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

    Mexico Unites In Anger Over President Trump Plan for Sanctions

    President Donald Trump’s escalating threats against Mexico have led to calls for a guerrilla struggle of national resistance from across the political spectrum, uniting the Mexican people as almost never before in modern times.

    A string of elder statesmen warn that the country faces grievous injury and is now in a state of de facto hostilities with Washington, forcing Mexicans to fight back on every front and whatever the cost.

    “An eye for an eye, and a tooth for a tooth,” said former president Vicente Fox. “Trade is important, jobs are important, but they are not as important as dignity. We must not be cowed or it will paralyse us,” he said.

    Felipe Calderon, who led the country a decade ago, said Mexico must retaliate immediately and where it hurts most, targeting counter-sanctions against the districts of US congressmen who have been the most vocal supporters of Mr Trump’s plans for a border wall and his talk of trade tariffs.  

    “We are seeing the behaviour of a bully. He who declares war against us will have to respond. There are going to be costs. Mexico will suffer. But we’ll show the size of our country and what our people are made of,” he said.

    “We must have a retaliation strategy in every area where the bilateral relationship with Mexico has value. We must put everything in the balance,” he told a forum on Mexico City’s Televisa.

    Mr Calderon said Mexico should fight tactically in the US courts and global bodies to tie the US administration in knots, targeting the lines of cleavage in Mr Trump’s own political base. It is a strategy used before in a cross-border trucking dispute, but this time it would be on a much greater scale.

    “We must revise the whole relationship point by point, including the presence of US agents in our country,” he said. Anti-terror co-operation on Isis should be frozen.

    “They have to understand that they cannot take Mexican support for granted. Trump has no idea what this means in terms of security and fighting organised crime and narco-traffic,” he said.

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    The retreat of the global company

    Thanks to a subscriber for this article from the Economist which may be of interest to subscribers. Here is a section:

    It looks as if, in the future, the global business scene will have three elements. A smaller top tier of multinational firms will burrow deeper into the economies of their hosts, helping to assuage nationalistic concerns. General Electric is localising its production, supply chains and management. Emerson, a conglomerate that has over 100 factories outside America, sources about 80% of its production in the region where it is sold. Some foreign firms will invest more deeply in American-based production in order to avoid tariffs, if Mr Trump imposes them, much as Japanese car firms did in the 1980s. This is doable if you are large. Siemens, a German industrial giant, employs 50,000 in America and has 60 factories there. But midsized industrial firms will struggle to muster the resources to invest more deeply in all their markets.

    Politicians will increasingly insist that companies buying foreign firms promise to preserve their national character, including jobs, R&D activity and tax payments. SoftBank, a Japanese firm that bought ARM, a British chip company, in 2016, agreed to such commitments. So has Sinochem, a Chinese chemicals firm that is buying Syngenta, a Swiss rival. The boom in foreign takeovers by Chinese firms, meanwhile, may fizzle out or explode. Many such deals, reliant on subsidised loans from state banks, probably make little financial sense.

    The second element will be a brittle layer of global digital and intellectual-property multinationals: technology firms, such as Google and Netflix; drugs companies; and companies that use franchising deals with local firms as a cheap way to maintain a global footprint and the market advantage that brings. The hotel industry, with its large branding firms such as Hilton and Intercontinental, is a prime example of the tactic. McDonald’s is shifting to a franchising model in Asia. These intangible multinationals will grow fast. But because they create few direct jobs, often involve oligopolies and do not benefit from the protection of global trade rules, which for the most part only look after physical goods, they will be vulnerable to nationalist backlashes.

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    Email of the day on leverage and the repercussions of quantitative easing

    Thank you for this extensive overview of the rates and currencies situation, which deservedly so need our full attention.

    I will add to the “puzzle of what to make of all this" 4 further concerning facts

    1 The evidence of constant decline in the global trade, referenced by a flow chart from the Dutch Central bank, I sent to David sometimes ago.

    2 The concern of extensive froth in the supposedly growth of earnings supported by ever extended buybacks and ever extended gap (pun intended) between GAAP vs non GAAP while revenues are still stalling. This may be a strong argument for repatriation of $ to support balance sheets, but as any action begets a reaction, please see No 4

    3 The leverage everywhere at levels that may not be healthy in this volatile environment.

    4 And what could concern mostly everyone is the growing scarcity and consequently cost of US$ :

     

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    Tesla's Battery Revolution Just Reached Critical Mass

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

    Three massive battery storage plants—built by Tesla, AES Corp., and Altagas Ltd.—are all officially going live in southern California at about the same time. Any one of these projects would have been the largest battery storage facility ever built. Combined, they amount to 15 percent of the battery storage installed planet-wide last year.

    Ribbons will be cut and executives will take their bows. But this is a revolution that’s just getting started, Tesla Chief Technology Officer J.B. Straubel said in an interview on Friday. “It’s sort of hard to comprehend sometimes the speed all this is going at,” he said. “Our storage is growing as fast as we can humanly scale it.”

    A Fossil-Fuel Disaster
    The new battery projects were commissioned in response to a fossil-fuel disaster—the natural gas leak at Aliso Canyon, near the Los Angeles neighborhood of Porter Ranch. It released thousands of tons of methane into the air before it was sealed last February.

    In its wake, Southern California Electric (SCE) rushed to deploy energy storage deals to alleviate the risk of winter blackouts. There wasn’t any time to waste: All of the projects rolling out this week were completed within 6 months, an unprecedented feat. Tesla moved particularly nimbly, completing in just three months a project that in the past would have taken years. 

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    US Shale Surge Stalls Weekly Oil Price Gains

    The steady rise of US shale production has stalled a strong week of oil price gains, as market fears grow that the extra oil flows could scupper Opec plans to drain the oversupplied market knocked a dollar from the price.

    Oil prices have been buoyed this week by optimism that the deal between producers in the Organization of Petroleum Exporting Countries and major producers outside of the cartel is beginning to relieve the global glut.

    The market climbed from around $54 a barrel late last week to $56.42, almost 5.5pc higher than the price before Opec agreed the historic supply deal in November.

    By midday the oil price had retreated to $55.60 after new data showing the extent of the US shale industry recovery reignited market jitters.

    US oil and gas flows were decimated by the two year oil rout due to higher costs for rig operators in shale-rich pockets of the States than in major producers in the Middle East and Russia.

    As oil prices have doubled over the last year from lows of less than $28 a barrel to over $50 many shale producers have been able to restart flows, threatening the price rises which have allowed their revival in the first place.

    Analysts at brokerage Cenkos said that the latest data shows that US output has risen by more than 6.3pc over the last six months, with some concerned that further rises will offset moves by Opec to curb output.

    “Traders will look closely at the weekly rig count data, set to be released this afternoon,” Cenkos added.

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    Trump Greets Prime Minister May as World Leaders Look For Cues

    Here is the opening of this topical article from Bloomberg:

    Theresa May will provide the first test for how world leaders can deal with Donald Trump when she arrives in the U.S. to welcome the new president to the global stage and lay the groundwork for a U.S.-U.K. trade deal.

    “As we rediscover our confidence together –- as you renew your nation just as we renew ours –- we have the opportunity, indeed the responsibility, to renew the special relationship for this new age,” the U.K. prime minister will tell Republican lawmakers gathered in Philadelphia on Thursday, according to excerpts from her prepared remarks. “We have the opportunity to lead, together, again.”

    The good news for May, who’s due to meet Trump at the White House on Friday, is that he’s eager to cement relations and nail down a U.K. trade deal too -- for his own reasons. He’d like to further drive a wedge into a fractured Europe and strengthen at least one trade relationship as he exits the Trans-Pacific Partnership and prepares to renegotiate Nafta.

    A close relationship between the U.S. and U.K. would prove that neither nation is turning inward -- Trump after an election victory fueled by his “America First” campaign, and May as she takes Britain out of the European Union after last year’s Brexit referendum.

    So May is opting to brush aside the worldwide protests that followed Trump’s inauguration and worked hard to secure Trump’s first meeting in office with a foreign leader.

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    The Weekly View: Focussing on Policy, Not Headlines: Investing in the Era of the Tweet News Cycle

    My thanks to Rod Smyth for his excellent timing letter, published by RiverFront Investment Group.  Here is the opening:

    2017 presents markets with significant potential policy changes on taxation, regulation, healthcare, infrastructure and trade.  After years of gridlock, where the main focus of policy has been on central banks, now the focus is squarely on the new administration and Congress.  On balance, we expect global stocks and interest rates to rise.

    Since November, the prevailing mood of investors has been one of optimism about faster economic earnings growth from lower taxes and less regulation, and we agree.  For now, the more alarming rhetoric on trade seems to have been viewed as part of a negotiation.  At RiverFront, we recognize that policy negotiation through tweeting is just a part of the new world.  Our challenge is to avoid the emotional cycle generated by the headlines and seek to assess policy changes that we believe will actually occur.  For now, we will seek to make changes when we believe assets become mispriced.  The baton pass from the dry language of central banks to the colourful one of politicians is our new reality.  

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