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

    As the Autumn Statement Looms, Spreadsheet Phil Can Have it Both Ways, If He Is Careful

    Here is the opening of Roger Bootle’s Bloomberg column in anticipation of Wednesday’s Autumn Statement:

    The Autumn Statement used to be a pretty humdrum affair, simply giving an update on the official  forecasts for the economy and public finances. In recent years, though, it has taken on the  character of a mini-Budget. It needs to revert to its earlier status. 

    But this Wednesday may not be the right time to downgrade it. Mr Hammond has been in the job for only a few months and needs to make an impact. Meanwhile, the economy is at a critical juncture. 

    Mind you, having just had Guy Fawkes night, there is no need for fireworks this week. A number of  commentators have accused “Spreadsheet Phil” of being dull. But seeing a former shadow chancellor disporting himself on the dancefloor is surely enough entertainment from the ranks of chancellors, actual and nearly. Dull but competent is fine by me.  

    Mr Hammond’s task is made more demanding by greater than usual forecasting difficulties. Under George Osborne, the Treasury sub-contracted forecasting to the Office for Budget Responsibility (OBR). We all know that the record of most economic forecasters is pretty poor. Sadly, the OBR’s own is no exception.

    The big forecasting issue at the moment is the impact of the Brexit vote. The forecasting establishment is mostly gloomy. It believes the impact on aggregate demand will be negative as the squeeze on consumers’ real incomes resulting from the lower pound – and the reduction in corporate investment caused by uncertainty – will outweigh any boost to exports. 

    More importantly, it also believes Brexit will harm the UK’s medium-term productive potential because of reduced trade and investment. Yet this group of forecasters recently has been even more than usually inaccurate. The much-heralded Brexit recession still hasn’t appeared. Indeed, last week’s retail sales figures showed, yet again, how resilient the economy has proved to be.

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    OPEC Oil Cut Nears as Battered Saudis Bow to Indomitable US Shale

    Twisting the knife deeper, the US is still drilling extra wells. The latest Baker Hughes rig count rose by two to 452 last week. Frackers have sold forward their production with hedge contracts, guaranteeing future supply whatever now happens.

    "They took advantage of the window for a few weeks when oil was higher and locked in hedges of around $52 for 2017, and $55 for 2018," said Mr Hansen.

    Esther George, the head of the Kansas Federal Reserve, told an oil forum on Friday that the average price needed by shale drillers to make a profit has fallen from $79 to $53 over the last two years as technology matures. Many are making money at prices well below that.

    She had a warning for those who expect a return to business as usual in world oil, predicting that a "large amount" of production would come on stream as soon as prices push through the mid-50s. "I do not see much room for price appreciation," she said.  

    Markets have grown cynical about Opec rhetoric on cuts. Yet it is increasingly clear that Saudi Arabia has genuinely reversed course under the new energy minister, Khaled al-Falih, and this has changed the character of the Vienna meeting entirely.

    The Kingdom can no longer afford to fight a grueling war of attrition to force rivals out of the market. While it has succeeded in killing off $200bn of investment in deep-water projects, Canadian tar sands, and other high-cost ventures, this has come at a very high price.

    The Saudis have been burning through foreign exchange reserves at a rate of $10bn a month, and contrary to general belief their usable reserve buffer is relatively thin. They face an internal banking and liquidity squeeze, a construction crash, and have had to tap the global bond markets on a large scale to pay their bills.

    "The Saudis are the ones that have suffered the biggest hit in revenue and face the most financial pain, and it has gone on a lot longer than they ever anticipated," said Mr Fyfe.

    Austerity policies are biting in earnest, threatening the social contract of cradle-to-grave welfare that underpins the Wahhabi regime. Cuts in salaries, perks, and allowances have reduced take-home pay for lower level state employees by as much as 60pc in some cases.

    Intelligence analysts say the Saudi-led war in Yemen is proving far more expensive than admitted, suggesting that the budget deficit is significantly higher than the official figure of 13pc of GDP. It recently emerged from Pentagon papers that the Saudis have lost 20 of their state-of-the-art Abrams tanks.

    Helima Croft from RBC says the Saudis are now throwing their full diplomatic weight behind the search for a deal, though markets have not yet grasped the significance of this. If the Saudis want a deal, a deal is what will almost certainly happen.

    Crucially, they need a much firmer oil price to have any chance of floating a 5pc share of state oil company Saudi Aramco for a very ambitious $100bn. The country is about to release secret details about the true extent of Saudi reserves, frozen at a constant 260bn barrels since the inception of the modern oil age - a patently absurd estimate.

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    Inside a Moneymaking Machine Like No Other

    Initially he bought and sold commodities, making his bets based on fundamentals such as supply and demand. He found the experience gut wrenching, so he turned to his network of cryptographers and mathematicians for help looking at patterns: Elwyn Berlekamp and Leonard Baum, former colleagues from IDA, and Stony Brook professors Henry Laufer and James Ax. “Maybe there were some ways to predict prices statistically,” Simons said in a 2015 interview with Numberphile. “Gradually we built models.”

    At their core, such models usually fall into one of two camps, trend-following or mean-reversion. Renaissance’s system had a foot in both. Its results were mixed at first: up 8.8 percent in 1988, its first year, and down 4.1 percent in 1989. But in 1990, after focusing exclusively on shorter-term trading, Medallion chalked up a 56 percent return, net of fees. “I was confident that the models would work better,” says Berlekamp, who returned to academia in 1991 and is now a professor emeritus at the University of California at Berkeley. “I didn’t think they would be as good as they were.”

    Eventually the scientists went so far as to develop an in-house programming language for their models rather than settle for a numbercentric option such as ASCII, which was popular at the time. Today, Medallion uses dozens of “strategies” that run together as one system. The code powering the fund includes several million lines, according to people familiar with the company. Various teams are responsible for specific areas of research, but in practice everybody can work on everything. There’s a meeting every Tuesday to hash out ideas.

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    North Pole Temperature Rise Gets Scientists In A Sweat

    Here is the opening of this worrying article from the Financial Times (Subscription required to access full article via this link):

    Scientists are struggling to understand why a burst of “scary” warming at the North Pole has pushed Arctic temperatures nearly 20C higher than normal for this time of year.

    Experts in the US and Europe say they have been shocked by the soaring temperatures recorded in November, when much of the region is plunged into freezing winter darkness.

    Temperatures this month have been as high as almost minus 5C when they are normally closer to minus 25C.

    “We’ve been processing this data since 1958 and we haven’t really seen anything like this at this time of year,” said Rasmus Tonboe, a sea ice expert at the Danish Meteorological Institute. “We are watching the situation and trying to analyse what is going on but it’s very surprising.”

    The unusual warmth has come as officials at the UN’s World Meteorological Organization said they were 95 per cent sure that 2016 would be the hottest year since records began in the 19th century. It would mean that 16 of the 17 warmest years on record have been this century.

    The 17th year was in 1998 when there was a powerful El Niño weather event, as there was in 2015 and 2016.

    But some scientists said climate change seemed to be more responsible for the unusual warming at the North Pole this month than the impact of the latest El Niño effect.

    “I don’t think that’s a huge factor,” said Jennifer Francis, a Rutgers University climate scientist, explaining that a near-record fall in the extent of sea ice in the Arctic this summer had led to a warmer autumn.

    This had reduced the temperature difference between the Arctic and more southerly regions, causing a “wavier” jet stream — a great river of fast-moving air about 10km above the earth that acts as a barrier separating the North Pole from warmer latitudes.

    The changes in the jet stream had allowed more warm air to penetrate further north, which explained a lot of the “ridiculously” high Arctic temperatures, Ms Francis said.

    “That is scary because it is showing us how rapidly the climate system is changing … We expected for a long time to see the ice disappear and the Arctic warm up and perhaps the jet stream doing bizarre things, but it’s happening much faster than I think anyone expected.

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    May Acknowledges Business Warning Over Brexit Cliff Edge

    Here is the opening of this interesting article from Bloomberg:

    Prime Minister Theresa May acknowledged calls from British business leaders to avoid a “cliff edge” in which the U.K. leaves the European Union before sealing a fresh trade deal, signaling she may be open to seeking a transitional agreement to bridge any gap.

    "We want to get the arrangement that is going to work best for the U.K. and that will work best for business in the U.K.," May told the Confederation of British Industry’s annual conference in London on Monday. "I understand that people don’t want a cliff edge."

    The CBI urged the government to clarify what happens on the day after Brexit amid concern companies could be hit by uncertainty, new regulations and tariffs if a new relationship hasn’t been arranged with the EU by then.

    “Businesses are inevitably considering the cliff-edge scenario -- a sudden and overnight transformation in trading conditions,” Paul Drechsler, the president of the group, said before May spoke. “If this happens, firms could find themselves stranded in a regulatory no man’s land.”

    May has said she wants to invoke Article 50 of the EU’s Lisbon Treaty by the end of March 2017, setting in motion two years of formal talks on the U.K.’s departure from the bloc. In that time, the government will have to draw up new rules for a range of economic activities currently governed by EU regulations as well as strike new trade deals. If no agreements are reached, trade between the U.K. and the EU would be governed by World Trade Organization rules.

    The CBI conference precedes Chancellor of the Exchequer Philip Hammond’s Autumn Statement on the economy on Wednesday, when he will outline the government’s priorities for tax and spending.

    Many business leaders favored staying in the EU. Since the June 23 vote went the other way, the CBI has led calls for the U.K. to maintain tariff-free ties to the bloc, while ensuring that British companies can continue to tap workers from the EU. May has pledged to curb immigration, a principal demand of the “Leave” campaign, but one that EU leaders have said is incompatible with continued single-market access.

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    French Thatcherite Upends 2017 Race Pledging to Shrink the State

    Here is the opening of this informative article from Bloomberg:

    Former Prime Minister Francois Fillon, the new front-runner in France’s 2017 presidential election, is offering voters an economic-policy revolution inspired by Margaret Thatcher.

    Fillon, 62, vaulted from third position in most polls to win the first round of the Republican primary by 15 percentage points from the veteran Alain Juppe on Sunday with the most free-market platform among the seven candidates. They’ll face each other again in next Sunday’s runoff and the winner will be favorite to become president in May 2017.

    Lifelong politician Fillon is pledging to lengthen the work week to 39 hours from 35, to increase the retirement age to 65 and add immigration quotas. He’s vowed to eliminate half a million public-sector jobs and cut spending by 100 billion euros ($106 billion) over his five years in office. And he proposes a 40 billion-euro tax-cut for companies and a constitutional ban on planned budget deficits.

    “Who is Fillon? The classic conservative, right-wing candidate,” Bruno Cautres, a political scientist at the Sciences Po Institute in Paris, said in an interview. “He wants a deep reform of the French model: shrinking the role of the state and cutting the welfare system.”

    Compared with the brash style of former boss, Nicolas Sarkozy, Fillon has a more low-key approach but he makes a virtue of telling it straight. When he took office as premier in 2007, he shocked even Sarkozy by announcing that France was a bankrupt state. Today he’s promising to reverse that, just like his role model when she became U.K. prime minister in 1979.

    “Thatcher was elected after a long and worrying period of decline” in the U.K., Fillon said in a book setting out his candidacy. “When she left office, the U.K. was no longer the sick man of Europe.”

    Like Thatcher, Fillon may also find an affinity with the new Republican occupant of the White House. Fillon says he’s ready to work with Donald Trump and the two men share an admiration for Russian President Vladimir Putin.

    Fillon has said repeatedly that he wants France to have a closer relationship with Russia, and with Putin himself, who was prime minister during the period when Fillon ran the French government. While other European leaders have called for Putin to stop bombing Syria, Fillon described the attacks as “cold but efficient pragmatism.”

    Polls, albeit six months before the vote, suggest that whoever the Republicans nominate is likely to face National Front leader Marine Le Pen and her anti-European platform in the two-way presidential run-off in May, since Socialist incumbent Francois Hollande is posting the worst approval ratings in French history.

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    Elon Musk: Tesla Solar Roof Will Likely Cost Less Than a Normal Roof

    Tesla CEO Elon Musk said the solar roof that will be sold under a combined Tesla-SolarCity will likely cost less than a normal roof to install.

    Tesla and SolarCity shareholders voted in favor of the merger, a deal worth $2 billion, Thursday. In late October, Musk unveiled a new solar roof product to show his vision for a combined company with SolarCity, but did not provide specifics on how much it would cost.

    On Thursday after the shareholder vote, Musk said its solar roof will likely cost less than a normal roof:

    “It’s looking quite promising that a solar roof will actually cost less than a normal roof before you even take the value of electricity into account. So the basic proposition would be, ‘Would you like a roof that looks better than a normal roof, lasts twice as long, costs less and by the way generates electricity?’ It’s like, why would you get anything else?”

    Musk added the price he is speaking to factors in the cost of labor.

    During a Nov. 1 conference call, SolarCity CEO Lyndon Rive said that the companies are aiming for 40 cents a Watt, which would put it in line with the competition.

    Musk unveiled four solar shingle options for a solar roof at the Oct. 28 event. The solar roof will incorporate glass developed by Tesla’s new glass division.

    Tesla will produce the solar cells for the roof with Panasonic at a manufacturing facility in Buffalo, New York.

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    India: The Great Rupee Failure

    Here is the opening of this interesting article from Bloomberg:

    One week after India’s sudden declaration that 500- and 1,000-rupee notes were no longer legal tender, the economy is in chaos. And that’s perhaps because the policy was designed as much to shock and awe observers with the government’s command of the Indian economy as to control India’s “black money” problem. What seemed at first to be a masterstroke by Prime Minister Narendra Modi now looks like a grave miscalculation.

    Modi is beginning to sound like he may agree. His recent speeches on the subject have been frankly bizarre. In one, he seemed to laugh at those inconvenienced by the ban; in another, he broke down while speaking of the “sacrifices” he'd made for India, and warned that he might be assassinated by “forces” desperate to protect their “loot."

    What’s changed in a week? Well, for one, it’s become clear that the government was simply too cavalier in its planning. Now that 86 percent of India’s currency is no longer valid, the central bank has struggled to print replacement denominations -- and the new notes are the wrong size for existing ATMs. Modi’s asked people to be patient for 50 days, but the process could take as long as four months.

    You have to wonder if Modi truly sought expert advice, or relied once again on a small and trusted set of politicians to determine policy. India’s simply too big and complex for shock and awe. Large parts of the rural economy use cash for 80 percent of transactions and have been hard-hit. In seafood-mad West Bengal, for example, the fishing industry is in a state of near-collapse; in the wheat-growing states of the northwest, farmers halfway through the sowing season have run out of cash to buy seeds.

    Few villagers have access to an ATM. Most have to trek to a bank branch to change their cash, which means losing out on crucial days of labor. Many Indians, particularly women, still don’t have an active bank account. Finance Minister Arun Jaitley wondered aloud how many poor people would even have 1,000-rupee notes -- probably a rhetorical question, but surely it shouldn’t have been. Someone should've sought the answer before shutting down India’s financial system.

    Among India’s middle class, Modi’s “surgical strike on black money” still appears to be popular. It’s the old “vegan fallacy” -- if something tastes terrible, it must be good for you. Enough Indians are suffering that they believe it must be in a greater cause. It’s a moral project, not an economic one. Stand in line, we’re told, and you honor our brave soldiers at the border.

    But will that support last? The government’s plan is likely to be ineffective in the long term. Economists agree it will have no effect on the generation of black money through corruption.

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