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

    Stretching Thin

    Thanks to a subscriber for this heavyweight 114-page emerging market fixed income focused for report from Deutsche Bank which may be of interest. Here is a section on Saudi Arabia: 

    Large FX buffers buy time despite high fiscal breakeven KSA also has a high fiscal breakeven, expected to reach USD84 in 2017 according to the IMF and somewhat lower according to our estimates at USD72. As such fiscal reform is a priority, but over USD500 billion of SAMA reserves and the potential for part-sale of oil assets give flexibility of timing. However, arguably, the size and conservative nature of the Kingdom makes early reform a necessity.

    Saudi Arabia’s approach to breaking its hydrocarbon habit has been to undertake something akin to a revolution in the country, as outlined in the Vision 2030 document and the shorter-term National Transformation Program 2020. The challenges are significant, given the elevated fiscal breakevens, delivering 11% budget deficit in 2017. Ambitions for achieving a balanced budget by 2020 (“Fiscal Balance Program 2020”), suggests the bulk of the social and economic overhaul should be front-loaded. 

    The National Project Management Office (NPMO), announced in September 2015 and tasked with moving projects forward in a coordinated fashion, has stalled. Furthermore, headline projects such as the Makkah Metro or the North-South rail line have been pushed out. Of the USD1 trillion pipeline, the only actual new project awards have been limited to Aramco investments. Until the NPMO is fully in place, any major project awards will be exceptions.

    By contrast the establishment of the Bureau of Capital and Operational Spending Rationalization – an entity aimed at reviewing the feasibility of projects less than 25 per cent complete has moved forward with a review of some of the SAR1.4 trillion of projects in development. On the first round, approximately SAR100 billion of costs have been cut. Some projects will be cancelled, others retendered or converted to self-financing PPP-style contracts, but the certainty is that these cannot continue to be financed substantially from the public purse. There has also been additional controls on current spending with cuts in civil service allowances. The switch from an Islamic contract year to a slightly longer Gregorian one amounts to a 3% pay cut.


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    1st Quarter Commentary

    Thanks to a subscriber for this report from Horizon Kinetics which I found highly informative and commend to subscribers. Here is a section:

    What’s this about? Paradoxically, it’s an unintended consequence of Vanguard’s strategy of driving fees on bread-and-butter indexes like the S&P 500 and the Russell 1000 down to the 5 basis point range. Advisors – whether human or robot – are not going to guide investors there; they can’t live on 5 basis points. And since for-profit fund companies can’t compete with Vanguard head to head on the S&P 500 battlefield, they will collect their higher fees elsewhere. Through product differentiation. Ergo, not only the oft-mentioned iShares Frontier Index, with a 79 basis point expense ratio, and the Italy ETF, with a 48 basis point fee, but also smart beta funds. 

    The challenge to the rational practice of indexation is the profit motive. Index funds are, by definition, commod-itized products: one S&P 500 or Russell 1000 fund can be no different than another. And it is wholly rational that the for-profit companies that promote index funds try to avoid selling near-zero-fee products. The use of market-ing to promote the sense of product differentiation to the customer in order to secure a higher price is not new: it’s done for vodka, cigarettes and shampoo. As the examples above illustrate, the ETF industry has hijacked tra-ditional indexation and distorted it to a dangerous degree. One cannot even be sure that when one buys a country fund, one even gets that country. 

    The Unavailability of Alternative Asset Classes/Sectors 
    Let’s suppose that it dawned on some modest proportion of investors that, though they thought they were at-tending an academic symposium, they were actually in the midst of what had devolved into a wild party. They decided it was time to leave. To go where? Small-capitalization stocks, a traditional alternative, are no longer a practical alternative. Because of the $1+ trillion that has flowed into ETFs since the Financial Crisis, in practical terms, ETF organizers could only accommodate this magnitude of demand with stocks that have substantial trading liquidity. They necessarily promoted large-capitalization indexes. Accordingly, over 80% of the stock market is invested in large-cap stocks (greater than $10 billion). Only 4.6% of the stock market, by value, are companies less than $2 billon in size. They simply cannot absorb a sufficient portion of the equity pool; they cannot be a functional alternative.

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    Email of the day on the Hong Kong Dollar peg

    NVIDIA GPU Cloud: It's Not What You May Think It Is

    This article by Karl Freud for Forbes may be of interest to subscribers. Here is a section:

    This initiative, which probably could have been better named something like the “NVIDIA Deep Learning Portal”, will actually set NVIDIA up as a channel and demand aggregator for these partners' cloud services, not compete with them. The tool will provision the latest tested versions of AI software stack and development frameworks and then will deploy these software containers on hardware infrastructure provided by the NVIDIA’s partners, initially on Amazon Web Services and the Microsoft Azure Cloud.

    Through this new program, NVIDIA will basically manage a cloud registry and repository of the latest 3 versions of tested applications, optimized libraries and frameworks, which are continually evolving through the open source community. In fact, NVIDIA regularly optimizes these frameworks and then offers these improvements back to the open source community for inclusion upstream. The software is put in an NVDocker container, which is then deployed on the user’s hardware of choice. Think of this as the next generation of CUDA and CuDNN, now expanded to the complete set of Machine Learning software and integrated with container provisioning.


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    Flooding hits northeast Arkansas rice hard

    This article by David Bennett for Delta FarmPress may be of interest to subscribers. Here is a section:

    “At this point, we’re estimating over 150,000 acres of rice will have been lost by the time this is over,” says Jarrod Hardke, Arkansas Extension rice specialist. “Of course, soybeans and corn will be taken out, but to less an extent. There wasn’t as much of those crops planted in the region being affected – especially corn, which is typically planted in lighter soils on higher ground.”

    The May 1 NASS report said 89 percent of Arkansas’ expected 1.2 million-acre rice crop had been planted.

     “Once rice is 10 days submerged, you can start writing it off. Some will survive but once that 10-day mark is hit you’re on the downhill side of expectation for a good rice crop. Rice may like a flood but doesn’t like to be submerged. And while it may survive being submerged longer than other crops it has a breaking point.”

    In many cases, says Hardke, “the water isn’t going down but is leveled out. And farther downstream the flooding is getting worse. The additional rain last week just added insult to injury. More rain is forecast for (the week of May 8).


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    Trump Train-Crash is Ominous for Hyper-Inflated Asset Markets

    The risks of a White House impeachment crisis and months of Washington paralysis are rising exponentially. You do not fire the head of the Federal Bureau of Investigations lightly.

    Donald Trump's sacking of James Comey in the midst of an expanding counter-espionage investigation  - on seemingly bogus grounds - is a political assassination. It is comparable to the Saturday Night Massacre in the Watergate saga, and arguably worse.

    For all his faults, Richard Nixon was at least a foreign policy statesman. Few ever suggested that his inner circle had joined forces with a hostile power to subvert a US election.

    The presumption has to be that the Oval Office is trying to obstruct a probe of Mr Trump's campaign team for suspected collusion with Kremlin. As the New York Times states today in a front page editorial: "Mr Comey was fired because he was leading an active investigation that could bring down a president." It certainly appears as simple as that.

    Whether the escalating constitutional crisis poses a risk to inflated global equity and credit markets is far from clear. There is no historical template for this. It is certainly the sort of catalyst that could shatter complacency, even if VIX volatility index for now remains eerily becalmed at a 24-year low.

    As a Washington correspondent in the 1980s and 1990s, I covered both the Iran-Contra affair and the scandals leading to the impeachment of Bill Clinton by the House of Representatives, and had own my brushes with the FBI along the way.

    In both episodes, markets shrugged off events. Nothing perturbed Wall Street. We journalists at the coal face of the Clinton saga were often asked to give talks in Washington to financial institutions eager to learn whether events might spin out of control.

    There was a cottage industry of investor newsletters and talk-radio hosts convinced that political Armageddon was coming, and with it a cathartic stockmarket crash. Those who "shorted" Wall Street on such advice lost a lot of money.

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    The Weekly View: En Marche! France Votes "Non" to Frexit

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

    France’s new president, Emmanuel Macron’s party is called En Marche! Which roughly translates as Forward we Go!’ He is not the only one going forward, the Eurozone economy and stock markets have done well this year, and as the first 2 clips of our chart below show, Europe is starting to outpace the US. Global markets generally (as measured by the MSCI World Index) are already up around 10% through Friday’s close, which is roughly what we were expecting for the year. With overseas markets doing slightly better than the US and high yield doing better than the Bloomberg Barclays Aggregate Bond Index, it certainly is tempting to follow the old Wall Street adage and “sell in May and go away”. However, even though some summer volatility would certainly not be a surprise, we maintain an overweight to stocks, especially overseas stocks, and are hopeful that a multi-year bull market is still in its early stages. We believe it is important to remember that the recovery in the Eurozone is only 3 years old, interest rates are zero, and the European and Japanese central banks are still buying bonds and thereby adding to their balance sheets every month.

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