Ireland finally came around to a global minimum tax plan that G7 and G20 nations hope will combat tax evasion and standardize rules across the world. The country will give up its treasured 12.5% corporate tax rate by joining a group of 140 nations that have agreed to an effective levy of 15% on major multinationals. The new rate will affect 1,556 companies in Ireland employing 500K people, including tech giants like Apple (NASDAQ:AAPL), Google (GOOG, GOOGL), Amazon (NASDAQ:AMZN) and Facebook (NASDAQ:FB), and will end up costing the country about €2B in lost revenues.

What happened? Dealmakers crossed out two words that changed the country’s mind. The initial text mentioned a minimum corporate tax rate of “at least” 15%, but that was updated to just 15%, meaning the rate wouldn’t be pushed up at a later date. Ireland was also given assurances that it could keep its lower rate for smaller companies operating in the country, ahead of an OECD meeting in Paris this weekend.

“In joining this agreement, we must remember that there are 140 countries involved in this process and many have had to make compromises,” said Paschal Donohoe, Ireland’s Finance Minister. “This is a difficult and complex decision but I believe it is the right one.” Over the past five years, hi-tech companies have accounted for the majority of Ireland’s €5B-€7B/year in foreign direct investment.

The last remaining holdout for the deal in the EU is Hungary, after Estonia joined Ireland on Thursday in signing up to the accord. Over in the U.S., President Biden and Treasury Secretary Janet Yellen are also on board, though they face challenges of getting the agreement through Congress. The changes could require the Senate to alter existing tax treaties, which would take a two-thirds vote and at least some GOP support. Republicans have already expressed opposition to any rise in taxes, while some lawmakers have condemned the idea of ceding taxing authority to other governments.

 

US Economy

 

  • New unemployment claims remain elevated, running near 2012 levels.
  • Some are calling for the US Treasury to issue a trillion-dollar coin and deposit it at the Fed, which would certainly “avoid” default (MMT on steroids).

 

 

  • Continuing claims declined sharply after most emergency benefits were terminated
  • Consumption declined faster through July in states that ended enhanced unemployment insurance (UEI) early. Will we see an even bigger “income cliff,” after most other states terminated these benefits in September?
  • Consumer spending increased in August, running well above the pre-COVID trend.
  • Car sales slumped in recent months, with the September figure coming in below consensus.
  • The September ISM manufacturing PMI surprised to the upside as orders remain robust.
  • Supplier bottlenecks are holding near extreme levels.
  • Factory orders continued to climb in August.
  • Capital goods orders and shipments were adjusted higher, pointing to robust business investment.
  • The ISM manufacturing PMI continues to show a gap between the new orders and production indices. Supply bottlenecks are increasingly holding back factory output.
  • Manufacturers are building larger-than-normal inventories to deal with shortages. The just-in-time (JIT) inventory management method has gone out the window.
  • China’s factory activity tends to lead the US, pointing to moderation in American manufacturing growth ahead.

 

 

  • Retailers are struggling to maintain sufficient inventories.
  • Residential and non-residential construction spending trends continue to diverge.

 

 

  • Mortgage applications have been resilient despite higher housing prices. But housing activity will see a pullback if Treasury yields rise further.
  • The Atlanta Fed’s GDPNow model forecast for the third-quarter GDP growth continues to sink.

 

 

  • The ADP private payrolls report surprised to the upside with all major sectors gaining jobs last month.
  • The upbeat ADP report and the debt ceiling reprieve (albeit temporary) sent the market-based probability of two Fed rate hikes next year to the highest level since June.
  • The reversal of the pandemic fiscal impulse will be a drag on the GDP next year.

 

 

  • The US Senate approved a short-term increase in the debt ceiling, raising the level by $480 billion. The timing was critical because the US Treasury’s cash balances hit the lowest level since 2017.

 

 

  • But the 480-billion boost will not last long, and the markets will face the same predicament in early December. There is a large T-bill maturing on December 9th.
  • The Philly Fed’s regional manufacturing survey (leading vs. lagging components) leads the broader ISM index. And right now, it is flashing a significant drop in early 2022.

 

 

  • The 2020 recession was the shortest on record, but it was not a normal recession. It was government-induced late in an aging business cycle. And due to government interference, the recovery out of that decline happened very quickly, and therefore we cannot treat it as a normal recession.
  • A recession normally clears the system from excesses that have been built up previously in an expansion that has not materialized. This time, the excesses are still there, and they are bigger than before.
  • Therefore, this recovery is going to be a bumpy one and incomparable to the normal recoveries coming out of recessions—that’s the first point.

Louis Gave (CEO of Gavekal Research) gave his thoughts:

As soon as bond yields start to rise in the next little mini cycle in 2023 and 2024, the cyclical bear market in stocks will begin. And around the middle of this decade, we will fall back into a serious global recession.

In this scenario, as soon as governments, and particularly the US government, becomes more aggressive again on the fiscal and monetary side, he thinks that will be the beginning of the next big leg down in the US dollar, and that will have a detrimental effect on the bond market, and it will be very bullish for gold, and the commodity sector.

 

Commercial Real Estate

 

Commercial real estate is going through changes. This chart shows the percentage of office space currently available for lease in some top metro areas. But this is just a snapshot in time, not the whole story.

 

 

Houston already had high vacancies before the pandemic because it was still recovering from the 2015 oil bust. It increased only slightly in the last year or so. Los Angeles, Chicago, and Washington also had fairly mild office vacancy growth. The story is quite different in San Francisco, Seattle, and Manhattan. All three saw sharply higher average availability since early 2020. Why? Possibly because they have high concentrations of technology and financial jobs that can be done remotely. Workers who had the opportunity to work from home seem to have liked it and have little interest in returning to the office. Competition and a tight labor market prevent employers from forcing the issue. So it appears for many companies, work from home will become a permanent change. That’s bad news for office building owners and possibly their lenders, too.

 

Friday’s Jobs Report

 

September’s jobs report was supposed to show a gain of 500,000 jobs last month. It was actually just 194,000. The headline unemployment rate fell to 4.8% instead of the expected 5.1%, while the fuller measure is 8.5%. Those numbers are partly because of upward revisions to previous jobs reports (good news), but also primarily because at least five million people are now permanently out of the workforce (bad news). They’re not even looking for work, which leaves them out of the report.

Where are all the workers? The U.S. economy, after 18 months of 15 days to slow the spread, still has five million fewer workers than in February 2020. Nearly three million people have been out of work for at least six months. Enhanced unemployment benefits finally ended everywhere last month, and employers are sharply raising wages and offering all kinds of other benefits in a bid to retain and attract workers. Yet there are nearly 11 million job openings.

What gives?

It could be that the COVID Delta surge played a role. Much of the country saw increased cases and deaths, and there was some policy regression that hindered job growth. According to Indeed, a job-search website, survey respondents’ number one reason for avoiding the workforce is fear of catching COVID.

Perhaps a lot of these missing workers are parents staying home with kids who can’t go to school. Whether schools have been shuttered entirely or on a “hybrid” system of going to school only on some days of the week, parents — many of them single moms — are left with young kids at home and thus are unable to return to work.

Pres Biden in July began incentivizing parents with his new program of sending parents direct payments for the child tax credit. That’s one of government benefits that make staying home and out of the workforce more doable.

Businesses are desperate for workers, but company after company, hospital after hospital, is firing unvaccinated workers, regardless of natural immunity or any other consideration. Those newly unemployed folks offset some gains.

The economy runs on people, and without people working, it sputters. Massive disruptions in the supply chain are largely caused by a lack of workers. This makes the products that are available more expensive — i.e., inflation.

A new report on inflation, which is at a 30-year high since Pres Biden took office and was 5.3% in August, estimates that higher prices are costing the average family an extra $175 per month. This is largely because grocery bills have skyrocketed and gas prices just hit a seven-year high. That spending blows a major hole in most family budgets, and millions are having a hard time making ends meet.

“The Federal Reserve has argued that inflation will recede to just above its 2% target by 2022,” reports The Wall Street Journal. “Nonetheless, Fed Chairman Jerome Powell, asked last week whether inflation is now broader and more structural than earlier this year, responded, ‘Yes, I think it’s fair to say that it is.'”

 

Energy

 

European energy prices have gone vertical. These unprecedented market moves will scar European and global economies by squeezing corporate margins and ultimately cutting into households’ disposable incomes and sentiment.

  • Natural gas:

 

 

  • Coal:

 

 

  • Electricity price in Spain:

 

 

  • Russia has been producing more natural gas than usual.

 

 

  • But Gazprom’s storage sites in Western Europe are running empty.

 

 

 

  • US natural gas futures are soaring as well, taking out the 2014 peak.

 

 

  • Brent crude is trading near $83/bbl.

 

 

China

 

  • Power rationing is now widespread in China.

 

 

  • Tech shares continue to struggle in Hong Kong.

 

 

  • China’s housing market was already slowing before the Evergrande fallout hit the newswires.

 

 

  • The leveraged developers’ credit contagion is spreading.

 

 

  • Fantasia’s bond prices collapsed.

 

 

  • Sunac’s bond price continues to sink.

 

 

  • Many developers already defaulted this year.

 

 

  • Chinese tightening earlier in the year could cause a significant deceleration in global growth at the end of 2021.

 

 

 

Evergrande is collapsing not in spite of the government’s wishes but because the government decided to let it fail.

China is losing its role as the world’s lead manufacturing exporter. Government policies aren’t helping. The apparent 40–50 year pattern in which a nation takes on this role then loses it. The US did so in the 1890s, then it was Japan, and China since the 1980s.

This process seems to be built into modern capitalism. There is a hunger for low-price manufactured products by wealthy countries that can no longer afford to produce them. Why does the cycle take 40 years? I have no explanation. It could be coincidence if there were only three cases. Or there could be some structural cause. But it is there, and it seems to be reaching its terminal stage in China.

The end of this period is traumatic. The US marked it with the Great Depression, and Japan with its 1990s downturn, but both countries adapted and recovered. We expect the same for China.

Another country we never expected will take its place, and then we will claim to have always known it was there.

 

Market Data

 

  • Stock investors’ focus is primarily on Treasury yields
  • Americans believe that, aside from their financial advisor, they or their partner are the best sources of financial guidance. Dead last are financial professionals in the media.

 

 

  • Treasuries are headed for their first annual loss since 2014.

 

 

  • Growth stocks remain under pressure amid jitters about bond yields.
  • The tech sector’s drawdown is still relatively modest, -7.26%.
  • The valuation gap between growth and value stocks remains near extremes.
  • By the way, here is the ARK Innovation ETF overlaid on top of the dot-com bubble.

 

 

  • Emerging Market equities are linked to the dollar and US equity returns.

 

 

  • Here are some of the biggest drawdowns among recent IPOs (globally).

 

 

  • The S&P 500 has gone 23 trading days without setting a new high, it longest stretch in over 200 days, the 2nd-longest in history.
  • Companies with substantial sales in China are widening their underperformance.
  • Buybacks are making a strong comeback, becoming a tailwind for stocks.
  • US equities have been outperforming EAFEfor the longest time since the 1990s.
  • The S&P 500 suffered its longest pullback in over 200 days. High inflation remains a concern, and emerging market central banks are raising rates.

 

Thought of the Week

 

Obstacles are what you see when you take your eye off your goals.

 

Pictures of the Week

 

 

 

 

 

 

All content is the opinion of Brian J. Decker