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

    Trump Aide Says U.S. to Stand Firm as China Talks Set to

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

    Donald Trump’s top economic adviser welcomed China saying it will send Vice Commerce Minister Wang Shouwen to the U.S. for low-level talks in late August, while also adding that the president’s determination on trade shouldn’t be underestimated.

    “It’s a good thing that they’re sending a delegation here - we haven’t had that in quite some time,” National Economic Council Director Larry Kudlow told CNBC Thursday. “The Chinese government in its totality must not underestimate President Trump’s toughness and willingness to continue this battle to eliminate tariffs and non-tariff barriers and quotas to stop the theft of intellectual property and to stop the forced transfer of technology.”

    He said the Chinese economy and currency “are slipping, as you all know, but let’s just see what happens.” Talks can produce better outcomes than expected, and talking is better than not talking, he added.

    The Chinese delegation led by Wang will meet with an American group led by David Malpass, under secretary for international affairs at the Treasury Department, at the invitation of the U.S., China’s Ministry of Commerce said in a statement on its website on Thursday.

    “This will be ‘talks about trade talks,’” said Gai Xinzhe, an analyst at the Bank of China’s Institute of International Finance in Beijing. “Lower-level officials will meet and haggle and see if there is a possibility for higher-level talks.”

    Before an earlier deal collapsed in May, China agreed to "significantly" increase purchases of U.S. goods and services, and that may provide a guide for the next round of discussions.

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    Amazon's Real Rival in India Isn't Walmart

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

    Meanwhile, Indian-managed companies like Ambani’s Reliance Retail Ltd. will be free to control and improve their supply chains while building a fearsome online presence in partnership with his mobile operator, Reliance Jio Infocomm Ltd.

    That’s not the only onerous aspect of the policy. The draft speaks of a two-year period after which data generated in India – on social media (Facebook Inc.), via search engines (Alphabet Inc.’s Google), or e-commerce (Amazon) – will have to be stored on local servers. As the Wall Street Journal noted this week, the move is bound to push up costs for Western firms.

    This new restriction will probably make it to the final law. The Indian central bank is already directing all payment firms like Visa Inc., Mastercard Inc. and PayPal Holdings Inc. to keep their Indian data exclusively in the country by October, so there’s little reason to expect that rules for e-commerce data will be much less stringent.

    Besides, similar laws already exist in China. Amazon sold its Chinese servers and some other cloud assets to a local partner to comply with Beijing’s local storage rules. Alphabet, which has no data centers in China, is also looking for a local partner to bring its Google Drive and Google Docs to that country, Bloomberg News reported recently.

    Other aspects of the policy may die without Bezos needing to move a muscle. Indian privacy activists will balk at the idea of a “social credit database,” to be set up — in a very Chinese fashion — by mixing state and non-state citizen data. While the goal of the database is to promote digital lending, there’s no guarantee it won’t be used to stifle dissent. 

    A more problematic suggestion in the draft is that the Indian government would have access to the data stored in India, “subject to rules related to privacy, consent etc.” A proposed Indian data-privacy law is yet to be passed by parliament, and whatever makes it onto the books will in turn be shaped by the Indian apex court’s verdict in a case challenging the constitutional validity of a biometric identification system that the government has rolled out to 1.2 billion Indians.

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    A dangerous bubble in corporate debt

    Thanks to a subscriber for this article from the New York Times which may be of interest. Here is a section:

    To help pay for its recently completed $8 billion buyout of the margarine and spreads business of Unilever — since renamed Flora Food Group — KKR, the private equity firm, offered investors 1.1 billion euros (about $1.3 billion) of senior notes with a minimal covenant package. Moody’s rated it 4.99 on a scale of 1 to 5, with 5 being the weakest. Nevertheless, investors gobbled them up.

    Or consider the mighty AT&T — now stuffed to the gills with an estimated $180 billion in debt following its $85 billion acquisition of TimeWarner. It is, according to Moody’s, the “most indebted, nongovernment controlled, nonfinancial rated corporate issuer” and one now “beholden to the health of the capital markets.” In other words, the company is so indebted that chances are high it will need continuing access to the credit markets to refinance and pay back its mountain of debt as it becomes due.

    So-called junk bonds — issued by companies with poor credit ratings — historically have yielded around 10 percent or more, to compensate investors for taking the risk of buying the debt of such companies. These days, junk bonds yield around 6.25 percent, meaning that investors — still desperate for yield — have overpaid for these bonds sufficiently to drive down their effective yields to levels that fail to compensate them for the risks they are taking.

    When junk bond yields return to more normal levels, as interest rates rise and investors’ yield-fever breaks, the price of the bonds bought during the feeding frenzy will fall and billions of dollars stand to be lost — by endowments, pension funds and high-yield funds, among others — as bonds across the board are repriced by the market.

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    Turkey Will Be The Largest EM Default Of All Time"

    This article by Russell Napier for his ERIC service may be of interest to subscribers. Here is a section:

    One wonders why investors expect President Erdogan, a man who has referred to them as like the loan sharks who enslaved the Ottoman Empire, to choose to repay the foreigner and accept the crushing socio-political cost on the local population of doing so? Even if Turkish institutions have the ability to pay, something your analyst has long doubted, the President will forbid them from doing so. This is a large default and it will prove to be almost a total default.

    It matters and, of course, it may be politically expedient for others to follow the advice of Paul Krugman and the IMF and choose not to repay their debt obligations to foreigners. This is the new normal. In a world where ten years of extreme monetary policy has failed to inflate away debts, it will become increasingly common to repudiate those debts. Those under the most pressure will be those with the highest levels of foreign currency debt where inflation can play no role in reducing increasingly crushing debt burdens - almost exclusively emerging markets.

    For the past few years professional investors have fretted about the implications of something widely referred to as ‘populism’. This, it seems, is a developed world phenomenon. While others see populism, all your analyst sees are sovereign peoples trying to bring power back to their elected representatives. This is a movement to strip power from multi-national organisations (the EU, WTO), multi-national corporations, independent central banks and any other body that has stripped sovereignty from elected representatives over the past three decades. That is an exercise in democracy that may well be bad for returns on, and of, capital but it is a constitutional swing within the rule of law.

    It is difficult to define this shift back towards a more representative democracy as populism, whatever you many think of the repercussions for your portfolio. I realise that many readers will disagree, but in the developed world the barbarians are really not at the gate. Things are entirely different in emerging markets.

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    A $40 Billion Plan to Cash Out Of Bitcoin

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

    Indeed, it would be a mistake to see this as a uniquely Bitcoin play. The most interesting part of a Bitmain pitch might be its shift into non-crypto terrain. The company has been using its chip-design expertise to expand into artificial intelligence, and company documents estimate this will make up 40 percent of its revenue in the next five years, according to CoinDesk. Wu told Fortune magazine in June that this business would be similar to Google’s AI-focused tensor processing units.

    Quite what the nationalists in the Donald Trump administration might think of a Chinese-owned crypto-powerhouse raising money to spend on advanced AI hardware and compete with Silicon Valley is anyone’s guess. Even if Bitmain is creating tech jobs in the U.S., and backed by U.S. venture capital funds, it would probably be listed in Hong Kong.

    All of this is obviously very much still in the rumor and speculation category, including the listing itself. But what appears like a straightforward play on digital currencies, might in fact end up as an attempt by a leading Chinese entrepreneur to cash out of the Bitcoin craze and fund some leading-edge tech instead — ironic when you consider that China has been far stricter on crypto-trading than most western nations.

    For investors still nursing losses from Bitcoin’s wild ride, the prospect of another tech moon-shot may seem a bit too soon. But maybe this could end up the first useful real-world thing to emerge from the Bitcoin bubble. 

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