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

    The World Turned Upside Down

    Thanks to a subscriber for this edition of John Mauldin’s note which may be of interest. Here is a section:

    * the excess liquidity provided by the world’s central bankers,
    * serving up a virtuous cycle of fund inflows into ever more popular ETFs (passive investors) that buy not when stocks are cheap but when inflows are readily flowing,
    * the dominance of risk parity and volatility trending, who worship at the altar of price momentum brought on by those ETFs (and are also agnostic to “value,” balance sheets,” income statements),
    * the reduced role of active investors like hedge funds – the slack is picked up by ETFs and Quant strategies,
    * creating an almost systemic “buy on the dip” mentality and conditioning.  
    when coupled with precarious positioning by speculators and market participants:
    * who have profited from shorting volatility and have gotten so one-sided (by shorting VIX and VXX futures) that any quick market sell off will likely be exacerbated, much like portfolio insurance’s role in a previous large drawdown,
    * which in turn will force leveraged risk parity portfolios to de-risk (and reducing the chance of fast turn back up in the markets),
    * and could lead to an end of the virtuous cycle – if ETFs start to sell, who is left to buy?


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    Email of the day on Brexit

    I guess the young voted for Corbyn out of a form of rebellion because they feel they got screwed by the old with Brexit? that's very much my take on those election results... I also think that another Labour, with an explicit no Brexit agenda, not feeling compelled to ratify the referendum result in Parliament (effectively abdicating to the Daily Express and such-likes) would have wiped away the Tory easy. 

    Re the difficulty of leaving the EU: that had been made abundantly clear by the so much derided experts. Shame they were not listened to, maybe risks and rewards would have been weighted more accurately. 

    For the rest: we live in highly structured and complex societies with sophisticated regimes (governments and central banks) that accommodate and fulfil the needs of most people through an apparently undisputed economic model; with much to lose and - as you say - a full belly it is hard to see revolutions erupting across Europe as we have seen in e.g. Northern Africa. This is an extraordinary achievement, although it presents some obvious risks: institution will still need to continue to innovate and change, and what will prompt innovation if not even a financial crisis such as the one endured 10 years ago prompted significant change? 

    Democratic regimes - almost by definition - have resisted reforms implying austerity (e.g. cost cutting, restructuring of debt, tax increases) and have often diverted from putting in place measures to improve productivity (rather than it being - as it should - their everyday obsession). Monetary policies have dampened the effects of the crisis, yet the QE presented its collateral effect (in the case of the UK: inequality). 

    Various detours were offered as distractions to the voting public, and the illusion of revolution via direct participation was a perfect cathartic offer to make to the electorate after such economic shock: change everything (to not change anything). The whole digression of the idea of sovereignty we have seen in the UK and the willingness of the ruling party to push the narrative of the evil enemy EU should be seen in this context, with the tragedy (I can't stress this enough, as it has been badly overlooked) of the misuse of the referendum and the permanent damage this inflicted to the very core of the democratic process. 

    As for Catalonia, or Scotland, the desire to join the EU does not derive by the fact there is no other choice, but by the desire to fall back into a set of regulations that allows to operate internationally with highest degree of freedom and protection, while dissociating from their enemy entity (be it Spain or the UK); the EU on the other hand has done nothing to promote or aid these attempts of independence, as it represents the sovereign states these regions are part of.

    It may sound simplistic or a bit of a conspiracy theory. But I find impossible to see the EU is as a superstate (why did we have a Euro Crisis then? and it could potentially still happen! spreads still open from time to time); it may become one (extremely unlikely after the last elections in Germany), and it is still very open to debate whether this is appropriate or not. Also, assuming it has taxing power because it is asking what is due is forgetting a much more simple fact: what is not paid by the UK will be paid by the citizens of other countries (that simply won't happen, hence the mandate to solve this issue given by the other governments: the UK government voted for those expenses, hence it will tax its citizens - and me - to pay for them... anything different may not be exactly like a classic default, but it is very very close to it). Sadly, the current attitude on this matter suggests no deal is the most likely scenario yet. I think however that the UK stance is untenable, and that we will see a capitulation on the GBP before being confident support has been found: a change of government may provide the trigger?


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    Ray Kurzweil's Most Exciting Predictions About the Future of Humanity

    This article from Futurism.com contains of video of Kurzweil’s presentation at SXSW which may be of interest to subscribers. Here is a section: 

    Kurzweil continues to share his visions for the future, and his latest prediction was made at the most recent SXSW Conference, where he claimed that the Singularity — the moment when technology becomes smarter than humans — will happen by 2045. Sixteen years prior to that, it will be just as smart as us. As he told Futurism, “2029 is the consistent date I have predicted for when an AI will pass a valid Turing test and therefore achieve human levels of intelligence.”

    Kurzweil’s vision of the future doesn’t stop at the Singularity. He has also predicted how technologies, such as nanobots and brain-to-computer interfaces like Elon Musk’s Neuralink or Bryan Johnson’s Kernel, will affect our bodies, leading to a possible future in which both our brains and our entire beings are mechanized.

    This process could start with science fiction-level leaps in virtual reality (VR) technology. He predicts VR will advance so much that physical workplaces will become a thing of the past. Within a few decades, our commutes could just become a matter of strapping on a headset.


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    Email of the day on investing in Africa

    Email of the day on the revolutionary zeal of youth

    Was listening to your market commentary and re GBP specifically… don’t think it I s fair to draw comparisons between Brexit and the Catalunya independence attempts… the 2 things are different: 

    • Catalunya is a region within a national state, the UK is a sovereign state part of a supranational union… so for example the EU has no taxing power on citizens of the member states, there is no conscription in a EU military service, and generally speaking the bare minimum for having a functioning Economic Union is agreed between member states via the Council and the Parliament;

    • If looking for a parallel, the situation in Spain is similar to that in Scotland, the Basques region, Sardinia, Corsica, some part of Northern Italy (by the way there is a referendum coming in a few days there)… it is significant that all these regions seek immediate shelter from and within the EU;

    • The movement for the independence of Catalunya has a long history, and various degrees of independence have been negotiated between Madrid and Barcelona over the years after a lengthy period of violent repression; 

    Also I disagree on the argument of Brexit being a success because there are more young people in the UK: it has been shows several times the young were overwhelmingly in favor of remaining in the EU; it was the old who voted out.

    As for the so called “Brexit bill” that you also mention: this is an obligation the UK has towards the EU whatever the local politicians feed to the public (i.e. it is not a matter of what the EU “feels”, there is no ambiguity regarding its nature). Not paying this obligation is equivalent to defaulting on debt, which I doubt any government would do. The current narrative is the result of the government trying to leverage whatever it can to obtain concessions on access to the EU market.

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    Email of the day on recent trades

    I bought the Nikkei as it broke out of its range and it has been doing well on the back of an Abe victory which would lead to increased monetary spending and a lower yen, thus boosting the Nikkei.

    I have read that very frequently pre-Japanese elections, the market runs up as people look to buy shares in industries that have been targeted by politicians for help, but that on the day of the election the market usually corrects. A buy the rumour, sell the news scenario. I wondered your thoughts on this. I know you are long the Nikkei and wondered if this was a potential long-term or short- term position, or what the charts are saying?

    Also bought the US Tech 100 which broke out of its range but has been travelling sideways since it broke out and I wondered if that was not a good sign, since you usually talk about explosions waiting to happen either up or down. Best regards,


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    Email of the day on the wool price

    Hi Eoin, There is a chart in the library in commodities for Fine Wool (OS2 COMB COMDTY). But it stopped updating in 2014. Can it be 'switched on' again, or is there another fine wool price chart available? Thanks in advance 
    P.S. will email you an update on the sewing machinery exhibition that we attended in Shanghai soon


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