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

    Merkel Said to Close Off Banks-for-Cars Brexit Deal Before Talks

    Chancellor Angela Merkel is seeking to stiffen German resolve on Brexit, singling out the car industry as vulnerable to any British attempt to strike market-access deals ahead of the U.K.’s exit from the European Union.

    In a closed-door meeting with German lawmakers, Merkel said some industries might press for such accords with the U.K. government and that political leaders should oppose them, according to two people who attended. In particular, allowing U.K. banks to do business in the EU in return for Britain granting market access to European carmakers is a non-starter, Merkel was quoted as saying by the people, who asked not to be identified because the meeting was private.

    The comments are the most specific signal yet of German concern that Prime Minister Theresa May’s government might try to sidestep the other 27 EU governments and seek sector-by-sector advantages before Brexit talks have even begun. As Merkel seeks to enforce the EU’s insistence on a package deal, some ministries in Berlin earlier instructed officials to avoid back-door contacts with U.K. counterparts for the same reason.

    “Merkel is rightly warning against special deals for individual industries,” Heribert Hirte, a lawmaker in the chancellor’s Christian Democratic Union, said in an interview. “We can’t enable cherry picking.”

    A German government spokesman declined to comment on what Merkel told lawmakers in the meeting last week, saying her position on Brexit -- that the U.K. must accept the EU’s free movement of people, capital, goods and services to have full market access -- is unchanged.

    The U.K. government has underscored the auto industry’s importance by giving assurances that persuaded Nissan Motor Co. to keep investing in Britain while May tries to balance taking the country out of the EU with safeguarding investment and jobs. For Germany’s auto industry, the stakes may be even bigger.

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    The Weekly View: US Stocks Are A Bit Stretched, But New Highs Confirm Bull Market

    My thanks to Rod Smith for the latest issue of this excellent timing service, published by RiverFront Investment Group.  Here is a brief sample:

    In conclusion: Measures of investor sentiment and anecdotal conversations with investors make us aware that a mood shift has occurred and that some investors are clearly worried that US stock indices have risen.  Our studies of trends and sentiment suggest that the current combination of the two may present an opportunity to return portfolios closer to long-term target norms, but do not indicate to us that risk should be brought below those norms.  

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    Japan sees start of bull run, focus on Trumponomics and 'America first' policy approach

    Thanks to a subscriber for this report by Kazuhiro Miyake for Daiwa Securities which may be of interest. Here is a section:


    As for exchange rates, which are important for Japanese stocks, US long-term interest rates warrant attention. If the 10-year Treasury yield rises to 3%, we think the yen will depreciate to Y120-125/$. In this case, expectations for the Bank of Japan (BOJ) to change its monetary policy framework would probably emerge. We forecast Japanese corporate earnings will recover sharply from 2H FY16 and significant upgrades to consensus earnings estimates are likely, due in part to yen depreciation. With free cash flow to equity expanding rapidly, shareholder payout capacity should increase.

    Outlook for Japanese stocks: Against the backdrop of interest rates starting to increase worldwide in July 2016 and US long-term interest rates and the dollar rising since Mr. Trump’s victory in the presidential election, global investors have been shifting funds from bonds to equities and taking a more positive stance toward Japanese stocks. We think funds will flow into the Japanese stock market. Assuming Y115/$, we forecast TOPIX EPS of 94 for FY16, 108 for FY17, and 120 for FY18. Based on this, we expect the Nikkei Stock Average to reach 21,000-21,500 by end-2017. If the yen weakens to Y120/$, we forecast the index to be around 22,500.

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    Angela Merkel faces her darkest hour

    This article by Derek Scally for the Irish Times may be of interest to subscribers. Here is a section:

    For years, Merkel has remained firm but fair. She condemned scores of sexual assaults at Cologne’s New Year celebrations and a series of attacks in Bavaria over the summer, all of which had some asylum seeker involvement. But her appeals not to conflate individual asylum crimes with the entire asylum population is wearing thin with many Germans as the year ends with another series of horrifying crimes.

    A young Afghan man is accused of raping and murdering a 19-year-old woman in Freiburg, near the Black Forest. This week Germans were perplexed and horrified by news of a foiled attack on a Christmas market in southwestern Ludwigshafen by a 12-year-old German-Iraqi boy.

    Populist pied pipers
    Those high-profile incidents have catalysed an already darkening mood towards Germany’s new arrivals and German mainstream politicians are torn between whether to challenge the populist pied pipers or join them.

    Far less reported, of course, are the by now daily attacks on asylum seekers and refugee homes, particularly in Germany’s east. But in the seething, post-factual social media cesspool, where every crime carried out by an asylum seeker or refugee is multiplied by many more fictional incidents, Christmas has come early for the far-right Alternative für Deutschland (AfD).

    Days after agreeing a programme of “targeted provocation” to maximise support in next September’s federal elections, senior AfD leader Marcus Pretzell wasted no time putting theory into practice on Monday night. Just an hour after the attacks, he tweeted that the Berlin victims were “Merkel’s dead” – and was promptly told by others to “shut your brown mouth”.

    Merkel is on the defensive as she heads off for Christmas and into an uncertain new year, her already complicated fourth term election bid in 2017 now considerably more difficult.


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    Italy lawmakers approve 20 billion euro plan to prop up banks

    This article by for Reuters may be of interest to subscribers. Here is a section:

    If Monte dei Paschi's capital plan fails, Prime Minister Paolo Gentiloni's new government is likely to meet this week to issue an emergency decree to inject capital into it.

    But that could prove to be politically explosive given that investors are required to bear losses under EU bailout rules.

    Parliamentary approval for the 20 billion euro government plan was needed to allow the state to take on new debt. Italy's debt burden, at about 133 percent of annual output, is already the second highest in the euro zone after Greece.

    The measure approved by parliament on Wednesday says the state can borrow money to provide "an adequate level of liquidity into the banking system" and can reinforce a lender's capital by "underwriting new shares".

    The failure of Monte dei Paschi, the world's oldest bank, would threaten the savings of thousands of Italians and could undermine confidence in the country's wider banking sector, saddled with a third of the euro zone's total bad loans.

    Before the vote, Economy Minister Pier Carlo Padoan vowed to shield retail bank investors from losses.

    "The impact on savers, if a (government) intervention should take place, will be absolutely minimised or non-existent," Padoan told parliament.

    Italy Senate also approves government request to lift debt to help banks
    Monte dei Paschi said it expected its net liquidity position, now at 10.6 billion euros, to turn negative after four months.


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    How One Huge American Retailer Ignored the Internet and Won

    This article by Kim Bhasin and Lindsey Rupp for Bloomberg may be of interest to subscribers. Here is a section:

    But don’t expect a trend heading back in time. This is a difficult system to replicate, said Simeon Siegel, an analyst at Instinet. TJX boasts a wide net of inventory buyers who find small batches of desirable clothing, then make a small bet on those goods. This is unlike the traditional department store model, where buyers look at runway trends and make large orders of a few items, hoping that they’ll be the winner for the season.

    “You’re buying closed-out product and you’re buying samples,” said Siegel. “You have to be very attuned to the numbers and very attuned to the fashion. The vendor base that you need to be plugged into and the intelligence that goes into buying the product is the most important asset they have. You need to find the most compelling stuff.”

    When stores like T.J. Maxx do it right, they leave their shoppers filled with feelings of adventure and serendipity, says Jordan Rost, vice president of consumer insights at Nielsen, a research firm. Even an unsuccessful trip to a discount store can reinforce the thrill of the hunt. The instincts driving customers into parking lots is similar to those shopping online, Rost says. They’re searching for deals and the best item to fill some broad want or need without a target in mind.

    As shoppers across generations and demographics become more focused on value than ever before, the excitement of finding something on sale has an even broader appeal. Millennials who grew up relying on e-commerce for all their needs are coming through the doors, too.

    “Younger consumers are really open to that kind of open- minded approach to shopping, not necessarily coming in with a specific brand or product in mind,” says Rost. “Discovery is part of the experience.”


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    The US is Crying Out for Donald Trump Economic Tonic

    Starting on January 20 2017, the United States will be a very different place to the one it has been for decades. President Donald Trump, who is an unconventional Republican, will control the Senate (52 Republicans to 48 Democrats); the House of Representatives (241 Republicans to 194 Democrats); 34 Republican Governors (out of 50) and the largest Republican control of the state legislatures ever. He could well appoint three new Supreme Court Justices and reform monetary policy from A to Z as well. 

    In 2009 when President Obama took office, the political world in Washington was the opposite. Times have changed.

    The defining issue in the US (and everywhere else) is the economy. America has had the single worst recovery in the past 70 years and there’s little improvement in sight. Government over the past eight years has doubled down on stimulus spending, taxes on the rich, regulations, dirigiste low interest rate monetary policies and failed trade initiatives. 

    Unfortunately, these policies do work – but in the opposite directions to the ones their proponents hoped. Somehow most western governments have conflated helping the poor with hurting the rich. We’ve found out once again the hard lesson – that if governments tax those who work and pays those who don’t work, there will be lots of people not working.

    Stimulus spending, meanwhile, is analogous to asking a poor man to spend himself into wealth. It just doesn’t happen.  And then again, whoever heard of an economy that’s been taxed into prosperity? Not I. 

    Government-mandated low interest rates guarantee that no one will lend either to risky borrowers or to working-class homebuyers, and low interest rates will also destroy the lives of retirees and pensioners. And then there are trading blocs like the European Union, where the likes of Ireland are joined at the hip with countries they don’t trade with and held at a distance from countries they do trade with (such as the US and the United Kingdom).

    Recognising that the future is more difficult to forecast than the past, I believe the new administration in the United States will reduce the corporate tax rate from 35 per cent (the highest in the OECD) to 15 per cent (the 3rd lowest); replace depreciation schedules with 100 per cent expensing of capital purchases in the year of purchase for tax purposes; eliminate the estate tax and repeal ObamaCare and replace it with common-sense health care savings accounts. 

    Tax legislation will also proceed to reduce personal income tax rates, undo many executive orders that over-regulate our economy, increase needed infrastructure projects, negotiate fairer trade agreements and increase economic efficiencies in government purchases.

    The nicest part of America’s checks and balances on government is that the House and the Senate will provide wonderful guidance to the administration and vice versa. The resultant policies will be first class, and I believe these policies will be supported on a bipartisan basis, just as they were when Reagan was president.

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    European Stranglehold Over the IMF Has Become a Curse

    The International Monetary Fund seems cursed. One managing-director embroiled in scandal is perhaps unlucky: to suffer three in a row starts to look serious.

    First it was the Spaniard Rodrigo Rato, now awaiting trial for embezzlement for allegedly running a "corrupt system" at the helm of Bankia.

    Then it was France’s Dominique Strauss-Kahn, accused of louche conduct in a New York hotel room.

    Now it is the turn of Christine Lagarde, inheritor of the French fief and today convicted of criminal negligence by a top French court in a case that has strange whiffs of political chicanery.

    The guilty verdict certainly calls into question her full fitness to lead a financial superpower with resources of $668bn, and vice-regal dominion over whole countries and societies.

    All three are European, the only race able to compete for the post under the Bretton Woods carve-up that has prevailed since the end of the Second World War. The fact that this has led to trouble is not accidental.

    “European politics has become very corrupt. It is almost inevitable that the European system will throw up people who have done something that will later be construed as having crossed the line, and who are therefore tainted,” said Ashoka Mody, the IMF’s former deputy-director for Europe.

    “My reading is that Europe is in very long-term decline from political and economic pre-eminence, and there is a great temptation to cut corners as they try to face these challenges,” he said.

    This European stranglehold over the Fund is now over. It is inconceivable that the next IMF chief will be chosen in the old cosy way.

    The Asian powers will not tolerate it any longer. If nothing is done they will walk away from the Fund entirely and create their own financial structures, probably revolving around China.

    The Fund mishandled the East Asia crisis in 1998, imposing fiscal retrenchment that went far beyond the therapeutic dose, and dished out the same medicine to countries as starkly different as Korea and Indonesia.

    It was bad economic science. Asia’s rising powers concluded that the IMF system was stacked against them. The Class of 1998 turned instead to “self-insurance” by building up such vast foreign reserves that they would never again be at the mercy of the Fund.

    This accumulation of excess savings led to the pre-Lehman capital glut and is a key reason why the world economy has been so far out of kilter for the last fifteen years, ending in a global liquidity trap.

    When the European crisis blew up, the Fund was suddenly all too willing to bail out countries - and on terms that were not available for the Asians, or the Latin Americans before them. The IMF was in effect hijacked by its European masters for a series of rescues that used up 80pc of its total lending between 2011 and 2014.

    The terms violated cardinal rules. Greece, Ireland, and Portugal were each allowed to borrow 3,000pc of their quotas, triple the normal limit. In the case of Greece, the Fund’s management violated their charter by lending to a state known to be insolvent rather than demanding a debt restructuring. An internal probe has since shown that they pulled the wool over the eyes of the IMF board.

    Some shortcuts can perhaps be justified given the real danger of contagion to Italy and Spain at that moment, and given fears of a global financial melt-down. Yet what emerges from the board’s probe is that the eurozone political class treated the Fund as their tool. The US went along with this in tacit collusion, but that is surely about to end under the Trump White House.  

    The IMF remains vital to the global financial system but it is clearly an organisation that has lost its way. Cleansing must begin from the top down. This could start with the appointment of former Indian central bank governor, Raghuram Rajan, or the Korean chief economist of the Bank for International Settlements, Hyun Song Shin. George Osborne's moment has passed.

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