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

    American Association of Professional Technical Analysts Conference 2017

    It was a pleasure to meet up with a number of other US based analysts at this year’s conference in Kansas City last Friday and I thought subscribers might be interested in my observations. 

    Google Might Run the Power Grid More Efficiently

    This article by Diego Marquina and Jahn Olsen for Bloomberg may be of interest to subscribers. Here is a section:

    The best way to send the right economic signals that reflect constraints is through locational marginal pricing – having different power prices in different parts of the grid.

    This is a politically unpopular mechanism, as it would see prices go up in zones of large demand – potentially industrial areas.

    The alternative is grid investment. But the costs are huge, as is the case for the bottleneck between Scottish wind farms and English demand centers. The 2.2 gigawatt HVDC cable currently being built there has an estimated cost of 1 billion pounds. Yet National Grid estimates as much as 8GW of additional transmission capacity could be required by 2030, on that particular border alone.

    Less human involvement might be part of the solution. Google’s DeepMind recently announced they are exploring opportunities to collaborate with National Grid. It has been successful elsewhere -- DeepMind demonstrated its immense potential by reducing cooling costs in an already human- optimized datacenter by 40 percent.

    Setting it loose on the extremely complex and quite probably over-engineered National Grid, with its many overlapping services and mechanisms, its rules of thumb and its safety margins, could provide novel ways to ensure system reliability cheaply and efficiently. DeepMind’s CEO conservatively hinted that it might be able to save up to 10 percent of the U.K.’s energy usage without any new infrastructure. Step aside, humans.


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    Porsche Pockets $17,250 Profit on Every Car

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

    In short, every time Porsche sells a 911 sports car or one of its Cayenne SUVs, it could take the profit alone and go buy a brand new Chevy Cruze.

    Its Teutonic peers don’t have nearly as much profit punch. Daimler AG pocketed about $5,000 a vehicle last year, roughly the same margin Bayerische Motoren Werke AG (BMW) has been managing. Part of the money magic is simply price. Porsche doesn’t make cheap cars. Even luxury players like Mercedes occasionally offer more pedestrian versions at narrower margins to get aspiring buyers into the family. And make no mistake, Porsche customers are paying a premium for the brand’s reputation.

    Ferrari knows this game well. Its operating profit equates to almost $90,000 a vehicle. But about 30 percent of Ferrari’s business comes from engines, key chains, amusement parks, and other things that don’t have wheels. What’s more, the company makes only about 8,000 cars a year, scrimping on supply to keep prices high.


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    The US Federal Reserve is Riding a Tiger by Raising Interest Rates

    Here is the opening of this controversial column by Ambrose Evans-Pritchard for The Telegraph:

    On three separate occasions since 2013 the US Federal Reserve sent shock waves through the global financial system when it tried to tighten monetary policy, and each time it was forced into partial retreat to halt the mayhem.

    The Fed has since come to terms with its unwelcome role as the world's central bank, a monetary superpower that cannot set liquidity conditions for the US alone. The international blow-back into the US economy from any mistake is instant and brutal.

    Over recent months the Federal Open Market Committee has been careful to take the global pulse before acting. It now hopes the coast is clear. Today's quarter point rise in the federal funds rate to 1pc has been so loudly signalled in advance that investors have already adjusted.

    Emerging markets seem better prepared, so far able to shrug it off. China has restored confidence in its exchange rate regime. Capital flight appears to be under control. Europe's shift towards bond tapering reduces the risk of a rocketing dollar. "We're not overly worried about downside shocks," said Janet Yellen, the Fed chairman.

    Yet nobody really knows whether the world can handle a total of six rate rises over the course of 2017 and 2018 as sketched in the Fed's 'dot plots' scenario.

    "Our highly levered financial system is like a truckload of nitroglycerin on a bumpy road. Don't be allured by the Trump mirage of 3pc to 4pc growth and the magical benefits of tax cuts and deregulation," says bond guru Bill Gross from Janus. This is a year to hold onto your money, he tells clients, not to seek a return on money.

    On the face of it, a 1pc rate is risibly low a full eight years into the economic expansion. It is deeply negative in real terms. Savings are being whittled away.

    But we are not dealing with normal circumstances. The Atlanta Fed's Wu-Xia 'shadow rate'  suggests that the combined tightening so far this cycle is equivalent to thirteen rate rises, once you include the withdrawal of stimulus from quantitative easing and dovish forward guidance. If so, we may be near the end-game.

    The Wu-Xia model and others like it show a relentless fall in the natural rate of interest over the decades. Each peak and each trough is lower. It is the deflationary consequence of a deformed world of over-capacity (China), under-consumption (Europe), excess savings (inequality), and lack of demand.  

    Former US treasury secretary Larry Summers thinks the natural rate has dropped to minus 3pc in his grim vision of secular stagnation. Is he wrong? Have we put this episode behind us at last? We don't know.  

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    The Key Lesson From OmNICShambles is How Urgently the Government Needs a Reboot

    There are your traditional U-turns, and then there are vicious, extraordinary punishment beatings of the sort Philip Hammond has just had to submit himself to. The Government ought to be congratulated for abandoning its absurd, manifesto-defying tax hike on the self-employed. But the way in which good sense has prevailed has been shocking, and casts grave doubt on the Chancellor’s political future.

    His fall from grace has been astonishingly swift. No Budget in living memory has disintegrated so fast; no Prime Minister has resorted to forcing a Chancellor to confess in writing to having got it so utterly wrong. His tax plan had already been kicked into the long grass, and the spotlight had moved on to Scotland; and yet No 10 still felt the need to distance itself further from Mr Hammond’s omNICshambolic Budget, even at the cost of exposing a terminal breakdown in the relationships at the heart of government.

    Listening to the Chancellor humiliate himself on Monday, one could almost begin to feel sorry for him: he sounded like a dissident who, after several rounds of torture in a sordid cell, realised that he would be forced to repudiate his core beliefs to avoid a full auto-da-fé.

    Yet still he remained stubbornly defiant, clinging to the delusion that he would in time be able to reinstate his beloved tax increase, and even claiming, laughably, that nobody in officialdom or government had noticed that the policy was in breach of the manifesto.

    His performance bore the tell-tale signs of a lame-duck Chancellor who has been assured that his job is safe but who in fact is now already on his way out, a mere eight months after being appointed.

    Never mind that Theresa May had signed off on Hammond’s plans, and that it was she who hired Matthew Taylor, the Blairite, to shake up self-employment rules and taxes; the Chancellor has been ruthlessly sacrificed. The brutality of the put-down suggests that tensions over other aspects of policy were coming to a head, and that patience had been running ever thinner on both sides.

    His relationship with the Prime Minister may thus never recover, an insurmountable problem in any administration but an especially dangerous and untenable one in a Government that is preparing to embark on the most complex project since the Second World War.


    Mr Hammond may bounce back, but the fundamental problem is that his economic policy is disastrously misaligned with the Government’s central mission of extricating the country from the EU. The Chancellor’s immediate, lethal mistake was to wage war on the Tory base; but his more profound error was to produce a Budget fit for a very different, pre-Brexit era.

    Full Treasury buy-in is required for Brexit to work, yet the Chancellor’s support has continued to be half-hearted, and his Budget was a head-in-the-sand exercise, pretending that nothing was about to change. It wasn’t worth the paper it was printed on even before yesterday’s U-turn.

    The first problem has been fixed but not the second. If he is to survive, he will need to change course radically. He will need to respond swiftly to events during the negotiations, reassuring and placating the financial markets and deploying a mix of carrots and sticks.

    If banks threaten to leave, he should dangle massive tax and regulatory cuts; if car firms say they will up sticks because of the possibility of tariffs, he will need to promise to compensate them in other ways, while reminding them that protectionism cuts both ways. It will require toughness, skill, a permanent campaign and even a permanent Budget process: the full powers of fiscal and tax policy will have to be put behind the Brexit negotiating team.

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    Narendra Modi Succeeds and the Failure of Liberal Politics in India

    “I can see the glimmer of a New India” proclaimed a triumphant Indian Prime Minister Narendra Modi a day after last week’s election victory in the country’s most politically significant state; at 200 million people, Uttar Pradesh has as many people as United Kingdom, France and Germany combined. If it were a country, it would be the world’s fifth most populous.

    Modi is right. Not since the 1970s and (former prime minister) Indira Gandhi — of whom it was said “India is Indira and Indira is India” — has an individual defined and dominated politics in this manner, defying all conventional assumptions, disrupting politics-as-usual and permanently smashing the elitism of India’s erstwhile liberal consensus. Above all, and bypassing the mainstream media for the most part, he has emerged as a supreme communicator.

    Even his most contentious and audacious decisions — like the move to ban 86 percent of India’s cash overnight last November have come at no political cost; instead, the big gains in India’s heartland prove that his decision to ‘demonetize’ high-value currency notes ultimately played out as a distinct advantage. In the cinematic plot of the Uttar Pradesh elections, Modi was cast as the vigilante action-hero, a sort of Robin Hood figure whose uncompromising toughness forced the rich and powerful to queue up at banks and suffer discomfort just like the poor. Unfazed by criticism — from opposition parties, eminent economists and large sections of the global and national media (I am on record as a skeptic of the move’s economic wisdom) — the prime minister positioned the currency ban as a patriotic purge of toxins from the body politic.

    As elsewhere in the world, from the Washington, D.C., Beltway to Brexit, the spectacular consolidation of Modi’s hold over India — as well as how Indians think — underlines the equally spectacular failure of liberal politics, its echo chambers and its elitism trap.

    His enormous victory in Uttar Pradesh has been touted as his Indira moment; not just for the complete command he enjoys three years into his term, but for his commonality with the former prime minister as an absolutist strongman. But if Indira was the daughter who inherited power from India’s first prime minister, Jawaharlal Nehru, Narendra Modi is the son of a tea vendor who rose from abject poverty and hardship to earn his influence. His success in pushing back against India’s old liberal elites catches the global anti-liberal undercurrent. That he is entirely self-made — unlike Indira Gandhi and the dynastic lineage her family spawned — empowers him to mock the pedigree of liberal elites, public intellectuals and the institutions they represent. During the recent election campaign Modi could not resist taking a swipe at Harvard, which he said mattered a whole lot less than hard work. At the same time, Modi referenced himself as a “poor mother’s son” in a speech widely believed to be a dig at the lofty criticism of his demonetization policy by Nobel Laureate Amartya Sen, among others.

    Yet, Narendra Modi exemplifies how the old labels of ‘Left’ and ‘Right’ do not apply. There is no doubt that among the many different elements that won Uttar Pradesh for Modi were state subsidies such as those for cooking gas (hugely popular among woman voters) and microfinance loans — all of which helped the prime minister cement his pro-poor credentials. In many ways he is not a free-market reformist — as fiscal conservatives may have imagined — but rather a new-age welfare-capitalist for the country’s poor, who believes that the government is the vehicle for change.

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    We Are More Likely to Get a Better Brexit If we Do Not Ask

    Here is the opening and a further section of this informative column by Matthew Lynn for The Telegraph:

    Our access to Europe’s markets will come to an end. Our powerful finance industry will lose the passport that enables it to sell its services across the Continent. Immigration will comes to a sudden stop, leaving fruit rotting on the trees, and, even more seriously, double mocha lattes unwhipped at Prêt, as companies struggle to find the staff to do the jobs that need doing.

    With the Prime Minister, Theresa May, preparing to finally trigger Article 50, and start the process of leaving the European Union, we can expect to hear a lot of warnings about a cliff-edge Brexit, with the looming threat that no deal will lead to a car crash for the British economy.

    Understandably, companies are going to feel nervous about that. Sterling is going to wobble on the currency markets – it is already down this week. The FTSE 100 is going to get hit if a deal seems to be falling apart. At many points over the next two years, the British negotiators are going to threaten to walk away with nothing, and every time, there will be a collapse in confidence.

    In fact, however, much of that will be nonsense. Paradoxically, the less we ask for from the EU, and the closer we get to walking away from the table empty-handed, the more we are likely to get a good deal in the end. Why? Because sometimes asking for nothing is the best negotiating position. The markets are going to be jittery, but investors and traders should keep in mind that the final outcome is likely to be a lot better than it looks right now.

    Don’t ask economists for any insights, however. The views of just about anyone (dentists, say, or actuaries, or, come to think of it, children’s party entertainers) would be more useful that a group of so-called professionals who disgraced themselves with absurdly over-the-top scaremongering in the run-up to the referendum, and even more hysterical predictions of imminent collapse in its immediate aftermath.


    Then imagine a different scenario. Our negotiators sit down and say, actually there is nothing we want from the EU. We are happy to operate under World Trade Organisation rules, we will make sure our market is completely open to European companies, and we have no plans to impose any tariffs of any sort. And, er, that’s it. The Brits then start looking at their watches, and asking if the team on the other side of the table knows anywhere good for lunch.

    At that point, the EU side will have to start thinking about all the things they want from Britain.

    The importance of these should not be dismissed. The UK makes a total contribution to the EU budget of £13bn. It gets £4.5bn back, so the net contribution is around £8.5bn. The UK, with Germany, is one of only two major net contributors, although countries such as France now also chip in a little as well. The expenditure of the EU is £123bn, so that £13bn is about 10pc of the total, and the net figure is about 7pc of the total. Once we have left, that money will have to come from somewhere. Several countries will have to become net contributors for the first time; plenty more will have to step up from trivial contributions to major ones. That will be neither easy, nor popular.

    We also have a massive trade deficit with the EU. Britain is the largest market for German cars, which also happens to be that country’s largest industry. It is a huge export market for the Netherlands, Belgium, and most of all Ireland (36pc of Irish exports by volume go the UK). Tariffs hurt everyone. But they hurt the surplus country more than the deficit country. The EU is going to want access to our market. If it loses that, or if we impose tariffs, then it will hit jobs and investment across the Continent.

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