuters Corporate Survey underscore the view that authorities may not have the means to bring about an escape to deflation, with respondents noting it has become too entrenched and that the mind-set of a rapidly aging but mostly middle-class population worried about pensions hinders any exit.” While this is just one survey, some takeaways indicate sentiment’s slide in Japan this year. That almost a third of respondents don’t think the BoJ’s inflation goal is feasible shows the decline in confidence in the BoJ and a potential knock to its credibility. This seems rational to us: Monetary policy alone lacks the ability to restore sustainable economic growth to Japan, and continued tepid economic growth is likely. That said, if sentiment continues slipping, it does set a very low bar for expectations to clear—increasing the chance of upside risk. To be sure, the economy still has plenty of weak spots, and we aren’t calling for a Japanese stock surge—but even a meh reality could start outpacing too-dour expectations.

By , Bloomberg, 08/22/2017

MarketMinder's View: We have a mixed take on this piece. On the one hand, we agree people overestimate the Fed head’s importance. Whether it’s Goldman Sachs alum and current presidential advisor Gary Cohn (as many speculate today), incumbent Janet Yellen or someone else, the Fed chief has much less power than many believe. On the Federal Open Market Committee (FOMC)—the Fed’s decision-making body—the chair is just one vote of a dozen, and as this piece details, the rest of the FOMC doesn’t simply follow the leader. Plus, there is pressure for consensus: “Three dissents in a single meeting starts to attract a lot of attention, most of it unwelcome. So chairs need to be mindful of where the center of gravity in the committee and navigate around and through it. And those district presidents, who are almost always the dissenters, now typically issue their own competing statements and aren't shy about getting on the telephone with journalists and making speeches on the issues.” On the other hand, we don’t agree giving “more voices” an opportunity to influence the selection of the next Fed head would be so good. While the Fed chief is an innately political animal, giving more influence to legislators and outside voices risks increased politicization of monetary policy. The Fed is designed to have as many safeguards against political influence as possible, and maintaining that independence is crucial for a central bank’s credibility. Don’t get us wrong—the Fed can stand to be more transparent with some operations (e.g., releasing meeting transcripts more quickly). But more input from lawmakers—many of whom aren’t banking experts—won’t necessarily bring better monetary policy. For more on the Fed’s overstated role, see Jamie Silva’s column, “Now Hiring: The Federal Reserve.”

By , The New York Time, 08/22/2017

MarketMinder's View: Indeed: Human ingenuity and innovation, combined with technology, yield amazing results.  The idea fuel-powered cars are reaching maximum efficiency sounds a lot like “peak oil” worries. Yet just as the shale oil revolution rendered peak oil moot, carmakers are finding ways to make gas- and diesel-powered engines even more efficient. That is important, given a majority of vehicles will continue having a combustion engine—both now and in the projected distant future. Pundits pay ample homage to the newest and latest (e.g., electric engines), but you don’t have to reinvent the wheel (or in this case, the internal combustion engine) to make an impact. For investors, keep this in mind any time you hear warnings that a certain industry looks doomed based on straight-line math projections: Life—and markets, for that matter—don’t  move linearly.

By , The Wall Street Journal, 08/22/2017

MarketMinder's View: This is how: “While higher-wage baby boomers have been retiring, lower-wage workers sidelined during the recession have been taking new full-time jobs.” Result: lower average wages, even if workers are getting paid more on average. So say researchers at the San Francisco Fed, whose work reinforces data published by the Atlanta Fed. The Atlanta Fed’s Wage Growth Tracker has steadily reflected rising wages—about 3% annually—for continuously employed workers, thus removing the dual downward skew of (previously highly paid) retirees and new (lesser-paid) job-seekers. The difference doesn’t matter for markets, as who gets paid what is sociology. However, it does cast doubt on the “salaries are stagnant” narrative frequently cited as a reason employment numbers aren’t as strong as they appear. Thus, clearing that misperception up could boost animal spirits a touch.

By , Bloomberg, 08/21/2017

MarketMinder's View: But it probably won’t, in our view. The worries stem from a theory common in this bull market: Will the removal of “easy” monetary policy provided by central banks globally remove stocks’ primary support? This latest version regarding the Fed’s plan to gradually unwind its balance sheet follows taper terror and rate-hike fears before it. Yet when the taper and hikes actually came, they passed uneventfully. We expect the same here. Why? The fear (still!) hinges on the premise “easy” money actually stimulated economic growth and markets in the first place. Yet there is no evidence programs like quantitative easing (QE) actually did that. For stimulus to stimulate, banks must increase lending. Banks lend because they can borrow cheaply short term and extend higher rate loans long term: The spread is their profit. Yet QE lowered long-term rates, squashing those loan profits. Hence, loan growth in the UK and US didn’t skyrocket while QE was in effect, it was actually very slow until after the UK and US ended their respective QE programs. If pumping “easy” money didn’t propel stocks higher, cutting it off shouldn’t send stocks lower. This latest iteration likely proves even more feckless than its forerunners, considering the Fed’s plan is for a gradual taper taking years to accomplish. For more, see our 6/15/2017 commentary, “The Fed’s Diet Plan.”    

By , Bloomberg, 08/21/2017

MarketMinder's View: In today’s “News You Can Use” segment, we provide you a nifty breakdown responding to the titular question. The analysis cites Bureau of Labor Statistics data on average annual expenses for each state and attempts to estimate what retirees aged 65 and older might need. You will want to consider that the estimates don’t include inflation, entertainment or travel—all generally important variables for retirees to keep in mind—but this gives good high-level look at how basic expenses can vary based on where you live. Don’t forget, though, your personal situation and costs of living are unique!    

By , The Wall Street Journal, 08/21/2017

MarketMinder's View: Those signs of unrest in US markets are: Political rifts in D.C.; weakness in certain market segments (e.g., transportation stocks and small cap stocks); lower Treasury yields, which signal strong demand for “safe” assets; surveys indicating investors believe a pullback is nigh; tighter Fed policy; record-setting household debt; and rising global tensions (North Korean sabre-rattling, terrorist attacks in Spain). We have a question: Are any of these concerns truly a surprise to markets at this point? Bull markets end because they either reach the Wall of Worry’s euphoric top—setting expectations reality can’t meet—or a huge, unexpected negative sufficient to wipe trillions off global GDP comes around. We don’t see any evidence of the latter right now, and based on the prevalence of articles like this, it seems like we are far from the characteristic euphoric sentiment of a bull market top. If you’d like more in-depth reasons why we believe these “signs of unrest” are overwrought, see our analysis, here, here, here, and here.

By , Forbes, 08/21/2017

MarketMinder's View: We too are bullish toward Europe, but it is important to be bullish for the right reasons. Three of the four titular reasons (valuations, fund flows and German bund yields) are backward-looking and/or not meaningful for stock prices at all. The other reason—rising loan growth and solid manufacturing PMI readings—get 0.75 point. Strengthening loan growth does signal the eurozone’s improving economic growth prospects, which should boost investor optimism, but solid manufacturing PMI numbers only show that a minority slice of the eurozone economy grew recently—it doesn’t say anything about growth to come, let alone anything about the bigger services sector. (Economic data like PMIs are also published at a lag—stocks look forward.) Furthermore, we would be remiss if we didn’t point out the cyclically adjusted price-to-earnings ratio (CAPE) is a horrific market indicator, comparing the past decades’ inflation-adjusted earnings to nominal stock prices—bad math and über-backward looking. Forward P/Es give a rough sense of sentiment, but CAPE can’t even do that. Instead of the reasons listed here, we point to falling uncertainty: Investors are finally warming up to the eurozone’s solid growth, and much of the political questions have now passed (with German federal elections the next scheduled vote to pass). This allows investors to better see and appreciate solid economic fundamentals and burgeoning profits, leading them to bid stocks up. Be bullish toward the eurozone, but don’t forget to have sound rationale for that bullishness too.     

By , BBC, 08/21/2017

MarketMinder's View: The Brexit negotiation process marches on. The UK just released a couple position papers outlining its stance on goods and services purchases and documentation confidentiality, respectively, in the post-March 2019 world. Essentially, both papers call for maintaining the status quo once the official Article 50 negotiation period expires in order to ensure stability as negotiators hammer out the details for a future agreement. Publicly, the EU reiterated that its priorities are “citizens’ rights, the UK’s ‘divorce bill’ and the Northern Ireland border” before dealing with any economic arrangements while the UK said its proposals would “drive the talks forward.” More position papers are coming down the pike, too, and one involving the UK’s future relationship with the European Court of Justice (ECJ) will likely spark fierce debate. That said, while the rhetoric may be sharp, the Brexit process is playing out like we thought it would: deliberately and publicly,  allowing markets to follow any and all changing storylines. If you’re a policy wonk, feel free to review the papers yourselves, but if you’re expecting to some sort of final Brexit insight now, you are likely to be disappointed—we still have a ways to go.

By , Bankrate, 08/18/2017

MarketMinder's View: The answer, of course, is no. But what we really like about this piece is its discussion of “Stocks Drop on X” headlines, which are usually just as ridiculous as trying to tie daily moves to celestial events. “You’d probably scoff at a story that read, ‘Stocks took a slight dip today as the moon completely covered the sun over the upper regions of Canada.’ That seems silly on its face. And it probably is. But you should flash that same skepticism when narratives arise about why stocks went up or down, and especially about where they’ll go in the future. You can easily fall into a conditional trap (‘if Trump signs a tax reform bill, stocks will rise’) that plays into your own hidden bias.”

By , MarketWatch, 08/18/2017

MarketMinder's View: Oh, the humanity! The Hindenburg Omen is flashing! Whatever should we do?! We suggest reading this article, which we wrote when the Hindenburg Omen flashed in June 2013. Since its 6/4/2013 publication date, the MSCI World Index has returned 42.6% (FactSet, returns with net dividends, 6/4/2013 – 8/17/2017), and we haven’t had a bear market. Oh, and the Hindenburg Omen flashed several more times between then and now. Any questions?

By , The New York Times, 08/18/2017

MarketMinder's View: Four years ago, if Japanese GDP grew 4% annualized, pundits would have been over-the-moon euphoric and writing 1,500-word odes to Prime Minister Shinzo Abe and his Abenomics platform—not exploring all the reasons the boomlet was probably temporary. Sentiment has plunged, and while we don’t think Japan’s economy is on the verge of something great, there is a risk expectations get so low that even blah results are a positive surprise. We wouldn’t go hog wild for Japanese stocks or anything, but articles like this are a sign investors probably shouldn’t outright ignore opportunities there.

By , A Wealth of Common Sense, 08/18/2017

MarketMinder's View: We often remind readers the service an investment adviser provides is as important as the returns they generate (presuming they’re mostly market-like). Service, after all, is what enables investors to a) have a portfolio and plan tailored to their unique situation and b) remain invested and receive those returns. What all does “service” entail? Read this and find out. It isn’t perfect, but it is a pretty good snapshot.

By , The Wall Street Journal, 08/18/2017

MarketMinder's View: The SEC is presently mulling a rule that would force auditors to “describe any significant issues they raised with the audit committee of the company’s board of directors. The auditors will have to explain any ‘challenging, subjective or complex’ judgments.” It’s an intriguing possibility, and we’re all for transparency. At the same time, we’re skeptical that this would radically change corporate governance or investor behavior. For one, US firms whose shares trade overseas already disclose this in their international reporting, so it isn’t like investors are getting any new information. It’s already available and priced in. Nor is there really any evidence European firms are run better or less prone to fraud than US firms. As the article notes, a change like this wouldn’t exactly prevent the next Enron. Then there is the little matter of most investors just not taking the time to read annual reports. This probably amounts to interesting fodder for equity analysts and not much more. But still, sunlight, yay.

By , Bloomberg, 08/18/2017

MarketMinder's View: While this overstates the 2015 shift in yuan pricing methodology by calling it a “surprise devaluation,” it is otherwise an insightful look at China and currency reform. Two years after said 2015 shift, the yuan looks stable, forex reserves are rising, and officials are murmuring about lifting some capital controls. Yet all this amounts to papering over the cracks. Chinese citizens are still funneling money out of the country, as evidenced by some customs bills shenanigans. Until Chinese officials address all the reasons why people and businesses are so desperate to move money offshore, fully freeing the currency would probably amount to economic suicide. The present currency regime isn’t perfect, but at least it preserves stability, buying time for deeper reforms.

By , The Wall Street Journal, 08/18/2017

MarketMinder's View: Interesting and worth keeping an eye on, but we aren’t so sure the impact is so widespread. While states can and do appropriate unclaimed assets—including brokerage accounts whose owners haven’t logged in for years—it isn’t something stock investors encounter often. But we guess it’s a nice reminder to log into your brokerage account if you’re one of those hands-off types who hasn’t signed in for a couple years.

By , Oil & Gas Journal, 08/18/2017

MarketMinder's View: Once upon a time, “peak oil” referred to the (mistaken) belief oil production would steadily decline as reserves ran out. The shale boom put that myth to bed, but a new “peak oil” sprang up in its place, this time referring to demand. Apparently someone forgot to tell oil consumers, because demand keeps rising. The chatter is quite disconnected from reality.

By , The Wall Street Journal, 08/18/2017

MarketMinder's View: Fire up some Pink Floyd or Bonnie Tyler, grab your NASA-approved glasses or camera obscura, and have a great Eclipse Day.

By , Bloomberg, 08/18/2017

MarketMinder's View: Yuuuuuuuuup. Volatility happens for any or no reason. Coincidence isn’t automatically causality.

By , RTT News, 08/17/2017

MarketMinder's View: The Conference Board’s Leading Economic Index (LEI) rose 0.3% m/m in July, marking its 11th straight monthly rise. Eight of 10 components increased, and one contracted (building permits). In particular, two of the most forward-looking indicators—the interest rate spread and ISM New Orders Index—contributed most to July’s positive figure. More than halfway into 2017, the US economy looks in fine shape for the rest of the year: a positive economic driver underpinning the global bull market.   

By , Bloomberg , 08/17/2017

MarketMinder's View: It seems the experts are (finally!) turning optimistic. As the chief economist at the IMF wrote, “Recent data point to the broadest synchronized upswing the world economy has experienced in the last decade.” We’d humbly suggest this growth has been going on for a while—the eurozone economy, for instance, has been expanding as folks still largely characterize it as a “recovery”—but it is promising to see some animal spirits starting to stir a bit. That said, we wouldn’t say growth is universally broad-based or gangbusters. Even though recent data show a pickup in Japanese domestic demand, the country still remains reliant on exports—and growth prospects aren’t robust given long-running structural issues. Still, optimism about the global economy is warranted, in our view, and it can run on for a while—a reason to be bullish for global markets.       

By , The Independent, 08/17/2017

MarketMinder's View: First, the facts: Retail sales volumes rose 0.3% m/m in July, matching June’s growth rate. Food sales jumped 1.5% m/m (vs. June’s -1.1%), while all other major sectors declined. Some context on the declines: The sales for the “predominantly non-food stores” sector (which includes non-specialized stores, textiles, clothing and footwear, household goods and other stores) fell just -0.1% m/m. Considering “predominantly non-food stores” (42.1%) and “predominantly food stores” (39.8%) comprise more than 80% of retail sales’ weighting, it seems like the gauge overall did fine in July. Now, contrast the numbers with the responding media coverage: This piece says retail sales were “weak again in July, reflecting the hit to spending power from spiking inflation and fragile household confidence that is marking the build-up to Brexit.” Other outlets report, “It’s hard to escape the feeling that there may be dark clouds on the way.” Yet the ONS’s senior statistician said in the July report that, “The underlying trend at the beginning of 2017 showed a relatively subdued picture in retail sales … Whilst the overall growth is the same as in June, trends in growth in different sectors are proving quite volatile.” That sounds about right to us—retail sales are indeed volatile, and reading too much into any one report isn’t very telling. What’s more telling is that media remain dour about UK consumers’ prospects, despite the data showing a solid overall reality.      

By , Bloomberg, 08/17/2017

MarketMinder's View: A bevy of articles have recently warned household debt surpassing 2008 highs is something very scary. We have addressed why big numbers in isolation aren’t worrisome in our “Headlines” section this week, but here is a sensible analysis that would make Darrell Huff (author of How to Lie With Statistics) proud: “A single number seen in isolation might score some clicks, but it doesn’t help the average person understand the data. This ‘denominator blindness,’ as we have called it before, is the failure to put large numbers into the appropriate context. When the Big Risk Fund loses $100 million; when Large Corp. cuts 1,000 jobs; or even when the Old Index loses 100 points, the lack of any frame of reference for those single numbers creates a misleading narrative.” Because, as this piece shows later on, the ability to service that debt is pretty healthy overall: “The quality of borrowers is much higher; debt-to-income ratios are much lower; if anything, the banks have tightened too much, denying credit to borrowers who would meet traditional lending standards.”   

By , The New York Times, 08/17/2017

MarketMinder's View: It seems some Fed people are starting to question whether their underlying assumptions about what drives inflation are correct. Their model is built on a presumed link between unemployment and prices, presuming when there is no slack in the labor market, wages and prices must rise in tandem. Milton Friedman and others soundly debunked this in the late 1960s, but we guess Congress missed the memo when they passed 1977’s Humphrey-Hawkins Act that established the Fed’s dual mandate. All evidence shows inflation is a monetary phenomenon of too much money chasing too few goods, with money supply tied largely to lending and thus the yield curve. As Friedman showed, when employers try to lure workers with higher wages, they take inflation into account—they compete on real (inflation-adjusted) wages, not nominal. So to believe in a wage-price spiral is to believe inflation begets inflation. We’re keen to see whether Fed folk keep questioning this and eventually get back to the yield curve, which has been apparently absent from their analysis for years now.

By , Project Syndicate, 08/17/2017

MarketMinder's View: We have been reading many retrospectives about the “lost” lessons and “wasted” opportunities following the Financial Crisis, which will fairly soon celebrate its 10th anniversary. We agree there is a lost lesson, but we haven’t seen anyone in the mainstream media discuss it. That lesson: The Financial Crisis resulted from the unintended consequences of FAS 157—the mark-to-market accounting rule—that ended up destroying about $2 trillion in bank capital because it was misapplied to illiquid, hard-to-value assets that banks never intended to sell. Without the misapplied rule, 2008 would likely have looked very different. However, many experts continue pushing other narratives, like the structural flaws of an economy’s growth model. This piece, for example, suggests advanced economies are too reliant on financial institutions to provide liquidity and leverage, leading to inevitable busts. The prose is dense, but we interpreted it to be an argument against fractional reserve banking and venture capital. But where does growth come from if not from risk-takers, whether financial or entrepreneurial? What system will better reward and encourage all the things that lead to growth better than a market-driven financial system? Will politically motivated governments really direct capital better? All available historical evidence says No. For more on mark-to-market and the Financial Crisis, see Elisabeth Dellinger’s column, “This Is Not the Financial Crisis’s 10-Year Anniversary.”

By , The Wall Street Journal, 08/17/2017

MarketMinder's View: First, we are fans of the upfront, clear takeaway: “Economic expansions don’t die of old age—they go on until something kills them.” While we happen to largely agree with that statement, as writers, we also appreciate the brevity. As for the rest of the argument, we have some minor quibbles. For one, it gives oil shocks too much credit for recessions in the early and late 1970s (ignoring monetary policy and the fallout from Nixon’s price controls). Two, it seems to misinterpret bear markets as recession causes, rather than recession warnings—stocks are leading economic indicators. But the broader thesis and discussion of central banking—and explanation of why rate hikes needn’t kill this expansion—are largely fine.


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Global Market Update

Market Wrap-Up, Tuesday, August 22, 2017

Below is a market summary as of market close Tuesday, August 22, 2017:

  • Global Equities: MSCI World (+0.7%)
  • US Equities: S&P 500 (+1.0%)
  • UK Equities: MSCI UK (+0.3%)
  • Best Country: USA (+1.0%)
  • Worst Country: Italy (-0.6%)
  • Best Sector: Information Technology (+1.3%)
  • Worst Sector: Real Estate (+0.0%)

Bond Yields: 10-year US Treasury yields rose 0.03 percentage point to 2.21%.


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.