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

    The City Finally Sees the Light On Brexit

    Wow. As U-turns go, this one takes some beating. TheCityUK, the main lobbying arm for the financial and associated business services sectors, appears to have suddenly embraced Brexit. In common with all the other big City groups and all the big banks, it was strongly in favour of remaining in the EU, seemingly at almost any cost. It argued loudly that the status quo, and especially the rules governing access to EU markets, was worth the cost in terms of counter-productive regulations, such as banking bonus caps or inappropriate, absurd Solvency II insurance rules.

    No longer: its latest missive appears to have been penned with the zeal of the convert. The press release is entitled “TheCityUK hails opportunity for trade and investment policy reset”. While it obviously remains worried about the threat of protectionism from the EU, its new report emphasises the upsides of developing new markets.

    Around 33pc of the UK’s exports of financial services go to the EU, which also accounts for roughly 40pc of Britain’s trade surplus in financial services. There is no doubt, therefore, that Europe is a crucial market for UK financial services firms. But it’s not that simple. The EU actually matters more to other sectors of the economy (44pc of all our exports of goods and services now go to the EU, a fast-declining share). Even more importantly, as TheCityUK points out in its new report, “over the next 10-15 years, 90pc of global economic growth is expected to be generated outside Europe and these markets – developed and emerging – must be a priority focus for the country post-Brexit”. In other words, we need to fight to retain as much access as possible to the EU, but our long-run future lies in trading a lot more with other economies, including emerging and already developed countries.

    A recent Financial Services Briefing by Shanker A Singham and Victoria Hewson, published by the Legatum Institute, put this very well. It points out that international and wholesale banking business related to the EU is between 20pc-25pc of the total. That’s a big number, helped by the availability of passporting, but still means that a huge amount of business is conducted by the City without any passporting mechanism. We shouldn’t obsess about the minority of activity that goes to the EU while neglecting the majority that doesn’t.

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    French Race Blown Wide Open as Le Pen, Macron Wait in Wings

    Here is the opening of this informative article from Bloomberg:

    Francois Fillon’s French presidential campaign plunged deeper into trouble on Tuesday after further revelations about his use of public funds to employ members of his family.

    The Republican candidate’s daughter and son allegedly earned 84,000 euros ($91,000) from 2005 to 2007 while working for him when he was a Senator, Le Canard Enchaine said. His wife, Penelope Fillon, earned more than 900,000 euros during over a decade as a parliamentary assistant and a contributor to a magazine, according to Le Canard.

    The newspaper’s initial report on Penelope’s job last week triggered a prosecutor to open a preliminary probe into the family’s affairs. The candidate says he’s innocent.

    “I am confident, I am calm and I’m waiting for the end of the investigation,” Fillon said in Paris. “Never has a situation like this one occurred. Never, three months before an election, was such an big and professional operation set up to eliminate a candidate other than through a democratic vote. Everyone will reap the consequences.”

    The scandal has gripped France over the last week and offers the prospect of another twist in a race that has the nationalist Marine Le Pen leading the polls and has already seen household names like President Francois Hollande and his predecessor, Nicolas Sarkozy, fall by the wayside. That said, polls show that Le Pen is still a long shot for victory in the second round of voting, with Emmanuel Macron also poised to benefit -- at least in the short term -- from Fillon’s woes.

    “His image has been seriously damaged, and what’s worrying for him is that even among his supporters many are not convinced,” said Yves-Marie Cann, director of political studies at pollster Elabe in Paris. “The fire is not contained.”

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    Trump Is Right: Germany Is Running An Illegal Currency Racket

    As a matter of strict objective fact, Donald Trump’s trade guru is correct. Germany is the planet’s ultimate currency manipulator.

    The implicit Deutsche Mark is indeed “grossly undervalued” The warped mechanism of monetary union allows Germany to lock in a permanent ‘beggar-thy-neighbour’ trade advantage over Southern Europe, inflicting mass unemployment on the victim countries and blighting their futures.

    Whatever you think of Peter Navarro’s trade philosophy, he is right that Germany’s chronic, huge, and illegal current account surplus - 8.8pc of GDP - saps global demand and seriously distorts the world economy.

    Let us concede that this super-surplus is an accident of history, rather than the result of a strategic conspiracy by Chancellor Helmut Kohl in the early 1990s. The German people never wanted the euro in any active sense.

    The Bundesbank went to some lengths to head off the creation a ‘greater euro’ with too many ill-suited countries, constructed on the unworkable foundations that we can all see so clearly today.

    That said, monetary union was never entirely innocent. The German Chambers of Commerce and Industry (DIHK) railed against the periodic devaluations by Italy and France in the various fixed exchange experiments of the pre-euro era. They were fully aware of the mercantilist advantage of fixing the D-Mark rate in perpetuity, and their influence played its part in the German acceptance of the Maastricht Treaty.

    Once the euro was underway, GermaAs a matter of strict objective fact, Donald Trump’s trade guru is correct. Germany is the planet’s ultimate currency manipulator.

    The implicit Deutsche Mark is indeed “grossly undervalued” The warped mechanism of monetary union allows Germany to lock in a permanent ‘beggar-thy-neighbour’ trade advantage over Southern Europe, inflicting mass unemployment on the victim countries and blighting their futures.

    Whatever you think of Peter Navarro’s trade philosophy, he is right that Germany’s chronic, huge, and illegal current account surplus - 8.8pc of GDP - saps global demand and seriously distorts the world economy.

    Let us concede that this super-surplus is an accident of history, rather than the result of a strategic conspiracy by Chancellor Helmut Kohl in the early 1990s. The German people never wanted the euro in any active sense.

    The Bundesbank went to some lengths to head off the creation a ‘greater euro’ with too many ill-suited countries, constructed on the unworkable foundations that we can all see so clearly today.

    That said, monetary union was never entirely innocent. The German Chambers of Commerce and Industry (DIHK) railed against the periodic devaluations by Italy and France in the various fixed exchange experiments of the pre-euro era. They were fully aware of the mercantilist advantage of fixing the D-Mark rate in perpetuity, and their influence played its part in the German acceptance of the Maastricht Treaty.

    Once the euro was underway, Germany then pushed through policies in labour law and tax policies that amounted to an ‘internal devaluation’ - cutting unit labour costs in manufacturing in the single year of 2005 by 4.4pc, for example - and continued to screw down its intra-EMU exchange rate long after there was any justification for doing so. The effect was to further entrench commercial supremacy.

    Large current account surpluses are invariably the result of tax policies, regulations, hidden barriers, and an overall governing structure that punishes consumption and fosters exports. Germany - for example - forces households to cross-subsidize the power costs of export industries.

    This would not matter much if Germany had a floating exchange rate: the currency would correct for the distortions over time. But such practices within the euro system are an entirely different matter. Nothing self-corrects.

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    Sometimes Dow Peaks Are Followed by More Peaks

    Last week, much attention was rightly focused on the Dow Jones Industrial Average as it breached the 20,000 mark for the first time.

    In past cycles, such peaks have led to bouts of euphoria as investors had a fear of missing out on further gains. Although a similar feeling could be motivating some investors today, many seem to still be scarred by the two crashes of the past 16 years or so in which the market was cut in half each time.

    The thinking is that any time stocks reach a new high it must mean that we are close to a peak that will surely bring the market crashing down. That is always a possibility, of course, but investors in stocks have to remind themselves that they will see many highs in a lifetime of investing. Generally speaking, stocks go up most of the time. A few of those highs will be temporary peaks but most will simply lead to even more highs down the road.

    For example, looking at over 100 years of data on the Dow going back to 1915 shows that stocks have had 1,252 highs. That works out to an average of about 12 new highs every year. Assuming the average investor is in the markets for 40 years, that would be almost 500 highs in a lifetime of investing in stocks.

    This table shows the number of highs by decade going back to 1915: (see article)

    There was an enormous dry spell following the Great Depression, but beyond the aftermath of that cataclysmic period, new highs in stocks are perfectly ordinary. Almost five percent of all trading days over this time span have seen new highs.

    To take this a step further, it can also be useful to look at how well stocks have performed in the ensuing years after reaching highs. This table shows how the Dow has performed one, three and five years after reaching a new high:

    The average total returns for one, three and five years are right around the long-term average in the stock market  of about 9-10 percent annually over this period. And stock market returns have been positive for most of the time following these events over all three time horizons.

    There are some caveats. If five percent of all trading days have led to highs, That means stocks are trading below a high 95 percent of the time. So the majority of the time stocks are in a state of drawdown, which can affect the psyche of any investor who doesn’t understand this fact. Most of your time as a stock market investor is spent in a state of regret.

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    Buffett Go-To Billionaire Dealmaker Has Wall Street on Edge

    Here is the opening and also a latter section of this interesting article from Bloomberg:

    It’s time for Jorge Paulo Lemann to get back in the hunt.

    That, anyway, is the word inside the food industry, where the Brazilian billionaire has been doing blockbuster deals roughly every two years. In 2013, he persuaded Warren Buffett to team up on H.J. Heinz. Then, in 2015, the duo orchestrated the $55 billion merger of Heinz and Kraft Foods.

    “It’s logical that this would be the year,” said David Palmer, a food industry analyst at RBC Capital.

    The talk has traders on edge. Last month, a story in a little-known Swiss magazine, resurfacing well-worn speculation about Lemann’s plan to buy Mondelez with Buffett, spurred an immediate pop in the U.S. snack giant’s shares. (They soared 28 percent in just a few minutes.) So far, no deal has been announced. Regardless, the question of what Lemann might go after in 2017 has just about everyone grasping for leads. Besides Mondelez, some other names include General Mills, Kellogg and Campbell Soup.

    And:

    Buffett’s Berkshire Hathaway is Coke’s biggest shareholder (with a 9 percent stake) and Lemann once called the company his dream acquisition.

    To swallow the $179 billion soft-drink maker, an offer would probably need to come from Anheuser-Busch InBev, which Lemann controls along with other Brazilian billionaires and wealthy Belgian families. AB InBev and Coke both declined to comment.

    As recently as 2015, Buffett said a deal was “very unlikely” because Coke wasn’t looking for one. But last month, his son Howard announced he wouldn’t stand for re-election to the company’s board. CEO Muhtar Kent also said he will step down next year and hand the reins to his lieutenant, James Quincey. That’s fueled speculation a deal is more likely now.

    “This seems like a situation tailor-made for a 3G transformation,” said Steve Wallman, a fund manager and longtime Berkshire shareholder.

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    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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