Eoin Treacy's view

A link to today's video commentary is posted in the Subscriber's Area. 

Some of the topics dicussed include: Fed tees up an interest cut, gold closes above $1350, stock and bonds firm, Dollar weak, downward pressure on interest rates increases the potenital for a bubble to evolve. 

While inflation near the goal and a strong labor market are the most likely outcomes, “uncertainties about this outlook have increased,’’ the Federal Open Market Committee said in the statement following a two-day meeting in Washington. “In light of these uncertainties and muted inflation pressures, the Committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion.”

The FOMC vote was not unanimous, with St. Louis Fed President James Bullard dissenting in favor of a quarter-point rate cut. His vote marked the first dissent of Powell’s tenure as chairman.

Policy makers were starkly divided on the path for policy. Eight of 17 pencilled in a reduction by the end of the year as another eight saw no change and one forecast a hike, according to updated quarterly forecasts.

In the statement, officials downgraded their assessment of economic activity to a “moderate” rate from “solid” at their last gathering.

The pivot toward easier monetary policy shows the Fed swinging closer to the view of most investors that President Donald Trump’s trade war is slowing the economy’s momentum and that rates are too restrictive given sluggish inflation.

Eoin Treacy's view

This statement tees up a rate cut in July. That is what the bond market has been pricing in and it got confirmation of that assumption today. Investor focus will now turn to the expectation that another cut will follow in September.

When we contemplate the market’s assessment of commodities versus stocks, we find the former, which includes oil and gas, to be at the lowest valuation point in at least 50 years.  Does this mean that the commodity market it being disrupted?  Peak valuation points occurred in 1973-74, 1990 and 2008.  Each peak was associated with spikes in oil prices caused by geopolitical events such as the Arab Oil Embargo, the First Gulf War and the Global Financial Crisis, which happened as oil prices traded in excess of $100 per barrel.  Likewise, each low has been associated with low oil prices – either absolute lows, or lows below more recent oil price ranges.  

With respect to the low points in the valuation of commodities versus stocks, the prior two lows were marked by excess stock market speculation about super-growth stock future earnings.  The 1998-99  Dot.com Bubble, which saw companies brought public with barely any revenues and no earnings, but lots of “eyeballs” on web sites or clicks on shopping sites, happened to also be associated with oil prices falling to $11 per barrel as the Asian currency crisis unfolded and a brief global recession occurred.  The 1970-73 low was marked by the market bubble created by the Nifty-Fifty growth stocks, as price-to-earnings ratios for these 50 super-growth companies soared to ratios in excess of 50 times next year estimates for earnings per share.  Of course, two energy service companies – Schlumberger Ltd. (SLB-NYSE) and Halliburton Companies, Inc. (HAL-NYSE) – were part of this Nifty-Fifty stock group.  Crude oil prices at that point were in the $3 per barrel range, and there was a battle brewing between the seven largest global oil companies that ruled the international oil business and the Organization of Petroleum Exporting Countries over the value of a barrel of oil for tax and royalty calculations.  That tax battle lit the fuse that exploded after the Yom Kippur War involving Israel and Egypt in 1973, leading to the Arab Oil Embargo and the explosion in global oil prices.  

Eoin Treacy's view

A link to the full report is posted in the Subscriber's Area.

This ratio has been doing the rounds of pundit commentary for the last couple of years because commodities are trading at a such a record low level relative to stocks. Jeff Gundlach in particular has been predicting a resurgence in commodity prices because of their relative discount to stocks and one of the reasons private equity has been so interested in the energy space is because of the relative discount to equities on offer, coupled with the prolific production profiles (and early payback) of unconventional wells.

I am enjoying the commentary as usual. 

I had two questions for which I would be grateful for your opinion:

I don't understand why gold should be priced differently in different currencies. One would have thought that the market would arbitrage out the differences. 

The second one is more general and applies to looking at long term trends such as that for oil versus the stock market. Could it not be argued that technology changes such as the advent of green energy or electric cars or indeed new modes of producing oil (fracking, oil sands etc) render these charts ineffective as predictors of future price action?

I thank you and look forward to hearing from you in due course. 

Eoin Treacy's view

Thank you for these questions which I’m sure will be of interest to other subscribers. Gold is a commodity and subject to supply and demand fundamentals just like everything else but it is also a monetary metal. That means it tends to trade more like a currency than a commodity.

The figures come a day before the BOE’s latest policy decision. As many central banks around the world shift into a more dovish mode, U.K. officials have been trying to push in the other direction, repeating a message that interest rates may have to rise more than the market currently anticipates if there’s a smooth Brexit.

Investors haven’t taken much heed given the continuing uncertainty over Britain’s exit from the European Union. Certainly in the short term, the latest inflation figures give policy makers breathing space to wait and keep interest rates on hold.

The BOE expects inflation to fall back below target this year. In May, it forecast that price growth would average 2.1% this quarter, easing to about 1.6% by late 2019.

Eoin Treacy's view

The Bank of England is protective of its independence, especially amid the continued contentious discussion about the merits or otherwise of Brexit. Nevertheless, with central banks all over the world signalling a willingness to cut rates, it seems foolhardy of the Bank of England to continue to signal its willingness to raise rates.

Eoin Treacy's view

Details of this trade are posted in the Subscriber's Area. 

Eoin Treacy's view

There will be a memorial concert for David at the Royal Festival Hall on October 5th. It looks like we will have a room at the Royal Festival Hall for an hour before the concert for a memorial. Wine and canapes will be served. Afterward we will retire to the Benefactor's Lounge where Tim Walker, Chairman of the LPO will dedicate the concert in David's memory. The concert will be from 7:30 to 10pm. If anyone would like to attend the concert in addition to the memorial there will be a box to tick on the booking form which I will provide as soon as I have it.   

Since this is the 50th year of The Chart Seminar we will be conducting the event on October 3rd and 4th to coincide with the memorial on the Saturday.

In the meantime, if you have any questions, would like to attend, or have a suggestion for another venue please feel to reach out to Sarah at sarah@fullertreacymoney.com.  

The full rate for The Chart Seminar is £1799 + VAT. (Please note US, Australian and Asian delegates, as non-EU residents are not liable for VAT). Annual subscribers are offered a discounted rate of £850. Anyone booking more than one place can also avail of the £850 rate for the second and subsequent delegates.