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

    Trump's Tax Cuts

    This article by LohKC on the FTAlphaville blog represents an interesting interpretation of motivations behind focusing on GDP versus GNI and may be of interest to subscribers. Here is a section:

    We can see immediately that more production means a larger GDP and that more production requires more workers, ceteris paribus (that is setting aside other considerations that can affect employment such as automation, productivity etc.). Most of the workers in any country would be its nationals. So usually a country’s desire to raise its GDP has a lot to do with the wish to create more employment for its people. But I would argue that Japan’s situation is quite different.

    Japan’s labour force is shrinking. It has been shrinking at the rate of 0.4% in the past decade and by all accounts the rate of decline will rise in the coming years. So unsurprisingly Japan’s unemployment rate is very low. Unemployment rate has fallen below 3% recently, which makes Japan’s unemployment rate among the lowest in the world. True, Japan still has a large source of untapped labour; women’s participation in the job market is very low. And that is a pressing issue but it is not really relevant to this discussion. Perhaps I might write about women’s participation in the job market one day but for now, regarding whether moving some manufacturing to the US isn’t such a bad idea, suffice to say that Japanese manufacturers are facing difficulties filling job vacancies in Japan because of Japan’s shrinking labour force and ultra low unemployment rate.

    Japan’s challenge today is not about reducing unemployment. Japan’s challenges today are about coping with the social costs of and economic headwind from an aging population and a shrinking labour force. 

    So we see that the raison d’être for GDP is no longer that compelling for Japan. Japan should aim to maximise its gross national income (GNI) instead.

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    Commodities Roiled as Arctic Blast Takes Hold

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

    Prices for the heating fuel rose to the highest in a month as the U.S. burned the most natural gas ever on Monday, breaking a record set during the so-called polar vortex that blanketed the nation’s eastern half with arctic air in 2014, Bloomberg News reports. America consumed 143 billion cubic feet of gas as temperatures dipped to all-time lows on New Year’s Day, topping the previous high of 142 billion from four years ago, data from PointLogic Energy show. Ice in the Hudson River delayed fuel-barge deliveries, as the government warned of a home heating-fuel shortage from the East Coast to Texas. Natural gas prices have jumped 19 percent from a 10-month low on Dec. 21. U.S. retail diesel prices averaged $2.87 a gallon on New Year’s Day, the most since June 2015, according to AAA.

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    Euro Tests Three-Year High as End-of-Stimulus Fear Batters Bonds

    This article by John Ainger and Samuel Potter for Bloomberg may be of interest to subscribers. Here is a section:

    The currency jumped, sapping stocks, and bonds slid as a slew of data signaled a potential uptick in inflation in the euro area, after manufacturing growth accelerated to a record in December. The numbers followed comments at the weekend from European Central Bank policy maker Benoit Coeure, who said that unless inflation disappointed there’s a “reasonable chance” the central bank’s extension of QE in October could be the final one.

    While Coeure didn’t mention the exchange rate, his comments were a boon for euro bulls and coincided with a period of ongoing dollar weakness. The common currency’s strength is translating into a painful start to the year for Europe’s export-heavy stock markets, while bonds have picked up where 2017 left off, with benchmark German bund yields rising to the highest since October.

    “The ECB suggestion that bond buying will not be extended is likely behind the recent push higher in the euro,” said Neil Jones, head of currency sales at Mizuho Bank Ltd. in London. “My sense is the euro will extend beyond its three-year high in the next two weeks.”

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    Email of the day on the big picture and biotech

    Happy and prosperous New Year to you and David and all the staff at “Fuller Tracey Money”.

    I compliment you on the outstanding “Year-end Big Picture” video.  Your assessment of the interaction between the social, political and financial considerations is particularly insightful and gives me, and all your readers, a firm base on which to plan our investing for 2018.  Towards the end of the video you discussed the inter-relationship between AI and big data.  You said health care and biotech sectors would be major beneficiaries of these developments. 

    Only today I read a comprehensive “Seeking Alpha” biotech sector report which may be of interest to readers.

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    Recreational pot puts medicinal marijuana on the backburner just as demand explodes

    This article by Geoff Zochodne for the Financial Post may be of interest to subscribers. Here is a section:

    But PwC said in a report earlier this year that some industry stakeholders felt the federal government’s “tight timeframe” for recreational legalization would lead to a lack of consultation and the potential to miss the opportunity to right the medical regime.

    “Because decision-makers will have so little time for regulatory development, the focus will be exclusively on recreational cannabis, to the detriment of changes that may be required for medical cannabis,” PwC warned, adding that changes to the medical regime could be as far away as three years as a result.

    One outstanding problem is that doctors may still be hesitant to prescribe cannabis to their patients, creating a bottleneck in the system for both patients and producers.

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    Who Wins, Who Loses From MiFID II Shakeup?: QuickTake Scorecard

    This article by Suzy Waite, Sarah Jones and Trista Kelley for Bloomberg may be of interest to subscribers. Here is a section:


    RESEARCH ANALYSTS. Those that aren’t ranked in the top three or four in their sector could be axed from trading floors.

    McKinsey & Co. expects banks to cut about $1.2 billion of spending in the area. INVESTOR RETURNS? Fewer analysts means less research, which means some fund managers may have to shrink the universe of companies they invest in. Missed opportunities could potentially limit returns, while less oversight could impact decision-making. 

    BOUTIQUE INVESTMENT BANKS. Independent research firms will see new competition once banks roll out their new offerings. MiFID II may also trigger a price war in execution, which could see bulge-bracket investment banks drive boutiques out of equities trading.

    STOCK EXCHANGES. Bourses such as Euronext NV and Deutsche Boerse AG could also lose out. Even if regulators close the pricing loophole that currently give SIs an advantage, bank-run platforms may still be more attractive as banks roll out increasingly competitive stock-trading options, such as low execution prices and larger “risk trades” to lure business.   

    SMALL-TO-MEDIUM-SIZED ENTERPRISES. Smaller companies are expected to see less coverage from research analysts, potentially reducing their shareholder base. That could make it hard for investors to price the shares and make stocks more illiquid. London-based Toscafund Asset Management, which invests in U.K. small caps, wrote a letter to 30 such companies urging them to pay for research on their own stocks.

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    Goldman Takes One-Time $5 Billion Hit From New U.S. Tax Law

    This article by Neil Callanan and Michael J Moore for Bloomberg may be of interest to subscribers. Here is a section:

    The old tax regime allowed companies to defer U.S. taxes until they brought back earnings held abroad. Under the new law, U.S. companies’ overseas income held as cash would be subject to a 15.5 percent rate, while non-cash holdings would face an 8 percent rate. Companies can make the payments in eight annual installments.

    Goldman Sachs, which gets more than 40 percent of its revenue outside the U.S., had $31.2 billion in earnings reinvested abroad as of the end of 2016, according to a regulatory filing.

    Companies have to account for the tax changes in the period in which they were enacted. That’s left corporate accounting departments scrambling after President Donald Trump signed the bill into law last week.

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    The Three Body Problem

    This article by Ben Hunt for Salient Partners may be of interest to subscribers. Here is a section:

    It’s not just that we endure large basis risks here in the Hollow Market, unmanageable for many. It’s not just that all of our old signposts and moorings for navigating markets aren’t working very well. It’s not just difficult to identify predictive/derivative patterns in today’s markets. There is a non-trivial chance that structural changes in our social worlds of politics and markets have made it impossible to identify predictive/derivative patterns. THIS is basis uncertainty, and it’s as problematic for humans facing markets that don’t make sense as it is for bees facing weather patterns that don’t make sense.

    Well, that’s just crazy talk, Ben. What do you mean that it might be impossible to identify predictive/derivative patterns? What do you mean that basis might not exist at all? Of course there’s a pattern to markets and everything else. Of course spring follows winter.

    Nope. This is the Three-Body Problem.

    Or rather, the Three-Body Problem is a famous example of a system which has no derivative pattern with any predictive power, no applicable algorithm that a human (or a bee) could discover to adapt successfully and turn basis uncertainty into basis risk. In the lingo, there is no “general closed-form solution” to the Three-Body Problem. (It’s also the title of the best science fiction book I’ve read in the past 20 years, by Cixin Liu. Truly a masterpiece. Life and perspective-changing, in fact, both in its depiction of China and its depiction of the game theory of civilization

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