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

    Email of the day

    On the EU’s response to Brexit:

    The current response to Brexit from the EU leadership reminds me of the cycle of emotions that investors are said to go through when things turn against them. That cycle may provide a guide to coming events.

    First there is denial, then anger and fear. The EU shows signs of being in these stages. One would hope to move on by next summer but I wonder if these stages may persist through most of 2017 due to rhetoric of politicians during the elections in France and Germany next year. 

    Then there is desperation and panic. So the UK may have to handle these emotions from the EU in the future, probably after the continental elections as French and German politicians are unlikely to express such emotions when trying to get elected. 

    Experienced investors will know this is followed by emotions such as despondency, capitulation and contempt for the market. The time-table suggested above would push this into 2018. If it coincides with a bear market too, with the EU / ECB having few viable policy options, then the mood in the EU will be bad!

    It can be difficult to move beyond this and accept a new opportunity but that is the key transition required. We may be up against it time-wise after triggering Article 50 in the first quarter of 2017 if many months of possible negotiation are lost next year due to the French and German elections. 

    So overall, I do not have high hopes for a negotiated settlement. I trust our government will realise it needs a strong and viable plan for this outcome. And if so, maybe they should just get on with it as soon as possible.

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    Mobius Says Gold Will Gain in 2017 as Fed Goes Slow on Hikes

    Here is the opening of this interesting report from Bloomberg:

    Mumbai: Gold is set to advance by as much as 15% before the end of next year as the Federal Reserve goes slow on increasing interest rates and the dollar remains subdued, buoying bullion demand, according to Templeton Emerging Markets Group.

    “The Fed is going to increase the rates by a little bit but not excessively and there is no guarantee that a rise in interest rates will put people off,” executive chairman Mark Mobius said in an interview at a Bloomberg event in Mumbai. “A lot will depend on the real rates.”

    Bullion has rallied 19% in 2016 as concern over the health of the global economy, loose monetary policies and the UK’s vote to leave the European Union fanned demand. After raising rates last December for the first time in almost a decade, Fed policy makers have stood pat on borrowing costs in the six meetings since. While the dollar gained to the highest since March on Friday on speculation that rates may soon climb, it remains lower this year.

    ‘Not that strong’

    “The U.S. dollar is not that strong and may even decline,” said Mobius, who also highlighted prospects for increased central bank buying of bullion. “So if that happens, gold gets more expensive.”

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    Ignoring the Debt Problem

    Thanks to a subscriber for this article by Paul Volcker and Peter Peterson that appeared in the New York Times. Here is a section:

    Whoever wins, the new president will eventually face fiscal realities that force him or her to develop strategies for decreasing the national debt as a share of the economy over the long term.

    Our current debt may be manageable at a time of unprecedentedly low interest rates. But if we let our debt grow, and interest rates normalize, the interest burden alone would choke our budget and squeeze out other essential spending. There would be no room for the infrastructure programs and the defense rebuilding that today have wide support.

    It’s not just federal spending that would be squeezed. The projected rise in federal deficits would compete for funds in our capital markets and far outrun the private sector’s capacity to save, to finance industry and home purchases, and to invest abroad.

    Instead, we’d be dependent on foreign investors’ acquiring most of our debt — making the government dependent on the “kindness of strangers” who may not be so kind as the I.O.U.s mount up.

    We can’t let that happen — not if we want an America that is able to provide growth and stability at home while maintaining global leadership. We would risk returning with a vengeance to stagflation — the ugly combination of inflation and economic stagnation that we tasted in the 1970s.

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    Email of the day on revisions to data

    I have noticed some discrepancies between the data you provide for the Bloomberg US Financial Conditions Index and the value as found on the Bloomberg terminal itself. Although the shape of the lines look similar, the values are different. For example in July your data goes up to 0.47, however the Bloomberg data goes marginally above positive. Could you please check and confirm? 

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    'Siri, catch market cheats': Wall Street watchdogs turn to A.I.

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

    A.I. may even sniff out new types of chicanery, said Tom Gira, executive vice president for market regulation at the Financial Industry Regulatory Authority (FINRA).

    "The biggest concern we have is that there is some manipulative scheme that we are not even aware of," he told Reuters. "It seems like these tools have the potential to give us a better window into the market for those types of scenarios."

    FINRA plans to test artificial intelligence software being developed in-house for surveillance next year, while Nasdaq Inc (NDAQ.O) and the London Stock Exchange Group (LSE.L) expect to use it by year-end.

    The exchange operators also plan to sell the technology to banks and fund managers, so that they can monitor their traders.

    Artificial intelligence is the notion that computers can imitate nuanced human behavior, like understanding language, solving puzzles or even diagnosing diseases. It has been in development since the 1950s and is now used in some mainstream ways, like Siri, an application on Apple Inc's (AAPL.O) iPhone that can engage in conversation and perform tasks. 


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    Pimco Sees Legs on Brazil's Rally as the Real Hits a 2016 High

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

    Pimco’s vote of confidence, albeit with a few cautionary caveats, is helping to reinvigorate investor appetite for a currency that has climbed 28 percent this year. It adds to a string of positive developments in recent weeks that has prompted traders to reassess bets that Brazil’s rally may be over, from President Michel Temer’s success in advancing a spending-cap bill to last week’s rating upgrade for the battered state-run oil giant, Petroleo Brasileiro SA. The central bank signaled Tuesday that it’ll be modest in its quest to lower borrowing costs -- the benchmark rate is 14 percent -- which also supports the real.

    “A better-than-expected improvement on the fiscal outlook and the slower-than-expected pace for interest-rate cuts both strengthen Brazilian assets,” said Andres Jaime, a strategist in New York at Barclays Plc. Back in September, “we had a less optimistic outlook.”

    In a note on Pimco’s website, emerging market portfolio managers Yacov Arnopolin and Lupin Rahman wrote that Brazil’s high interest rates offer a “decent cushion against potential weakness.” Borrowing dollars to lend in reais has returned 40 percent in a so-called carry trade this year, the most among major currencies.

    “The country’s fixed-income assets continue to present compelling opportunities,” they wrote. “With confidence in the government returning, Brazil could be set for a comeback -- one that could restore nominal interest rates to single digits and put credit rating upgrades back on the table.”


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    Our Roads Could Hold the Secret To Sucking Carbon Out Of Natural Gas

    It’s not easy to capture carbon dioxide. I’ve written before about some of the more ambitious efforts currently underway – be it sucking it directly out of the urban air, or transforming it into rock. But now, researchers from Rice University have found another option – asphalt – and they’ve used it to suck carbon dioxide out of natural gas. Now, it’s important to say at this point that this research was funded by an oil and gas exploration company, so there’s a risk of ‘spin’. However, having read the paper(s), it’s clear to me that the technique itself is interesting, and I suspect it’ll find much wider usage. So let’s look into how it works.

    When natural gas emerges from the ground, it’s composed of hydrocarbons, and up to 10% carbon dioxide (CO2). Before the gas can be sold to the market, the CO2 plus any other impurities need to be removed, and this cleanup process is expensive. Generally, the ‘raw’ gas is filtered through a series of liquid compounds called amines, which extract only the CO2, while letting the ‘clean’ gas through. Amines have a limited capacity though – they can absorb around a fifth (between 15 – 20%) of their own weight in CO2 – and recycling them for reuse is incredibly energy-intensive. So, lots of research groups have been looking into alternative options that could reduce this cost.

    Enter Rice University and their asphalt…though, I prefer to call it bitumen, so no doubt I’ll switch between the two terms. Anyway, asphalt/bitumen is the black, sticky, petroleum-based substance that’s used to build roads. There, it holds together the small bits of rock that are known as aggregate, to form a dense, tough surface for road vehicles to drive on. But if it’s to be used for carbon storage, you need to do a bit of chemistry first.

    The team, led by Prof James Tour, started with a naturally-occurring form of bitumen called Gilsonite, which is found in various locations across the US, and used in everything from cement to inks. This, they heated to 400°C to remove the volatile (‘evaporate-able’) components. What’s left is then heated to 900°C in the presence of potassium hydroxide, transforming it into a porous form of asphalt. These tiny holes give the asphalt an ultra-high surface area – so high, in fact, that a single gram of it has a surface area equivalent to that of two ice hockey rinks. And in the same way that a bath sponge can hold a lot of water, this asphalt sponge could be used to store gas… albeit temporarily. This sponge relies on high pressures, already present at gas wells, to hold the carbon dioxide within it pores. Once the pressure drops, the CO2 is released – either to be pumped back into the ground, keeping it out of the atmosphere, or stored for use elsewhere.

    The paper, published in Advanced Energy Materials (£), isn’t the first from this team – they’ve been working on carbon sequestration for years. In 2014, they wrote about transforming gaseous carbon dioxide into solid polymers (there’s also a video about that work here) and in 2015, they produced the first version of this porous asphalt. In those initial tests, they showed that their sponge could adsorb (store on its surface) 114% of its weight in carbon dioxide. But in this latest paper, thanks to the increase in surface area (i.e. they made more space in which to store the gas), the asphalt could manage 154% of its weight…. that’s ten times more than the amines currently in use.

    There are other benefits too. The raw Gilsonite is readily available, and unlike amines, the final porous sponge can also be reused immediately. “[We’ve shown] we can take the least expensive form of asphalt and make it into this very high surface area material to capture carbon dioxide,” Prof Tour said in the press release. I admit that I’m no great fan of the oil and gas industry, and I hope that we move away from it sooner rather than later. But anything that makes it cleaner and more energy-efficient in the short-term is a positive step, so I’ll be keeping an eye on this area.

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    Sweden Holds Out Olive Branch to Brexit Britain

    Here is the opening and another brief section of this timely article by Ambrose Evans-Pritchard for The Telegraph:

    Sweden has warned that it would be a serious mistake to chastise Britain for voting to leave the EU, appealing instead for an amicable settlement to minimise damage for both sides.

    “The softer the Brexit, the better. We’re an open country and we are in favour of free trade, and we want to see a solution that is as beneficial as possible for everybody,” said Magdalena Andersson, the Swedish finance minister.

    The olive branch from Stockholm reflects the shared view of the Nordic bloc that there is nothing to be gained from a fractious divorce between Britain and the EU. 

    “I think our basic instincts are the same. We’ve heard some voices from the Continent that now is the time to punish the British, whereas our instinct instead is that this is the new situation and we have to make the best of it. We have to see what is good for jobs and growth,” she told the Daily Telegraph on a trip to London.

    The EU itself needs to tread with care since there are large eurosceptic movements in Sweden, Denmark, and Finland. A hard-line stance that ignored the concerns of the Scandinavian bloc would risk opening fresh rifts within an already badly-fractured Union.

    The comments came as Swedish companies start to feel the chilling effect of the referendum campaign in Britain and the sharp fall in sterling. Data released this week show that Swedish exports to Britain are in free-fall, with a drop of 19pc over the period from January to July compared to the same period a year ago.


     “Sentiments have calmed down a bit during the last few months, but there can be no cherry picking. You can’t just pick the cherries you like,” she said.

    The warnings on cherry-picking are part of the joint script agreed by the EU-27 states but it is unclear what this mantra means in practice. Britain has a complex set of diplomatic, defence, and security ties that go far beyond the one-dimensional issue of the single market. It is ultimately implausible to imagine that Britain could be treated like any other ‘third country’ in trade talks, as if it were in Latin America or Africa.

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    Email of the day

    On Germany’s new auto industry push to ban internal combustion engines starting in 2030:

    Dear David This article points to a very rapid change in car engines quite soon now. I am sure you will agree with this quote from the article: "...the sooner diesel is stopped from poisoning our lungs with cancer-causing nitrous oxide, the better." And it's not just nitrous oxide. The chart showing the increase in diesel cars to 50% of total cars in Europe over past decades is truly shocking. I believe that was due to EU policy, and their belief in bad 'research' suggesting diesel was less polluting than petrol. Anyone with an ounce of common sense knew that was nonsense. I suspect that EU policy has done more to damage the health of European citizens than any amount of global warming. I wonder if the EU will ever admit its mistake and instigate an investigation into it's enormous blunder. Best wishes

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