David Fuller and Eoin Treacy's Comment of the Day
Category - General

    Goodbye EU, Goodbye Austerity Britain

    The era of so-called austerity economics was characterised by modest increases in overall public spending, some unpleasant individual cuts to welfare and huge increases in tax revenues. The rise and rise of our gross and net contributions to the EU aggravated the balance of payments deficit and forced us to borrow more money to meet the demands of Brussels. The sooner we are out of the EU, the sooner we can cancel the contributions. The need for large tax revenues sometimes encouraged the imposition of high taxes that damaged growth and hit jobs. Sometimes raising the rates acutely reduced the tax take. Higher stamp duties hit the property market, while income tax from the rich went up when the rate was brought down a bit.

    Leaving the EU is a sovereign decision by a newly sovereign people. It is not something to negotiate with Germany. Offer to continue tariff-free trade, send them the letter and then leave. It should not take two years and does not need to. The rest of the EU are likely to want to carry on with tariff-free trade as they have more to lose from tariffs than us. All services are tariff-free whatever happens, under world rules.

    Of course, after we leave we need to continue payments to farmers, universities and others who did get a bit of our EU money back, though most of it did not come home. We can now spend it on our own priorities. But we should not simply use the savings to cut the deficit. We need to get that down by promoting growth. Growth slashes the gap between spending and tax revenues by cutting the need for benefit top-ups as people get jobs and pay rises while boosting the tax revenues as people earn and spend more.

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    American Exposure to the European Financial Crisis

    Thanks to a subscriber for this report from Geopolitical Futures which may be of interest to subscribers. Here is a section:

    The locus of the 2008 financial crisis was in the United States, and rapid decision making was possible, even if the decisions made were controversial—then and now. The locus of the crisis we are describing will be in Europe, and the greater American exposure to Europe, the greater American pressure will be on Europe to act decisively. Since Europe seems incapable of rapid decision making, this could create a collision with the United States. 

    Ultimately, the US is not appreciably exposed directly to the Italian banking crisis. However, the US is deeply exposed to other major Western European countries, particularly France and Germany. The Italian crisis will have deep ramifications, especially for these two countries, and that in turn means that, indirectly, the US economy will feel significant effects from the overall crisis. Looming over it all is the question of derivatives, a question that is all the more ominous because its answer is ambiguous at best. Indirect evidence suggests that this is worse than what the official numbers say, but not so severe as to put the US directly in the path of the coming storm.

    In our view, the US will be something of an on-looker this time. While the US will certainly feel the effects of a deeper crisis in Europe, European uncertainty in its response will not create a subsequent political crisis between the US and the EU. Still, the possibility should be borne in mind, depending in large part on how hard the American financial system is hit. Even minor pain and anxiety could cause the US to find the European approach intolerable. Financial crises of this magnitude are not solved by markets but by political systems, which are sensitive to these crises in very different ways than the financial system. 


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    Beyond Algiers

    Thanks to a subscriber for this report from Goldman Sachs which was issued on the 27th, ahead of the OPEC meeting. Here is a section: 

    Nonetheless, our 4Q16 oil supply-demand balance is weaker than previously expected given upside surprises to 3Q production and greater clarity on new project delivery into year-end. This leaves us expecting a global surplus of 400 kb/d in 4Q16 vs. a 300 kb/d draw previously. Importantly, this forecast only assumes a limited additional increase in Libya/Nigeria production of 90 kb/d vs. current estimated output. As a result, we are lowering our 4Q16 forecast to $43/bbl from $50/bbl previously. While a potential deal could support prices in the short term, we find that the potential for less disruptions and still relatively high net long speculative positioning leave risks skewed to the downside into year-end. Importantly, given the uncertainty on forward supply-demand balances, we reiterate our view that oil prices need to reflect near-term fundamentals – which are weaker – with a lower emphasis on the more uncertain longer-term fundamentals.

    Despite a weaker 4Q16, our 2017 outlook is unchanged with demand and supply projected to remain in balance. We expect demand growth to remain resilient while greater than previously expected production declines in US/Mexico/Venezuela/ Brazil/China are offset by greater visibility in the large 2017 new project ramp up in Canada/Russia/Kazakhstan/North Sea. While our price forecast remains unchanged at $52/bbl on average for next year with a 1H17 expected trading range of $45- $50/bbl, we continue to view low cost and disrupted supply as determining the path of an eventual price recovery with our forecasts conservative on both. As we wait for headlines from Algiers, it is worth pointing out that Iran, Iraq and Venezuela have each guided over the past month to a 250 kb/d rise in production next year.

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    D-Wave Systems previews 2000-qubit quantum processor

    This press release from D-Wave Systems may be of interest to subscribers. Here is a section:

    “As the only company to have developed and commercialized a scalable quantum computer, we’re continuing our record of rapid increases in the power of our systems, now up to 2000 qubits.  Our growing user base provides real world experience that helps us design features and capabilities that provide quantifiable benefits,” said Jeremy Hilton, senior vice president, Systems at D-Wave. “A good example of this is giving users the ability to tune the quantum algorithm to improve application performance."

    “Our focus is on delivering quantum technology for customers in the real world,” said Vern Brownell, D-Wave’s CEO. “As we scale our processors, we’re adding features and capabilities that give users new ways to solve problems. These new features can enable machine learning applications that we believe are not available on classical systems. We are also developing software tools and training the first generation of quantum programmers, which will push forward the development of practical commercial applications for quantum systems.

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    OPEC Agrees to First Oil Output Cut in Eight Years

    OPEC agreed to a preliminary deal that will cut production for the first time in eight years. Oil prices gained more than 6 percent as Saudi Arabia and Iran surprised traders who expected a continuation of the pump-at-will policy the group adopted in 2014.

    The group agreed to drop production to a range of 32.5 to 33 million barrels per day, said Iran’s Oil Minister Bijan Namdar Zanganeh, following a meeting in Algiers. While some members of OPEC will have to cut output, Iran won’t have to freeze production, he said. Many of the details remain to be worked out and the group won’t decide on targets for each country until its next meeting at the end of November.

    The lower end of the production target equates to a nearly 750,000 barrels-a-day drop from what OPEC said it pumped in August.

    The deal will reverberate beyond the Organization of Petroleum Exporting Countries. It will brighten the prospects for the energy industry, from giants like Exxon Mobil Corp. to small U.S. shale firms, and boost the economies of oil-rich countries such as Russia and Saudi Arabia. For consumers, however, it will mean higher prices at the pump.

    "The cut is clearly bullish," said Mike Wittner, head of oil-market research at Societe Generale SA in New York. "What’s much more important is that the Saudis appear to be returning to a period of market management."

    The agreement also signals a new phase in relations between Saudi Arabia and Iran, which have clashed on oil policy since 2014 and are backing opposite sides in civil wars in Syria and Yemen. The deal indicates that Riyadh and Tehran, with the mediation of Russia, Algeria and Qatar, were able to overcome the differences that sunk another proposal to cap production earlier this year.

    Brent crude surged as much as 6.5 percent to $48.96 a barrel in London. The shares of Exxon Mobil, the world’s largest publicly listed oil company, climbed 4.2 percent, the biggest one-day increase since February.


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    Mad Economic Plans of the Labour Party Would Ruin Britain

    If anything, John McDonnell, Labour’s shadow chancellor, was controlling himself, restraining his more extreme instincts. He didn’t actually call for the nationalisation of all of the economy, or the introduction of compulsory wage equality, or 90pc tax rates; instead, he tried his best to sound moderate. It didn’t work. His programme is ruinous, backward-looking and economically illiterate. 

    True, the Confederation of British Industry managed to put out a mealy-mouthed, painfully laboured press release which wasn’t entirely hostile. But the bottom line remains that a Labour government led by the re-elected Jeremy Corbyn, McDonnell and their hard-left allies would be a disaster for the economy and for business.

    He wants to massively increase public spending, dramatically increase government intervention, introduce a Seventies-style industrial strategy with real teeth, decide what parts of the economy are legitimate and which need to be shut down, hike the minimum wage further and faster, and tax wealth. 

    It would be a recipe for calamity, a financial and social catastrophe, a negative productivity shock of the like we haven’t seen since – yes, you’ve guessed right – the Seventies. Those companies still reeling from the Brexit vote need to realise that it is Corbyn’s Labour, not our imminent departure from the EU, that is the real enemy.

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    Erdogan Adviser Says Turkey Should Consider Buying Deutsche Bank

    Here is the opening of Bloomberg’s report on this provocative comment from Turkey:

    Deutsche Bank AG’s crashing share price is prompting takeover speculation from unexpected places. 

    Yigit Bulut, a chief adviser to Turkish President Recep Tayyip Erdogan, said the country must consider using a new wealth fund or a group of state-owned banks to buy the Frankfurt-based company. Bulut made the proposal on Tuesday via his Twitter account, saying Germany’s largest lender should be made into a Turkish bank.

    The stock of Europe’s biggest investment bank has slumped by more than 50 percent over the past year, falling to a record low on Tuesday, over concerns about its weakening financial position and penalties in the U.S. tied to mortgage-backed securities. Bulut’s comments come after Moody’s Investors Service on Sept. 23 cut Turkey to junk, citing slowing economic growth and deteriorating credit fundamentals.

    "For months on TV programs, I’ve been calling on Turkey’s private and public capital: ‘Some very good companies in the EU are going to fall into trouble and we need to be ready to buy a controlling stake in them,’” Bulut wrote on Twitter. "Wouldn’t you be happy to make Germany’s biggest bank into Turkish Bank!!"

    The suggestion may ignite political opposition in Germany, where Deutsche Bank -- for all its troubles -- has long been viewed as a national champion and has played an integral role in Germany’s economy.


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    The UK is the Seventh Most Competitive Economy in the World

    Here is the opening of this interesting article from City A.M.

    The World Economic Forum (WEF) said the UK had overtaken Hong Kong, Japan and Finland to climb three places in this year’s global competitiveness index, more than reversing last year’s embarrassing fall to 10th place.

    The WEF hailed the UK’s strong digital landscape, world-leading institutions and infrastructure, along with its business-friendly regulation and strong connections to the international economy as powering the UK’s climb up the rankings.

    The scores are an amalgam of 114 individual measures the WEF believes contributes to the competitiveness of an economy. These range from the macroeconomic environment, education systems and healthcare to business regulation, employment systems and technological penetration.

    Switzerland maintained its place at the top of the rankings, with Singapore and the United States completing the top three. The Netherlands, Germany and Sweden were the only other European economies to rank as more competitive than the UK.

    The WEF found the UK had the third most “technologically ready” economy in the world, with new technologies widely available, and some of the best internet coverage on the planet. The UK also has the second best management schools in the world, the second-most advanced advertising industry, strong intellectual property rights and scored top for foreign ownership of companies.

    Chancellor Philip Hammond said the results “demonstrate our ability to sharpen our edge and improve our competitiveness.”

    He added: “This government will build on that progress, as we demonstrate to the world that Britain continues to be highly competitive and open for business.”

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    Questor Share Tip: Buy [This Share], Owned by Four Top Managers With Skin in the Game

    When it comes to financial performance, we follow the advice of those professionals who say the most important measures are return on capital, the ability to deliver profits in hard cash rather than as a notional figure that derives from complex accounting techniques, and low debt. 

    The best growth comes from those companies that can produce these high cashflows from their assets and then reinvest that money in new assets at similar rates of return. Any business that can do this reliably over the long term will deliver a strong compounding effect and should reward shareholders handsomely.

    The only instance where such a company will not deliver for shareholders is when the shares were bought at too high a price. As a valuation yardstick, we will look at the much-loved price-earnings (p/e) ratio.

    Among the professional investors who focus on return on capital, cash generation and low debt are Terry Smith of Fundsmith, Nick Train of Lindsell Train, Sebastian Lyon of Troy Asset Management and Hugh Yarrow of Evenlode.  

    Mr Smith founded Fundsmith and has a large stake in his flagship Fundsmith Equity fund, while Mr Train co-founded the firm he works for and has a multi-million-pound holding in the Finsbury Growth & Income investment trust, which he manages.

    Mr Lyon has a similarly large stake in his Personal Assets investment trust. The family of Hugh Yarrow, manager of the Evenlode Income fund, owns a large slice of the management company.

    All can therefore be said to have significant “skin in the game” – and all four of the portfolios mentioned own a stake in today’s tipped share, 

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