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

    Some 2017 Impressions

    My thanks to a subscriber for this 16-page illustrated report by James W Paulson, Ph.D, Chief Investment Strategist at Wells Capital Management Inc.  Here is the first page:

    Welcome to the New Year! The current economic recovery turns nine this summer making it the third longest in U.S. history. However, this calendar-old recovery still appears young at heart. It has not yet sustained a real growth rate above 3%, has never been driven by excessive borrowing or lending nor produced a significant capital spending or housing cycle. Moreover, because it has only recently returned to some semblance of full employment, it has yet to seriously aggravate inflation. Yields about the globe remain near all-time records lows and the Federal Reserve is only now beginning to finally normalize monetary policy. Finally, despite an almost three-and-a-half fold increase in the U.S. stock market from its 2009 low, this bull market has never generated a broad-based public run into equities.

    Perhaps for the first time in this recovery, we expect animal spirit behaviors; those originating from confidant businesses, consumers and investors, to increasingly characterize both the economy and the financial markets in 2017. Essentially, this furthers trends already evident during the last few months of 2016. After almost a two-year hiatus, economic growth recently accelerated and broadened about the globe. This rare synchronization in the economic recovery comes just as the U.S. has finally returned to full employment. Consequently, improved economic growth is also aggravating inflation and interest rate concerns.

    Although broader economic growth, a restart of the earnings cycle and the election of a pro-business U.S. president have recently combined to boost confidence and awaken the animal spirit throughout the private sector, it also represents a quandary for the financial markets. The stock market begins the year surging to new highs as confidence in the durability of the economic recovery improves. However, the bond market is being battered by rising inflation expectations and recognition that the artificially low yield structure orchestrated about the globe during this recovery may finally be ending.

    Here are some specific impressions for the economy and the financial markets in 2017.

    Economic growth

    The 2017 economic outlook is shaped by many important factors including a synchronization of economic policies about the globe, an economic recovery which is broadening both globally and within the U.S., a refresh and restart of the profits cycle, an end to the global manufacturing recession and collapse in commodity prices, the potential for awakening animal spirits and the increasing likelihood that a

    recession is still multiple years away.

    Synchronized global economic policies

    Not only has global economic growth been persistently subpar, it has never been synchronized. Economic policies typically conflicted during this expansion and economic boats around the globe have seldom risen together. While the U.S. has persistently employed stimulus, other developed and emerging economic policies have often been restrictive. While Japanese policy officials were hesitant earlier in this recovery, today, similar to the U.S., they are implementing full-out central bank balance sheet stimulus. Likewise, the eurozone, which earlier adopted fiscal tightening, is now also fully embracing monetary stimulus. Moreover, the oil crisis has forced energy-based economies like Canada and Australia, which earlier felt sheltered from many ongoing global struggles, to also boost accommodation.

    Consequently, as illustrated in Charts 1 and 2, in the last couple years, policy officials everywhere have simultaneously attempted to improve the economic

    recovery. Already, signs of a synchronized global economic bounce are materializing and we suspect this will become more obvious as the year progresses.

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    Ariad Enters into Definitive Agreement to Be Acquired by Takeda for $5.2 Billion

    This press release from Ariad Pharmaceuticals may be of interest to subscribers. Here is a section:

    Dr. Denner continued, “The transaction also underscores the tremendous value that shareholder activism can create for shareholders, patients and society. While ARIAD’s stock price was collapsing and many investors were abandoning the company, Sarissa Capital saw a company with important drugs and innovation and stepped in to become one of ARIAD’s largest shareholders. However, many things needed to be fixed before the value could be realized. With a new board and management team, ARIAD was able to focus on optimal capital allocation and operational excellence. As a result, the company created meaningful shareholder value and advance the options for those suffering from rare cancers.”

    “The acquisition of ARIAD is a unique opportunity that will enable us to positively impact the lives of more patients worldwide, advance our strategic priorities and generate attractive returns for our shareholders,” said Christophe Weber, president and chief executive officer of Takeda. “This is a very exciting time for Takeda as we will broaden our hematology portfolio and transform our global solid tumor franchise through the addition of two innovative targeted therapies. Opportunities to acquire such high-quality, complementary targeted therapies do not come often, and we are very excited about the potential for this transaction to benefit patients, our shareholders and other stakeholders.”


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    Email of the day on India's demonetisation

    Thank you for another very well done video commentary. I think it was excellent. When you or any one from the collective have time, could you please share their/your views on the effect of India's move to change their currency bills. Thanks in advance

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    Email of the day on the risk of a pullback on Wall Street:

    I love you Vimeo updates and prefer to just the audio. While we have made new highs in the US equity indexes, it appears they are quite extended to the trend means which makes them prone to sharp pull backs in the short term. Would you not agree?

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    Consulting on the Cusp of Disruption

    This article by Clayton M. Christensen, Dina Wang and Derek van Bever for the Harvard Business Review may be of interest to subscribers. Here is a section:

    The consultants we spoke with who rejected the notion of disruption in their industry cited the difficulty of getting large partnerships to agree on revolutionary strategies. They pointed to the purported impermeability of their brands and reputations. They claimed that too many things could never be commoditized in consulting. Why try something new, they asked, when what they’ve been doing has worked so well for so long?

    We are familiar with these objections—and not at all swayed by them. If our long study of disruption has led us to any universal conclusion, it is that every industry will eventually face it. The leaders of the legal services industry would once have held that the franchise of the top firms was virtually unassailable, enshrined in practice and tradition—and, in many countries, in law. And yet disruption of these firms is undeniably under way. In a recent survey by AdvanceLaw, 72% of general counsel said that they will be migrating a larger percentage of work away from white-shoe firms.

    Furthermore, the pace of change being managed by the traditional clients of consulting firms will continue to accelerate, with devastating effects on providers that don’t keep up. If you are currently on the leadership team of a consultancy and you’re inclined to be sanguine about disruption, ask yourself: Is your firm changing (at least) as rapidly as your most demanding clients?

    Finally, although we cannot forecast the exact progress of disruption in the consulting industry, we can say with utter confidence that whatever its pace, some incumbents will be caught by surprise. The temptation for market leaders to view the advent of new competitors with a mixture of disdain, denial, and rationalization is nearly irresistible. U.S. Steel posted record profit margins in the years prior to its unseating by the minimills; in many ways it was blind to its disruption. As we and others have observed, there may be nothing as vulnerable as entrenched success.


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    Our Shell-Shocked Civil Service Is Simply Not UP to the Job On Brexit

    We should be grateful to Sir Ivan Rogers for accidentally reminding us that we need wholesale reform of our broken Civil Service, since the cultural chasm between Whitehall and the public has grown dangerously large. 

    For Sir Ivan, now thankfully our outgoing ambassador to the EU, and many other mandarins of his ilk, the barbarians truly are at the gates. They now mostly realise that Brexit is going to happen, but remain desperate to find ways to blunt its implementation.

    In places, Sir Ivan’s resignation email reads like a parody, a textbook illustration of the dangers of creating a permanent ruling class. At times, one could even be forgiven for believing that he saw himself as a Platonic philosopher-king, entrusted to guard the guardians and to keep those pesky politicians and voters in line, ensuring that they don’t deviate from the expert orthodoxy of the times.

    Sir Ivan is one of the most powerful, unaccountable men in Britain, and yet, hilariously, sees his and his colleagues’ job as “speaking truth to power”. He cannot even bring himself to write about Brexit without using inverted commas around the word – or as Americans would put it, sneer marks. He forgets that with independence comes a duty not deliberately to undermine the Government.  

    His attack on “muddled thinking” – from Brexiteers in Government, presumably – is especially revealing: it is the meaningless insult favoured by the mandarin classes. The French try to dismiss arguments by deeming them “illogical”; the equivalent British put-down is haughtier, snootier and reeks of classism. 

    Yet Sir Ivan himself confuses opinion and facts, claiming that “contrary to the beliefs of some, free trade does not just happen when it is not thwarted by authorities”. Try telling that to those who repealed the Corn Laws, or to unilateral free trading economies such as Hong Kong. Commerce is something that emerges spontaneously from the free interaction of human beings; it does not require structures. Of course, Sir Ivan is right that in the current context multilateral liberalisation deals may be the best solution to maximise overall free trade, and that these can be fiendishly complex. 

    But the problem is that we are asking too much of some of our civil servants, whose heart simply isn’t in Brexit. For the past 50 years or more, the British establishment’s foreign policy mission has been a united Europe. There were other major projects too, including dismantling the Empire, fighting the Cold War, helping to rebuild the free-trading international economy and signing up to a new global environmentalism. But since 1990 at least, the construction of Europe has been our most important foreign policy goal, an all-consuming project.

    The Civil Service didn’t just help deliver government policy: it embraced the project. Many of its brightest minds, when exposed directly to Brussels, went native. This was not just the professionalism which sees officials nationalising firms under a Labour government before privatising them under a Tory one: it was a fundamental and permanent shift. Nation-states were out; liberal democracy was out; corporatism and rule by the technocrats were in. 

    The Leave side collected very few votes in Whitehall last June: the Civil Service was institutionally Europhile. Officials could barely imagine how Britain could possibly function, let alone thrive, outside of the EU. 

    Bizarrely, however, we are operating under the assumption that the people that have dedicated their entire working lives to promoting European integration can suddenly devote themselves to delivering the best possible Brexit. We are asking the old guard to become the revolutionaries, with immediate effect. Some can, of course, especially the younger, more ambitious officials who see how the world is changing, but not all. 

    Other countries don’t work this way: Barack Obama’s people are not being asked to implement Donald Trump’s plans. Instead, the president-elect is hiring 4,000 or so people. It is common in other countries for new governments to recruit large numbers of political appointees; it is also healthier as it means the government isn’t controlled by self-serving and institutionalised lifers.

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    Element Six Diamond Sculptors Push the Envelope From Lasers to the Quantum Realm

    The innovation centre dates from 2013, and was born out of a desire to group E6’s R&D teams in one place; it also rationalised its manufacturing facilities across the world. The lab occupies the front plot of Harwell Campus, a science park that is home to around 200 organisations. The European Space Agency is across the road, and it is a short walk to the UK’s Synchrotron, which fires electrons at near-light speeds around a ring.

    E6 prides itself on a “start-up” ethos; like Google, it allows its staff to use 10pc of their time to work on pet projects. The 180-strong workforce at Harwell includes people from 54 countries and there are free language classes and sports teams. Hühn acknowledges that Brexit “doesn’t make life easier” when it comes to recruitment, but insists Harwell’s location near Oxford is attractive.

    While cutting tools are the bread and butter of E6’s work, it is also forging ahead into more exotic areas. Synthetic diamonds are in the race to become the bedrock of quantum computing – a theoretical field that promises massive computational power that eschews the digital technology of “classical” machines.

    Quantum computing involves the entanglement of particles in the sub-atomic realm. When one particle becomes ‘entangled’ with another, it synchronises with its partner, even when they have no physical connection. Manipulating one can change the state of the other. Albert Einstein called it “spooky action at a distance”.

    Scientists at E6 and Harvard achieved a breakthrough last year when they proved that one particle could alter another 1.3km away without any possible transfer of data between them. “It fundamentally proved this entanglement process is a physical reality - there’s no other explanation for it,” says scientist Matthew Markham.

    Yet the properties of diamonds get even weirder. It transpires that diamonds with a ‘nitrogen vacancy defect’ - a gap in the lattice that makes up the crystal - are highly sensitive to magnetic waves at room temperature. The hope is that these diamonds, embedded in handheld scanners, could eventually replace MRI scanners; experiments have already shown that a red diamond can pick up the firing of an axon in the brain of a marine worm. “In 10 years’ time you could envisage having a helmet with diamond sensors that would be the equivalent of MRI sensors,” says Markham.

    Scientists also believe that these diamonds could one day use magnetic distortions caused by the sun to triangulate their position on the earth. This would eliminate the need for GPS, which relies on satellite signals to tell a driver where they are; it could also make driverless cars a reality. Currently a diamond with an NV defect has been calibrated to detect the magnetic signature from a car at 300m.

    Many of these experiments are decades away from practical applications. But, as Hühn remarks, sometimes they have to “evangelise” about diamonds to create a market for their products. “We need to demonstrate what can be done and then make it transparent to the market,” he says.

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