Daily Commentary

MarketMinder’s View: First, this article mentions a few individual German firms, so please note that MarketMinder doesn’t make individual security recommendations. But above and beyond this, the article documents March’s -0.4% m/m decline in German factory orders, much worse than the expected 0.4% rise. The piece bemoans this as a sign heavy industry-dominated Germany faces headwinds to growth, despite a recovery in the country’s services industry. But here is the thing: Yes, areas of manufacturing are weak. But Destatis, Germany’s statistics office, noted that this decline was centered in orders for aircraft, ships and trains, which tumbled -2.3% m/m. Excluding these, orders rose 0.1% m/m, with the auto industry rebounding (up 1.1%). But more importantly, Germany isn’t nearly as heavy industry-dominated as this article or its reputation implies. Per the World Bank, manufacturing constituted 18% of German GDP at 2022’s close (the most recent figure). Add in construction, and you get to 27%. Services are 63%. So the point here: Yes, heavy industry faces some headwinds, but they are a) well known, b) not as strong as feared and c) affect a smaller slice of the German economy than people think. There is a lot of room here for reality to surprise positively, much as growth did in Q1.

MarketMinder’s View: This article details tax changes proposed in the Biden administration’s budget proposal, and perhaps the most noteworthy tidbit is the titular change in policy towards IRAs. The plan would force a required minimum distribution on IRAs exceeding $10 million—specifically, a requirement to withdraw 50% of the value exceeding that mark—regardless of the holder’s age. It would also cap IRAs at $20 million and bar Roth conversions of any size for taxpayers with $400,000 in adjusted gross income. The article alleges these moves would be a huge boon to the Treasury, given traditional IRA withdrawals are taxed at ordinary income rates, which may even rise if the 2017 tax cuts aren’t extended. Maybe, but we think this rather overlooks the fact such large IRAs are very rare animals. And, most significantly, this kind of legislation has next to zero chance of passing in this Congress. Sure, if the Democratic Party sweeps the elections in November with decent majorities, it could pass. But that is a mere possibility at this point, and one that doesn’t look all that likely to us, given the makeup of the Congressional elections. At any rate, don’t hold your breath that this becomes law, which you can pretty much say about most US budget proposals in the last decade-plus.

MarketMinder’s View: In an updated report, the government now estimates Medicare and Social Security will have sufficient funds to pay full benefits through 2036 and 2034, respectively, as tax collections outpaced estimates and Medicare expenses were far lower than projected. For Medicare, this is a full five years(!) beyond previous estimates, while the revised Social Security figure (one year later than thought) simply returns the projection to where it was a couple years ago. Look, this is fine news, but we think some perspective is needed here: One, the “go-broke date” doesn’t mean the funds can’t pay any of their expenses. It means they are expected to have sufficient funding to pay 89% and 83% of forecast expenses, respectively. But also, there are a wild number of variables that affect these forecasts and can drive volatility like these revisions, including: Economic growth rates, immigration, inflation and more. Furthermore, it may not happen tomorrow, because Congress usually waits until the last minute, but we strongly suspect it will eventually pass legislation to either raise taxes, adjust benefits or otherwise stabilize these programs beyond the mid-2030s. Talk about this being an untouchable third rail overrates things. It hasn’t been touched in 40 years because Congress didn’t need to touch it, and politics is as myopic as the world gets, in our view. Why would politicians do something potentially controversial when they don’t have to? That is the attitude we think is common in DC.