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June 11 2021

Commentary by Eoin Treacy

A year of disruption in the private markets

This report from McKinsey may be of interest to subscribers. Here is a section:

Dry powder Private equity dry powder stands at $1.4 trillion (60 percent of the private markets total) and has grown 16.6 percent annually since 2015. Dry powder stocks are best viewed in the context of deal volume, and as a multiple of average annual equity investments over the prior three years, PE buyout dry powder inventories have crept higher, growing 11.9 percent since 2017. However, normalizing for abnormally high deal volatility in 2020, PE dry powder as a multiple of deal volume remained largely in line with historical averages (Exhibit 21). Dry powder growth reflects fundraising in excess of capital deployment. Its continued growth in 2020 highlights a common misperception among industry participants and pundits: the belief that stocks of dry powder can be deployed quickly in a market correction. While fundraising fell sharply in the first half of 2020 (–22.8 percent relative to the first half of 2019), so too did deal volume (–22.5 percent). Despite the sharp (and short-lived) decline in mark-to-market valuations in the first half of 2020, PE investors were largely unable to take advantage, as private owners exercised a key feature of PE—the right to hold. Without willing sellers, dry powder stocks rose once again, piling pressure on deal multiples, which once again reached all-time highs in 2020.

Eoin Treacy's view -

 A link to the full report is posted in the Subscriber's Area. 

Private Equity is one of the primary destinations for liquidity and the fact that dry powder stands at $1.4 trillion with no easily accessible opportunities or willing sellers is a testament to just how high valuations are.



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June 09 2021

Commentary by Eoin Treacy

Inflation: The defining macro story of this decade

This is a thought-provoking report from Deutsche Bank’s new What’s in the tails? series of reports. Here is a section:

The Fed’s move away from pre-emptive action in its new policy framework is the most important factor raising the risk that it will fall well behind the curve and be too late to deal effectively with an inflation problem without a major disruption to activity. Monetary policy operates with long and variable lags, and as we have noted, it will also take time to recognize that inflation has actually overshot excessively and persistently. As inflation rises sustainably above target, forward looking expectations are likely to become unanchored and drift higher, adding momentum to the process.

By this point, the Fed will likely be moved to act, and when it does the impact will be highly disruptive to the markets and the economy. In the past, the Fed has not been able to reverse a sustained run-up in inflation without causing a recession and potentially large increase in unemployment. Being behind the curve when it starts will make the event that much more painful. Rising interest rates will also cause havoc in a debt-heavy world, leading to financial crises especially in emerging markets. If the Fed lets up and reverses rate increases in response to rising unemployment and other economic pain as occurred during the 1970s, inflation could back up again, leading to a repeat of the stop-go economic cycles that occurred during that period.

Depending on the timing of this potential inflation scenario, the 2022 midterm elections could be crucial. A surprisingly strong showing on the Democratic side could even pave the way for modifying the Federal Reserve Act to raise the inflation objective. This discussion has been brewing in academic circles for some time, not the least as a way to enhance the Fed’s power to move interest rates into negative territory when needed. But such a move could damage the Fed’s inflation fighting credibility. It could also lead to still higher inflation over time and ultimately intensifying the kind of boom-bust cycle experienced during the 1970s.

In brief, the easy policy decisions of the disinflationary 1980-2020 period appear to be behind us.

Eoin Treacy's view -

A link to the full report is posted in the Subcsriber's Area.

The response to the credit crisis resulted in massive asset price inflation which exacerbated inequality across society in most countries. The response to the pandemic is aimed at reversing that trend and providing greater opportunity to the people left behind by the last recovery. That implies massive money printing, spending and social programs.



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June 08 2021

Commentary by Eoin Treacy

Man Group-Oxford Quants Say Their AI Can Predict Stock Moves

This article from Bloomberg may be of interest to subscribers. Here is a section:

Multi-horizon forecast models using statistical analysis have been around for years now, channeling market variables into predictions about how a stock will move over different time periods. The machine-learning techniques introduced in this research will increase the amount of data that can be processed and the potential accuracy of the predictions over longer time periods.

But to make it work, the AI has to be able to process a huge amount of data quickly. The researchers turned to Bristol, England-based Graphcore’s Intelligence Processing Unit, a pizza box-sized chip
designed specifically to handle the demands of an AI program. In the trials, Graphcore’s chip performed about 10-times faster than GPUs.

While the research and the Graphcore chips that make the model possible are the “logical next step” in the high-speed computations that Man Group is interested in, the fund hasn’t committed to rolling it out, Ledford said.

Meanwhile, not every firm would be able to deploy this kind of strategy. “You would not try this model if you did not have access to fast computation,” said Zohren, who worked with Oxford-Man Institute research associate Zihao Zhang on the research.

 

Eoin Treacy's view -

Traders built some of the fastest telecommunications equipment anywhere, to get prices quickly between New York and Chicago. They pioneered colocation and the transition of exchanges into data centres. It is inevitable they will invest heavily in super computers if they believe they can gain an edge in short-term trading.



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June 04 2021

Commentary by Eoin Treacy

Secular Themes Review June 4th 2021

Eoin Treacy's view -

On November 24th I began a series of reviews of longer-term themes which will be updated on the first Friday of every month going forward. The last was on May 7th. These reviews can be found via the search bar using the term “Secular Themes Review”.

The pandemic panic is now one year in the rear-view mirror. It seems to have lost its ability to scare us so that begs the question what happens next? That’s the big conundrum

Some still believe that technology will solve all our problems and that the largest companies in the world will continue get even larger. Others believe that the inflation genie has been releases so it is inevitable that bonds will collapse in value. Others believe that we are in for a long grind of subpar growth because the debt is so large, it will sap the will to live out of every speculative asset. Others believe we are in a stock, commodity and property market bubble that could pop at any moment. Still other believe that cryptocurrencies are the solution, though no one is exactly sure what the problem is. So how do we make sense of these divergent views?

Personally, I have a strong feeling of déjà vu. In late 1999 and early 2000 I was selling Optus cable connections door to door in Melbourne. When I tired of backpacking, I went to London and within three weeks had started at Bloomberg. I was amazed at the speed of the Royal Mail. I saw an ad in The Times on a Wednesday for European sales people. I posted my CV that afternoon and had a reply back from Bloomberg delivered the next day. I had an interview on Monday and started on Tuesday. To say they were desperate for sales people is a gross understatement. I was in Belgium, visiting private banks, 10 days later. That was the top of the market and it was evidence of a true mania in the TMT (Telecoms, Media and Technology) sectors.

By the end of the Nasdaq bear market in 2003 the number of Bloomberg terminals being sold to mortgage bankers was surging. I was even offered a job by one. The Dollar was pulling back, there were fears about financial repression, China’s demand for commodities was only beginning, emerging markets were breaking out and gold was completing its base formation. A year later oil broke out.



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May 28 2021

Commentary by Eoin Treacy

Fed Reverse Repo Primed to Top Record Demand Level at Month-End

This note from Bloomberg may be of interest to subscribers. Here is a section: 

Volume at the Federal Reserve’s facility for overnight reverse repurchase agreements is poised to climb on the last trading day of the month, surpassing Thursday’s record, as global banks pull back on their balance sheet activity for regulatory purposes.

Wrightson ICAP said it’s likely demand for the Fed’s RRP moves above $500 billion level, but will be looking for some pullback in activity on June -- though any dip may be temporary

RRP usage surged to $485.3 billion Thursday, a record since the facility started in September 2013 and up from $450 billion in the prior session

The rate on overnight GC repo opened at -0.01%, according to Oxford Economics. Treasury bills out to September are yielding less than 1.5bp. On the unsecured side, three-month Libor dropped to a fresh record low of 0.13138% from 0.13463% in the previous session

The glut at the front-end has been spurred by the central bank’s ongoing asset-purchase program, commonly referred to as quantitative easing, as well the drawdown of the Treasury’s general account. The latter has been driven by the looming debt-ceiling reinstatement, which is due to take place at the end of July, and the flow of pandemic stimulus funds to taxpayers

Federal relief payments to state and local municipalities are also adding to the oversupply, and that’s being exacerbated as regulatory constraints encourage banks to turn away deposits, directing that cash into money-market funds

Eoin Treacy's view -

There was a lot of concern at the prospect of banks turning away deposits and the impact that would have on money market funds a couple of months ago. Since then, the Fed has acted to support banking operations. Additional supports are now going to be required to ensure money market funds do not see negative yields. That may require stepping up asset purchases in an effort to mop up excess liquidity.



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May 28 2021

Commentary by Eoin Treacy

ECB Expected to Keep Its Higher Bond-Buying Pace Through Summer

This article from Bloomberg may be of interest to subscribers. Here is a section:

The pandemic purchases were ramped up in March when the U.S. rebound was fueling a global rise in borrowing costs while the euro zone was in a double-dip recession. The ECB will unveil new economic projections that should confirm a far brighter outlook as vaccinations pick up.

A European Commission report on Friday showed economic confidence in May at the highest level in more than three years as restaurants, hotels and shops across the region start to reopen.

Yet in a sign that the recovery remains fragile, French data on Friday came in much weaker than expected. Consumer spending fell 8.3% in April from the previous month, more than twice as much as forecast, and first-quarter gross domestic product was revised to show a decline. Finland also posted an unexpected contraction.

Eoin Treacy's view -

Over the past few decades there have seldom been times when European equities outperformed the S&P500. The equity cult in the USA is much stronger than elsewhere which creates demand for domestic growth stories. The presence of strong consumer brands, companies with long histories of paying and increasing dividends, the ready supply of new exciting stories from Silicon Valley and the largest consumer base in the world means Wall Street has tended to outperform.



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May 27 2021

Commentary by Eoin Treacy

Bank of England likely to raise rates at some point in 2022

This article from Reuters may be of interest to subscribers. Here is a section:

“In that scenario, the first rise in Bank Rate is likely to become appropriate only well into next year, with some modest further tightening thereafter,” he added.

The government’s furlough programme, which pays the wages of more than 2 million workers, does not expire until Sept. 30 and Vlieghe said it would take time for the true health of the economy until early in 2022.

If unemployment in the first quarter of 2021 was low and upward pressure on wages stronger then than the BoE expected, “a rise in Bank Rate could be appropriate soon after, along a slightly steeper path than in my central case,” Vlieghe said.

However, if concerns about COVID infection risks persist - possibly as a result of new variants of the disease - higher unemployment could prove persistent and the economy might need more BoE stimulus. (Reporting by David Milliken and Andy Bruce)

Eoin Treacy's view -

Dominic Cummings and his lengthy testimony in front of Parliament are making headlines today but crowds have short memories.

Psychologically, we tend to remember a whole experience by how we feel at the end. Christmas is a good example. All of the preparation, decoration and rushing around are worth it because of the positive experience at the climax of the festival.



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May 25 2021

Commentary by Eoin Treacy

Email of the day on the value/growth ratio

Eoin, congrats for your most recent calls on crypto etc. well done! You were showing a chart re value over growth outperformance and that it could go on a little longer. What in your view is the best way to play it? iShares ETF value long and short iShares growth? Tkx a lot and keep, up your good work! Dani

Eoin Treacy's view -

Thank you for your kind words and the general pattern of outperformance in value is certainly noteworthy. Low interest rates favour growth at the expense of value because expectations for future potential are stretched to the point of incredulity the longer an easy money regime persists. When interest rates change direction the enthusiastic outlook for valuations is harder to justify and the relative attraction of reliable earnings is burnished.



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May 24 2021

Commentary by Eoin Treacy

Cars Are About to Get a Lot More Expensive

 This article from Bloomberg may be of interest to subscribers. Here is a section:

Consider a car manufacturer with $100 billion in sales. A 10% decline in sales volume would push earnings before interest and tax down by 40%, the Boston Consulting Group has estimated. That's an optimistic scenario — and this analysis assumed the company could eliminate all variable costs such as raw materials and labor. In the current situation, that’s not quite possible.

No doubt, carmakers could digest the rising cost of production a bit longer by reducing incentives and discounts they’ve used to lure buyers. But that's already been happening in the world’s largest auto markets, the U.S. and China, and you can’t trim back enticements forever. 

Companies have few options to offset creeping manufacturing expenses. With prices already high, consumers aren’t going to be as liberal with their wallets. So far, they have been willing to
accept a 12% premium, or around $5,000 over the sticker price, according to Kelley Blue Book and Cox Automotive. But a U.S. vehicle affordability index has started ticking down, signaling people are beginning to think twice before splashing out. Almost 40% of those who were going to buy cars have now put off their purchases. 

Eoin Treacy's view -

The challenge for consumers is prices rarely go down after they go up because companies pocket margin. That’s as true of cars as it is of every other product. The additional premium companies are no enjoying will help as they redeploy resources towards developing electric replacements for their biggest sellers. That was going to happen anyway so in many regards the current go-slow on production is being welcomed by manufacturers.



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May 24 2021

Commentary by Eoin Treacy

Solar Power's Decade of Falling Costs Is Thrown Into Reverse

This article from Bloomberg may be of interest to subscribers. Here is a section:

For the solar industry, the timing couldn’t be worse. Renewable energy finally has a champion in the White House and ambitious climate goals have been announced across Europe and Asia.

At the center of the crisis is polysilicon, an ultra-refined form of silicon, one of the most abundant materials on Earth that’s commonly found in beach sand. As the solar industry geared up to meet an expected surge in demand for modules, makers of polysilicon were unable to keep up. Prices for the purified metalloid have touched $25.88 a kilogram, from $6.19 less than a year ago, according to PVInsights.

Polysilicon prices are expected to remain strong through the end of 2022, according to Roth Capital Partners analysts including Philip Shen. 

And the problem isn’t limited to polysilicon. The solar industry is facing “pervasive upstream supply-chain cost challenges,” panel manufacturer Maxeon Solar Technologies Ltd. said in April.

Eoin Treacy's view -

This is just one more sector facing medium-term supply disruption. The clear conclusion is when we look around the world there is too much money chasing too many goods and services. The big question is how long will it take for this inflationary bias to become anchored in the minds of consumers?



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May 21 2021

Commentary by Eoin Treacy

South African Central Bank Maintains That Next Rates Move Is Up

This article from Bloomberg may be of interest to subscribers. Here is a section:

The Reserve Bank’s hawkish stance is likely to draw criticism from politicians and labor unionists, who say it should be doing more to support the economy and reduce unemployment that’s at a record high.

The central bank cut the key rate by 300 basis points last year. Its contribution to an economic recovery will now be predictable policy, according to Deputy Governor Kuben Naidoo.

“You need low, predicable rates during the recovery to support economic activity, to encourage people to lend, to encourage businesses to invest,” he told reporters. “That’s the contribution of the SARB during a crisis.”

Eoin Treacy's view -

South Africa has joined the ranks of countries signaling the lows for rates are in. Interest rate differentials are once more a factor in how currencies are valued. Commodity exporters are leading this trend because of their much-improved balance of payments and that is true of both emerging and developed markets.



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May 19 2021

Commentary by Eoin Treacy

Bitcoin Plunge Wipes $500 Billion From Value in Crypto Rout

This article from Bloomberg may be of interest to subscribers. Here is a section:

Bitcoin is now down more than 50% from its record of almost $65,000 set in April. Fueling the volatility is Tesla CEO Elon Musk, whose social-media utterances have whipsawed the crypto community. A statement from the People’s Bank of China on Tuesday reiterating that digital tokens can’t be used as a form of payment added to the selloff.

The selloff dominated market chatter on a day when equities also were tumbling and the Federal Reserve was set to release minutes from its latest meeting. #Cryptotrading was trending on Twitter, where critics and fans alike were in a tither over the rout. Critics had warned for weeks that the moves in crypto assets were unsustainable and that any sign of a selloff would lead to a rout.

“This is going to be the first ‘welcome to crypto’ day for a lot of new entrants,” said Stephane Ouellette, chief executive and co-founder of FRNT Financial. “The history of these assets has been littered with aggressive rallies and sickening selloffs.”

Eoin Treacy's view -

The biggest question for the wider investment community is “who are the new entrants to crypto?”. There are two large new groups of investors. Retail investors, flush from US government stimulus checks, bought cryptos in size in the first quarter. Institutional investors, desperate for an “uncorrelated asset” also jumped in and helped fuel the appreciation in value to $1.9 trillion for the entire crypto sector at its peak.



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May 18 2021

Commentary by Eoin Treacy

Eurozone in Double-dip Recession as Mediterranean Economies Risk Another Lost Summer

This article from The Telegraph may be of interest to subscribers. Here is a section:

But Robert Alster at Close Brothers Asset Management warned of a divide between industrial economies in the north and tourist-reliant nations in the south, despite the start of UK tourism to Portugal. This could spark a return to the two-speed Europe which raised questions over the stability of the bloc after the financial crisis.

Mr Alster said: “The risk now is that the north/south divide continues to widen. Germany’s economic growth is not far behind the UK’s, with its vaccination programme set to overtake, whereas Spain’s economy has been hardest hit,” he said.

“The northern countries have benefited from strong manufacturing growth, with the US and China driving global demand, whereas the Southern countries are on tenterhooks to see whether the European tourism season can go ahead.”

Two consecutive quarters of contraction mean the currency area is officially in recession again, despite not fully recovering from the initial shock of Covid.

GDP remains more than 4pc below its pre-pandemic peak at the end of 2019.

Employment fell by 0.3pc in the first quarter of 2021, meaning the number of people in work is still almost 3.6m below its pre-Covid level.

Jack Allen-Reynolds at Capital Economics said the jobs market should soon start to recover too, but that the rebound in hiring will probably be quite slow.

He said: "Many firms will be able to raise output by increasing employees’ working hours before they start taking on more staff."

Eoin Treacy's view -

Europe and the USA adopted very different methods of supporting the economy during the pandemic. The USA favoured giving direct support to workers by boosting unemployment benefits. Europe favoured supporting companies so they would not fire large numbers of workers. Both sets of policies have resulted in unintended consequences.



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May 17 2021

Commentary by Eoin Treacy

Gold Miners Rise With Prices on Weaker Dollar, Inflation Worry

This note from Bloomberg may be of interest to subscribers.

Earlier, gold was buoyed by signs that money managers and exchange-traded fund investors are turning more positive on the precious metal
Gold spot price was up as much as 1.3%, silver +2.8% intraday; U.S. Dollar Index (DXY) fell as much as 0.2%
Precious metal miners intraday gainers include HL which rose as much as 15%, EDR CN +11%, GGD CN +11%, CDE +8.9%, FR CN +7.4%, K CN +6.1%, FVI CN +6.5%
Goldman said in a note that “gold tends to perform well when realized inflation is elevated and rising, while the dollar suffers, especially as the Fed stays on hold”
Meanwhile, copper miners also got a boost as price climbed on Monday, lifted by concerns of supply disruptions in Chile and signs that Chinese demand is picking up
Some of the copper/base metals miner that gained intraday include TKO CN, FCX, FM CN
TECK also gained, which was partially helped by rise in coal equities on higher natgas prices

Eoin Treacy's view -

Negative real interest rates are the primary secular tailwind for gold prices. With inflationary measures ramping higher and central banks reluctant to raise rates, the negative real interest rate environment is being supported by that policy.



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May 17 2021

Commentary by Eoin Treacy

Email of the day on India's demographics

You say that India has a significant demographic tailwind, taking the consensus view that that is an investment plus; one that is embedded in so many analyses on India. For a challenge to this listen to the Meb Faber interview with Vikram Mansharamani, 50 minutes in for 5 minutes, on his take on India and why in fact the demographics are a head not a tail wind: https://www.youtube.com/watch?v=cM40JZ3NSNk&t=30s

Eoin Treacy's view -

Thank you for this link and the discussion raises a large number of questions. There are two that I think are particularly relevant. The first is on the assumed ubiquity of the bullish India story and the second is the continued dominance of capital over labour.



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May 14 2021

Commentary by Eoin Treacy

McDonald's, Amazon Accelerate Push Toward Higher Minimum Wage

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

McDonald’s Corp. announced Thursday it will raise hourly wages by about 10%, bringing the average wage at its restaurants to more than $13 an hour. Chipotle Mexican Grill Inc. said earlier this week it will set hourly starting wages at $11 to $18. Target Corp. and Costco Wholesale Corp. have increased theirs to $15 and $16, respectively.

McDonald’s is hiring 10,000 new employees at its company-owned stores over the next three months alone, and Walmart Inc. brought half a million people on board last year. Chipotle is hiring 20,000 workers across the U.S., and Target needs workers for the 30 to 40 stores it will open this year.

Amazon.com Inc. also upped the labor market ante Thursday by announcing plans to hire 75,000 people in the U.S. and Canada at starting pay that will average more than $17 an hour. New employees will get hiring bonuses of $1,000 and those fully vaccinated for Covid-19 will get additional $100.

Eoin Treacy's view -

The year over year change in average hourly wage growth has been massively distorted by the pandemic. It surged in 2020 because fewer people were working, and those that were got pay rises. It then plummeted to historic lows because the current growth is on par with what was witnessed a year ago.



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May 12 2021

Commentary by Eoin Treacy

The Days of Low Treasury Yields Are Numbered

This article by Bill Dudley may be of interest to subscribers. Here is a section:

Today, there’s ample reason to expect a positive term premium to return. For one, the Fed has a new, more patient monetary policy stance. As a result, inflation will be higher and more variable — a risk that must be compensated with higher long-term yields. Also, keeping inflation in check will require a higher peak fed funds rate, reducing the risk that the Fed will again get pinned at the zero lower bound. Beyond that, deficit financing is expanding the supply of government bonds: Treasury debt outstanding has quadrupled since 2007, and the Biden administration is seeking to add several trillion dollars more. Meanwhile, one big source of demand for the bonds is set to dwindle as the Fed phases out its asset purchases, most likely next year.

Putting the pieces together, one can expect a 10-year Treasury yield of at least 3%: The 2.5% floor set by the federal funds rate, plus a term premium of 0.5% or more. But that’s not all. The Fed says it wants inflation to exceed its 2% target for some time, to make up for previous shortfalls. This, in turn, could stoke inflationary fears and lead markets to expect a higher path for future short-term rates. As a result, the 10-year Treasury yield could more than double from the current 1.6%. And if persistent deficit financing prompts concern about growing U.S. debt, the yield could go to 4% or higher.

Anyone who has been in finance for less than a decade has rarely seen 10-year Treasury note yields above 3%. So what’s coming could, for many, be quite a shock. The secular bond bull market that began nearly 40 years ago is finally ending.

Eoin Treacy's view -

US job openings now far exceed the pre-pandemic peak. At the same time credit card balances are declining even as debt loads are increasing. Meanwhile the unemployment rate is holding at 6%.

The conclusion is simple. Households are buying capital goods like houses and cars, that do not require credit cards, because they are flush with cash. Companies are desperate for workers, but unemployed people are in no hurry to take up offers. The reality is the stimulus enacted in the first quarter was overly generous and has created economic disincentives. It exacerbated bottlenecks and enhanced consumer perceptions of rampant inflationary pressures.



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May 11 2021

Commentary by Eoin Treacy

China's Surging Factory Prices Add to Global Inflation Risks

This article from Bloomberg may be of interest to subscribers. Here is a section:

The widening gap between CPI and PPI “suggests an uneven recovery of the economy,” said Raymond Yeung, chief China economist at Australia & New Zealand Banking Group Ltd. “Despite the commodity boom, the service sector has yet to catch up.” 

Wages are lagging and the central bank will likely keep its policy stance “largely neutral,” he said. The People’s Bank of China is seeking to scale back the stimulus it pumped into the economy during the pandemic last year, worried by the build up of debt. Economists expect policy makers to slow the pace of credit expansion rather than raise interest rates. The Communist Party’s Politburo, China’s top decision-making body, said last month there won’t be any sharp reversal of macroeconomic policies. China aims to keep consumer inflation at around 3% this year, but an NBS official said in a recent interview that the headline index is expected to be “significantly lower” than the official target in 2021.
 

Eoin Treacy's view -

China exported deflation to the world by producing goods at lower prices than anywhere else for years. The interconnectedness of the global economy means that if inflation does return as a trend, it will not only occur in one country but will be a global phenomenon. That suggests the world’s relationship with China and what happens inside China will have a strong bearing on the outlook for longer-term inflation.



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May 07 2021

Commentary by Eoin Treacy

Secular Themes Review May 7th 2021

Eoin Treacy's view -

On November 24th I began a series of reviews of longer-term themes which will be updated on the first Friday of every month going forward. The last was on March 5th. These reviews can be found via the search bar using the term “Secular Themes Review”.

After a crash everyone is wary. We all seek to learn lessons from our most recent experience because it is the only way to help us emotionally move past the trauma. Coming out of the pandemic most investors wished they had sold everything at the first sight of virus news in early 2020 and bought everything back again following the crash. Today they are worried that there is another big shock waiting around the corner that will cause a repeat of pandemic panic.

The challenge for investors is less to learn from the most recent mistake but rather to know when to deploy the lessons learned. The best time to be wary about a massive decline is when no one is worried about it. The time to take precautionary action is when it seems like a waste of time and when you are most afraid of giving up on the potential for even better gains. That’s the best time to remember the experience of the crash but the interval of time and the positive reinforcement of experience in an uptrend make it difficult.



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May 04 2021

Commentary by Eoin Treacy

Yellen Says Spending May Spur 'Modest' Interest-Rate Increases

This article may be of interest to subscribers. Here is a section:

“It may be that interest rates will have to rise somewhat to make sure our economy doesn’t overheat,” Yellen, a former Federal Reserve chair, said in an interview with the Atlantic recorded Monday that was broadcast on the web on Tuesday. “It could cause some very modest increases in interest rates.”

Eoin Treacy's view -

Investors relying on momentum want to hear that the money will keep flowing and there is no risk the punchbowl will be taken away. Whenever that desire is fulfilled, we see the stock market climb to new highs. However, when it is even modestly questioned it is cause for profit taking.



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May 04 2021

Commentary by Eoin Treacy

Cautious German Savers Brave the Stock Market

This article from the Wall Street Journal may be of interest to subscribers. Here is a section: 

Michael Schacht, 70 years old, is a typical German saver. Risk-averse, the clothing-shop owner kept the equivalent of $300,000 in a local bank in a small town near Hamburg.

Then, earlier this year, Mr. Schacht’s bank told him it wanted to charge him a negative 0.5% interest rate to hold his money.

Furious, Mr. Schacht did something he never considered: He put it all in the market. His portfolio includes investments in stocks and corporate bonds from Europe and elsewhere through funds, plus gold and silver.

“I don’t want to make lots of money, I just want a low-risk investment that provides a reasonable return on capital, like 2%, 4%,” Mr. Schacht said. “That has always been realistic in the past.”

Eoin Treacy's view -

This is an example of how investors are being forced to speculate. Negative interest rates are an obvious tax on savers so they have no choice but to buy riskier assets. It is a choice between guaranteed modest losses or potential gains with the added scope for bigger losses.  This is particularly acute in places like Germany where retail investors don’t generally invest in the stock market.



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May 04 2021

Commentary by Eoin Treacy

Email of the day on central bank digital currencies:

I have been a subscriber to your service for over 20 years, probably closer to 30 years. I am very satisfied with your service, and am one of your great admirers. I was surprised though how certain you sounded on the future of money and digital currency on Friday's audio. Do you really think that the current monetary system will change drastically and that digital currency will be the main currency in the future? What will be your guess as to how long will it take to have that kind of change? Once again thanks a lot for the excellent service. 

Eoin Treacy's view -

Thank you for your patronage over the decades and this question which may be of interest to the Collective. The world is awash in debt and the total continues to rise. Governments are running wartime-like deficits and spending plans continue to be revised upwards. Nothing has occurred to change the trajectory of policy. Whenever the next crisis occurs central bank balance sheets will multiply in size again.  



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April 29 2021

Commentary by Eoin Treacy

EBay Warns Pandemic Sales Boost Could Soon Fade; Shares Tumble

This article from Bloomberg may be of interest to subscribers. Here is a section:
 

EBay Inc. warned investors that its sales boost tied to the pandemic and government stimulus checks may be coming to an end.

Shares tumbled as much as 7% in extended trading Wednesday after the online marketplace issued a revenue forecast for the current quarter suggesting spending on the site could recede as more people get vaccinated, businesses reopen and stimulus checks dry up.

Investors are watching to see which companies can build on their pandemic gains and which will fade. Google parent Alphabet Inc., Facebook Inc. and Shopify Inc. all hinted at lasting momentum in their earnings reports this week, sending their shares higher. EBay joined social media platform Pinterest Inc. as a potentially short-lived pandemic phenom.

“This is a relative challenge for EBay to not be able to fully hang on to the gains from the pandemic,” said Ygal Arounian, an analyst at Wedbush Securities Inc.

Eoin Treacy's view -

Rebounding consumer behaviour, renewed hiring and generous handouts have boosted earnings for all manner of consumer companies in the first quarter. That has been particularly true for the mega-caps with Apple, Google, Facebook and Microsoft all posting impressive results.

The fact that about half of people are better off unemployed than working has also helped to boost consumption of goods in particular. Those benefits will expire in September so there is still room for revenue support absent the spikes associated with stimulus cheques. 



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April 28 2021

Commentary by Eoin Treacy

Hoisington Quarterly Review and Outlook

Thanks to a subscriber for report from Lacey Hunt which reiterates his long-term view that yields will continue to compress. Here is a section:

Before the pandemic, economic growth was decelerating as confirmed by a decline in world trade in 2019, one of the few yearly declines in the history of this series. While the huge debt financed programs were a response to the pandemic, the end result is that global nonfinancial debt increased to a record 282% of GDP in 2020. The 37% surge of debt relative to GDP was also a record. While this debt may be politically popular and socially necessary, it will weaken growth and inflation after a transitory spurt, which will lead to even more disappointing business conditions than existed prior to the pandemic.

The actual global debt situation may be worse than these numbers indicate because they include China, the world’s second largest economy. Scholarly forensic research indicates that Chinese GDP is overstated by at least 18%. Thus, the official Chinese debt to GDP ratio is suppressing the global numbers. A comparative analysis of money velocity confirms the suspicion about the Chinese figures. Money velocity in China in 2020 was 0.44 versus 1.19 in the U.S. Admittedly money and debt are not identical, but they are opposite sides of the balance sheet and the glaring gap is too much to be ignored.

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

Something that has been troubling me for a while is why has China chosen now as the time to clamp down on Alibaba and Ant Financial’s massive money market fund. The rationale that it was politically motivated and that the firm has become too big and powerful for the comfort of the Communist Party is tempting and probably holds some truth. However, the bigger question is whether the financial system needs to reabsorb the flows and be refortified because the debt overhang is much larger than investors are willing to give credence to?



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April 28 2021

Commentary by Eoin Treacy

What 175 years of data tell us about house price affordability in the UK

Thanks to a subscriber for this detailed article from Schroders which may be of interest. Here is a section:

Houses have rarely been more expensive relative to earnings than they are today in more than 120 years. Prices are stretched everywhere but London and the south of England stand out. Things look even less affordable for women.

The last time there was a sustained decline in the house price-earnings multiple was the second half of the 19th century. Average house prices fell for more than 50 years thanks to substantial building of houses, many of which were smaller than existed before. At the same time earnings rose.

How likely or even desirable would that be today? The UK’s heavily mortgaged consumers would struggle to cope with 50 years of falling house prices. It would also be political suicide for whoever was deemed responsible. A shift towards the building of smaller houses would also seem unlikely  – research has found that houses are smaller today than at any point since at least the 1930s[1]. Hobbit homes cannot be ruled out entirely but I’m not sure how positive an outcome that would be.

Which leaves us with earnings. Earnings growth has been weak since the financial crisis but has recently picked up strongly – average earnings in the final quarter of 2020 were 4.7% higher than the same period of 2019. A period of stronger pay growth may represent the best hope of improving affordability (with the caveat that stronger earnings may result from a stronger economy which could result in a stronger housing market).

The elephant in the room here is interest rates. A Bank of England working paper[2] concluded that nearly all of the rise in average house prices relative to incomes between 1985 and 2018 can be seen as a result of “a sustained, dramatic, and consistently unexpected, decline in real interest rates as measured by the yield on medium-term index-linked gilts”[3]. The Bank doesn’t rule out other factors, but concludes that they have had more of a short-term impact. It furthermore concludes that: “An unexpected and persistent increase in the medium-term real interest rate of 1 percentage point from its level as at end 2018 could ultimately generate a fall in real house prices (over a period of many years) of just under 20%.”

However, depending on whether you are a current home owner or a prospective buyer, you are likely to be encouraged and discouraged in equal measure by the Bank of England’s scepticism that this is likely to materialise. Just because house prices are expensive relative to earnings does not mean there is a good reason to expect them to cheapen materially.

Eoin Treacy's view -

The view that property is a better investment than stocks has grown considerably in the UK because the FTSE-100 peaked in 2000 and has spent the last twenty years ranging in a volatile manner. Against that background investing in property has been the right decision regardless of the costs of maintenance and taxes. The big question for investors is whether that will continue to be the case.



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April 23 2021

Commentary by Eoin Treacy

Longer-Run Economic Consequences of Pandemics

This report from the San Francisco Fed may be of interest to subscribers. Here is the conclusion:

Summing up our findings, the great historical pandemics of the last millennium have typically been associated with subsequent low returns to assets, as far as the limited data allow us to conclude. These responses are huge. Smaller responses are found in real wages, but still statistically significant, and consistent with the baseline neoclassical model.

Measured by deviations in a benchmark economic statistic, the real natural rate of interest, these responses indicate that pandemics are followed by sustained periods—over multiple decades—with depressed investment opportunities, possibly due to excess capital per unit of surviving labor, and/or heightened desires to save, possibly due to an increase in precautionary saving or a rebuilding of depleted wealth. Either way, if the trends play out similarly in the wake of COVID-19 then the global economic trajectory will be very different than was expected only a few months ago.

Should we expect declines of 1.5%–2% in the real natural rate, however? There may be at least three factors that could possibly attenuate the decline of the natural rate predicted by our analysis, but their presence and magnitude is uncertain and unknowable until therapies to fight COVID-19 are more developed. First, the death toll of COVID-19 relative to the total population might be smaller than in the worst pandemics of the past, but we cannot know for sure at this point. Second, COVID-19 primarily affects the elderly, who are no longer in the labor force and tend to save relatively more than the young, so the demographic channels could be altered, although the recent pick up in infections is now affecting younger individuals. Third, aggressive counter-pandemic fiscal expansion will boost public debt further, reducing the national savings rate and this might put upward pressure on the natural rate, even though our analysis suggests that this expansion of public debt should be easier to sustain in the long-run.

Eoin Treacy's view -

This report has obviously helped to inform the view of the Fed in how they expect the path of interest rates to play out. They are worried that the rebound from the pandemic will not translate into a sustained path of outsized growth because of the damage done to the economy and animal spirits will take time to overcome.



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April 20 2021

Commentary by Eoin Treacy

April 15 2021

Commentary by Eoin Treacy

A Mystery in 10-Year Treasuries Has Links to Carry Trade Blowup

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

Hedge funds are snapping up 10-year Treasury futures, and no other maturity, presenting a puzzle. The answer may lie in the collapse of a popular carry trade last year.

The highly-leveraged basis trade involved going long cash bonds and selling futures, to profit from the difference between the two, but came asunder in March 2020 when investors stampeded to buy the latter at the peak of coronavirus fears and upended the spread. Now the gap -- the so-called gross basis -- has reversed and favors shorting cash bonds and buying futures.

Of course, it’s not quite that simple. In futures markets, the counterparty who is short determines which specific cash bond traders have to deliver, adding another element of risk to the transaction. But with so-called ultra 10-year Treasury futures, there are only two bonds in the delivery pool, limiting that risk compared to other contracts.

That could be one reason why leveraged funds have built up net-long positions of almost 230,000 ultra 10-year futures, despite this year’s Treasury market slump, according to the latest data from the Commodity Futures Trading Commission. As for the original strategy -- there are no signs of it returning anytime soon.

While returns from this year’s trade are much lighter, a play based on 10-year ultra futures is most attractive, according to one trader who asked not to be identified as he isn’t authorized to speak publicly.

Cash Bond Pressure
A sense of how the cheapest-to-deliver 10-year Treasury bond has performed against futures can be seen in the implied repurchase rate for the note. It flipped from positive to negative in the first quarter, indicative of greater selling pressure on cash bonds than futures.

“With the sudden and significant rates selloff in late February, Treasuries came under pressure, underperforming futures quite noticeably,” wrote Morgan Stanley’s Kelcie Gerson in a note this week. “On an outright level, futures/cheapest-to-deliver bases reached the widest levels seen since last March/April.”

Across the rest of the Treasuries curve, hedge funds hold net short positions, though well below last year’s levels after the collapse of the original basis trade.

Market
A gauge of aggregate leveraged fund short futures positions -- which would likely be mirrored by long cash bonds in a basis trade -- has dropped by over $300 billion since last year’s February peak, according to calculations by Bloomberg.

Eoin Treacy's view -

Repositioning in the sovereign bond markets gathered pace today with a high degree of commonality across the sector. This above narrative highlights how quickly positions can be unwound when the trend changes and it represents a potent source of short covering activity.



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April 14 2021

Commentary by Eoin Treacy

ECB's Lagarde: Economic Support Needed "Well Into the Recovery"

Here are a couple of soundbites from Christine Lagarde’s statements today.

“We consider that both fiscal and monetary support are needed and will be needed until the pandemic crisis is over” and “will be needed well into the recovery,” ECB President Christine Lagarde says at Reuters event.

Preserving favorable financing conditions is a condition for the economy to recover -- “they go hand in hand”

Eoin Treacy's view -

The question is not whether the ECB will provide assistance but rather how much. The spectre of deflation has been hanging over Europe for most of the last decade and there is a credible argument the region is heading into a Japan-like era of lower consumption and low growth. Avoiding that potential is the primary goal of both the ECB and every Eurozone government.



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April 13 2021

Commentary by Eoin Treacy

China Huarong's Plunging Bonds Point to Major Market Shift

This article from Bloomberg may be of interest to subscribers. Here is a section:

The big question now confronting investors is how much pain China’s government is willing to tolerate as it tries to wean the bond market off implicit guarantees. None of the state-owned companies that have defaulted so far -- including Peking University Founder Group Corp., which is ultimately controlled by China’s education ministry -- were considered as systemically important as China Huarong.

Chinese authorities have tried to strike a balance between instilling more market discipline and avoiding a sudden loss of confidence that might spiral into a crisis. But the tumult surrounding China Huarong, some of whose bonds are now trading below 80 cents on the dollar, highlights how quickly investor sentiment can deteriorate even at a time when the economy is strengthening.

“China’s credit market is entering a new era as SOEs are emerging as the main source of stress,” said Shuncheng Zhang, an analyst at Fitch Ratings. Whatever the outcome for China Huarong, policy makers will likely allow more defaults in the state sector to reduce moral hazard and cultivate a more mature debt market, he added.

Eoin Treacy's view -

Huarong was created as a bad bank, where the defunct loans of China’s banks were dumped 20 years ago. The generally accepted business model for these kinds of entities is they end up with hard to value assets and are given the time required to sell them at profitable rates. That’s how Ireland’s bad bank functioned in the aftermath of the Global Financial Crisis for example. The fact that Huarong is now running into trouble is reflective of the fact that it long ago departed from its bad bank foundation to imitate the business model of the banks it was designed to clean up.



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April 13 2021

Commentary by Eoin Treacy

Lumber Frenzy Drives Up Home Prices as Suppliers Can't Keep Up

This article from Bloomberg may be of interest to subscribers. Here is a section:

“Each part of the supply chain has different issues,” said Brooks Mendell, chief executive officer of forest-supply researcher Forisk Consulting in Georgia. “There is not a sawmill that I have talked to in two years that has all their slots filled.”

This is a big turnaround from just two years ago. In 2019, weak demand prompted a steady stream of output reductions and mill closures from companies including Canfor Corp. and West Fraser Timber Co., the world’s biggest lumber supplier. That left producers flat footed amid the unexpected demand boom as the pandemic kept people indoors, sparking a wave of do-it-yourself upgrades, full-scale renovations and purchases of bigger homes.

When demand held strong throughout the winter, typically a seasonal lull, mills didn’t have time to replenish their inventories. Now, stockpiles are “extremely lean” as North America heads back into peak building season and lumber prices will stay high “for the foreseeable future,” Devin Stockfish, the CEO of Weyerhaeuser Co., said last month.

Lumber futures have more than tripled since the pandemic started, touching an all-time high of $1,157.50 per 1,000 board feet on Monday.

Eoin Treacy's view -

The mountain pine beetle infestation has been a growing problem for more than a decade but production cuts, the closing of mills and lack of a skilled workforce are more immediate problems. The only way to encourage more workers into the sector is to offer higher wages. That suggests we have seen a step change in the price of lumber and the breakout will be sustained in just the same way as it was in 1993. 



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April 12 2021

Commentary by Eoin Treacy

Impatience

Eoin Treacy's view -

There is one theme that seems to be running through every asset class at present. Perhaps it is because we have been locked up for a year, and literally can’t wait until it is all over, but there is a distinct air of impatience in every circle of life. The pandemic has accelerated the decision-making process for everyone in every facet of our lives.

Mrs. Treacy and I have been discussing moving from Los Angeles for two years but there was never a push big enough to stir us into action. We looked at Las Vegas suburbs in 2019 and toured schools but my eldest daughter was accepted into one of the most prestigious high schools in Los Angeles, so we decided to linger.

The experience of living in Los Angeles during the lockdowns, from schooling to public safety, made us impatient for a change. Like many others we decided to move and have only been delayed by reapplying to schools for our daughters and finding a suitable home.



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April 08 2021

Commentary by Eoin Treacy

Email of the day on electric vehicles and reshoring

I came across this article (attached) about a new British company that has recently listed on the Nasdaq. Big questions about whether it can succeed, but it's an interesting take on the possible future of local manufacturing, and not just for vehicles. If successful, it could presumably have an impact on the issues of on-shoring, local community development and not to mention the ESG sector.

 

Eoin Treacy's view -

Thank you for this email and the attached article from the Times. Here is a section:

One reason why the prediction is more convincing this time can be found on an industrial estate in Oxfordshire. Arrival will start producing electric vans at its first small plant outside Bicester soon in what the company believes will be a turning point for global manufacturing. Avinash Rugoobur, the former General Motors executive who is Arrival’s chief strategy officer, says that not only the motor industry will be watching closely. “Many other industries will say: ‘If Arrival can do it in automotive, why can’t we do it in our sector?’ ”

Valued at about $10 billion after its recent flotation on Nasdaq, Arrival has been working for five years on the necessary technology. Denis Sverdlov, its founder, a Russian telecoms tycoon and former government minister, believes that using highly automated small plants can be dramatically cheaper than traditional large factories. A decentralised model also should reduce carbon emissions and deliver big economic benefits to the microfactories’ communities thanks to localised supply chains.

To apply this approach to vehicles has required a fundamental redesign of the products. Arrival makes its bodies from coloured composite materials, doing away with the metal pressing and painting that take up much of a traditional car plant. Although Arrival makes some use of 3D printing, Rugoobur says that “3D printing can be an enabler of decentralised manufacturing, but is not the only way of getting there”.

During the pandemic, many of these techniques were used by British companies to produce personal protection equipment and medical components when supplies from China were interrupted. In addition to fears about the resilience of supplies, companies have been worried about rising wages in China and the rising costs of transport. The Suez Canal snarl up has heightened concerns. At the same time, many western governments have said that they want to build up domestic manufacturing in critical industries, a resolve only strengthened by the vaccine wars.



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April 08 2021

Commentary by Eoin Treacy

Email of the day on corporate taxes:

Hi Eoin, I am shocked that the US is attempting to get agreement on a global minimum tax. If I replace Yellen's speech with any global industry the same reasons would be justified to fix pricing which is clearly illegal. Why is no one challenging the legality of this or at least criticizing the move based on this premise? Kind regards, TG

Eoin Treacy's view -

Thank you for this email which may be of interest to the Collective. When it comes to agreements between countries there are few limits on what is possible given sufficient will. The barrier to agreement on taxation is probably lower than it is for incentives and supports because governments are broke and hungry for revenue.

Governments are curtailed from rising individual taxes or cutting back on social services because of the threat of social unrest. The rise of populism on both sides of the political spectrum is a direct consequence of the response to the credit crisis. It is the number one unintended consequence of pushing private sector debts onto unsuspecting populations. 



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April 06 2021

Commentary by Eoin Treacy

Email of the day on the potential for a crash:

I am a little concerned, that Bill Ackman is shorting the market and Ray Dalio and Michael Burry have predicted a market collapse. Burry recently went on record to confirm this prediction.

You have not mentioned Margin Debt for a while and my further concerns are that despite Margin Debt officially being at an all-time high - the ArchEgos scandal has demonstrated that perhaps not all of the margin debt is recorded as some hedge funds are circumventing the need to record their position by using prime banks to hold assets for them.

RLB

PS Best wishes to you and your family.

Eoin Treacy's view -

Thank you for your kind words and for this email which helps to elucidate the very real concerns of a large swathe of the market. Just over a year ago the market crashed. The decline was unlike anything we’ve seen before because it was unrelenting in its severity. Even during the crash of September/October 2008 there were weeks when the market rallied.

That did not happen in 2020. Between late February and March 24th, the S&P500 failed to rally for two consecutive days. Fear permeated market and it had a long-lasting impact on sentiment. Even today people are afraid of a repeat of this unrelenting selling. However, it would be extremely unusual to see another 35% drawdown a year after the last one.



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April 06 2021

Commentary by Eoin Treacy

Gold Rises to Eight-Session High With Dollar, Yield Gains Ebbing

This article from Bloomberg may be of interest to subscribers. Here is a section:

Gold advanced to the highest in more than a week as gains in bond yields and the dollar abated.

Treasury yields edged down from a recent high, increasing the allure of bullion, which doesn’t earn interest. The dollar gave back early gains, making gold more appealing to investors holding other currencies. The ebb is taking place even as positive economic data shows rapid growth for U.S. businesses and jobs.

That’s “good news for gold,” according to Commerzbank AG analyst Carsten Fritsch.

Gold has been under pressure this year because of increasing optimism over the post-pandemic economic recovery in the U.S., which buoyed bond yields and the dollar. Investors fled bullion-backed exchange-traded funds, a major pillar in gold’s ascent to an all-time high last year, with holdings in ETFs dropping to the lowest since May.

Eoin Treacy's view -

It is not a coincidence that gold and Treasury bond prices peaked within a day of each other in August. As bond prices have declined, they have taken gold with them. The strong correlation between the two assets has raised all sorts of questions for gold investors. Let’s try and answer some of them by looking at flows.



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April 01 2021

Commentary by Eoin Treacy

Secular Themes Review April 1st 2021

Eoin Treacy's view -

On November 24th I began a series of reviews of longer-term themes which will be updated on the first Friday of every month going forward. The last was on March 5th. These reviews can be found via the search bar using the term “Secular Themes Review”.

The pandemic has been an accelerant. The full ramifications of what that means are becoming increasingly clear.

The pandemic took trends that have been in evidence for a while and exaggerated them. At the same time, it introduced new challenges which require new solutions.

Corporations operating without the safety net of cash on the balance sheet has been a feature of the markets for decades too. They continue to be bailed out when they get into trouble. There is no evidence that the trend of using all available means to buy back shares has ended. In fact, buybacks are back at pre-pandemic levels. Companies were touting “resiliency” last summer. It appears to have been just talk. Buybacks represent a powerful tailwind for stock markets that were absent for much of 2020 but are now back in force. 



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March 31 2021

Commentary by Eoin Treacy

Biden Plans $2.25 Trillion Spending, Corporate Tax Hikes

This article from Bloomberg may be of interest to subscribers. Here is a section:

A major undercurrent through the infrastructure plan is addressing inequality and expanding help for segments of society that the administration judges have been left out in the past. For example, in addition to fixing the “ten most economically significant bridges in the country in need of reconstruction,” there’s $20 billion for a new program that will “reconnect” neighborhoods that were cut off by past investments, such as the I-81 highway in Syracuse, New York. And all lead pipes will be replaced, to address water-quality issues.

Eoin Treacy's view -

$2.25 trillion is still a lot of money and if it passes it will represent a significant additional surge of liquidity through the economy. At a minimum that will help to spur commodity and building materials demand growth over the next decade.



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March 30 2021

Commentary by Eoin Treacy

Email of the day on where the most leverage resides

After Greensill and Archegos, where next? The GCC of 2008 cleaned up the banks and the Tech Bust of 2000 cleaned up non-earning tech. Leverage always lies hidden somewhere, and rising interest rates usually make the best assassins. But where's the leverage this time? Tech + Leveraged Product Roll Out? Can we put together a list of leveraged companies and sectors that will make the headlines in 2021 and 2022 as 10-year yields breach 2% and beyond? Keep up the excellent work.

Eoin Treacy's view -

Thank you for your kind words and this question which may be of interest to other subscribers. The Global Credit Crisis decapitated the banking sector and many of the tech champions of the 1990s disappeared. Both crashes exposed massive leverage and egregious abuses. The first challenge is to identify the sectors where leverage is concentrated and then what are the potential catalysts to unwind those positions.

The rush of interest in listing via SPACs is an obvious area to begin searching. Many private companies eschewed listing for years because they had no need to seek funds in the public markets. They are now eager to list because their backers want to exit while there is still time. Softbank’s wake-up call with WeWork was the catalyst for much greater interest in IPOs.



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March 26 2021

Commentary by Eoin Treacy

WeWork agrees to $9 billion SPAC deal in new path to go public

This article from Fortune may be of interest to subscribers. Here is a section:

The company disclosed to prospective investors it had lost about $3.2 billion last year, the Financial Times reported earlier this week. The documents also show that occupancy rates fell to 47% at the end of 2020, down from 72% at the start of the year, before the pandemic hit, according to the newspaper.

In the interview in January, Claure argued the pandemic was helping WeWork. He said the work-from-home situation benefits the company and would continue to do so as people return to the workplace. “This is where WeWork suddenly becomes an incredible value proposition,” he said. “New habits have been developed during this pandemic.”

Mathrani will continue to lead the company after the deal. Vivek Ranadive of BowX and Insight Partners’s Deven Parekh will join the board.

BowX Acquisition Corp. is managed by Ranadive and Murray Rode, both former executives at TIBCO Software and co-founders of venture firm Bow Capital.

Eoin Treacy's view -

How a global work-from-home trend can be positive for a company that offers office space is beyond me. That’s particularly true for start-ups for whom rising yields represent a challenge in raising capital.



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March 26 2021

Commentary by Eoin Treacy

Message Received, Loud & Clear

This report from CIBC may be of interest to subscribers. Here is a section:

The Bank of Canada is seeing enough progress in the economy that it feels it can begin reducing outdated programs, as well as slowly begin to remove some of the considerable stimulus in the system. There should not be too much impact from the cessation of select market functioning facilities directly. The bigger news today is the strongest signal yet that the Bank is ready to conduct a taper, and begin ‘right sizing’ the QE program. This is also the first time we have been shown what the future sequencing looks like, which is: i) taper to a net-zero purchase profile; ii) enter a reinvestment phase, and; iii) normalize rates. The best trades to take advantage of this are micro in nature, though also put ‘bigger’ macro trades like receiving 2yr-to-4yr forwards versus the U.S. at risk.

Eoin Treacy's view -

As we exit the pandemic the approach being adopted by central banks to the respective challenges in their countries will help to inform us on what to expect from the late starters. Since Canada is about to begin tapering in April how the bond, currency and stock markets perform may offer a foretaste of what a taper will eventually look like in the USA and elsewhere.



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March 19 2021

Commentary by Eoin Treacy

Oaktree Client Memo

Thanks to a subscriber for this note by Howard Marks. Here is a section:

So today’s high asset prices may be justified at today’s interest rates, but that’s clearly a source of vulnerability if rates were to rise. (Note that today’s 1.40% yield on the 10-0year Treasury note is up from -.52% at he low in august 2020 and from 0.93% in just the last seven weeks)

The Fed says rates will be low for years to come, but are there limitations on its ability to make that happen? Can the Fed keep rates artificially low forever? On longer-maturity bonds? And what about inflation? Can the 10-year Treasury note still yield 1.40% if inflation reaches 3%? Will people buy it a negative real yield? Or will the price fall so that it yields more? Where could inflation come from? The price of goods may not rise in dollar terms, but reduced respect for the dollar (or increased quantities of dollars in circulation) could cause it to depreciate relative to the price of goods: same result.

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

These questions are seeking an answer in real time as Treasury yields trend higher. At present Treasury yields are pausing near 1.75% and the Personal Consumption Expenditure inflation measure is at 1.5%. The bond market is therefore insisting on a positive real yield to justify buying.

However, since a clear and consistent trend is in evidence bond investors are also pricing in the potential that the PCE will continue to also trend higher. Bond investors have become accustomed to central bank assistance. There was no revolt at the beginning of the quantitative easing era because the Fed was supporting the market.



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March 17 2021

Commentary by Eoin Treacy

BlackRock, Lombard Say Faster Inflation Calls Are Premature

This article may be of interest to subscribers. Here is a section:

“As the dust settles in the wake of today’s FOMC, we will be focusing upon whether any additional back-up in yields is accompanied by a further widening of breakevens,” said Richard McGuire, the head of rates strategy at Rabobank. “If so then this argues that the move higher in rates is sustainable.”

But as long as U.S. yields don’t rise in a chaotic fashion, risk assets including emerging-market and high-yield corporate debt are expected to outperform, according to BlackRock’s Seth. “Rates can drift higher and still remain a positive backdrop for the risk assets, as long as the vulnerability is under control,” he said.

A Bloomberg Barclays index on global credit returns has gained 11% over the past year, compared with a loss of 2% for a gauge tracking Treasuries. BlackRock switched to a neutral duration position in February from underweight. The fund likes notes sold by Chinese real estate companies and the nation’s onshore bonds.

“The lack of correlation with the rest of the global developed markets also provides a diversification benefit,” Seth said of Chinese debt.

Eoin Treacy's view -

The Fed remains wedded to its view nascent inflationary pressures will not last long. There is a logical argument to support the view that the bounce back from the pandemic lows is exaggerated by the base effect and everything will settle down over the course of the next year or two. Since the Fed is willing to wait and see with inflation, it could be two full years before they are willing to draw firm conclusions.



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March 17 2021

Commentary by Eoin Treacy

Lennar Shares Spike on Plan to Spin Off Startup Investments

This article from Bloomberg may be of interest to subscribers. Here it is in full:

Lennar Corp. soared after the homebuilder said it will create a spinoff with at least $3 billion in assets.

The new company, which will have $3 to $5 billion in assets and no debt, will include Lennar’s technology investments, according to an earnings call Wednesday.

Lennar, which said it made about $470 million on its investment in Opendoor Technologies Inc., jumped as much as 9.5% to $97.09 in New York. The stock had gained 16% this year through Tuesday’s close.

Miami-based Lennar reported orders on Tuesday that beat estimates as it benefited from the pandemic housing market. It got also a boost from Opendoor, which began trading in December.

Lennar said two other “technology-driven” companies it has invested in also have announced agreements to go public through mergers with special purpose acquisition corporations, or SPACs.

Those companies are Doma, formerly known as States Title, and Hippo, the home-insurance startup that’s merging with a blank-check company led by Zynga Inc. founder Mark Pincus and LinkedIn co-founder Reid Hoffman

Eoin Treacy's view -

It is a clear sign of the times that a home builder, which is about as brick and mortar as it gets, has upwards of $5 billion in technology investments. It’s good news that the company has made wise decisions in what are now highly valued digital assets. However, that decision to prioritise risk in non-core businesses is also a symptom of the wider lack of building new homes that has been a feature of the recovery from the 2007-12 housing recession.



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March 15 2021

Commentary by Eoin Treacy

Yields, ETF Buying BOJ Set to Add Flexibility

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

The basic elements of yield-curve control will probably remain unchanged, with the short-term rate anchored at -0.1% and the BOJ aiming to keep the 10-year JGB yield around 0% -- while allowing fluctuations depending on economic and price developments.

We expect Kuroda to renew the commitment to the 10-year yield range of +/-0.2 ppt around 0%, but -- importantly -- also indicate that temporary moves beyond the range would be acceptable, as long as the effects of monetary easing aren’t disrupted and the yield curve is consistent with economic activity, prices, and financial conditions.

In operational terms, this may mean the BOJ will conduct its JGB purchases with more flexibility -- changing the frequency of the operations and the menu of its purchases, depending on market conditions.

This would help improve the functioning of the Japanese government bond market in terms of price discovery and liquidity -- increasing policy sustainability.

Eoin Treacy's view -

The question investors are likely asking is if the Bank of Japan is willing to loosen its yield curve control bands, do they believe inflation is in fact returning with sufficient vigour to initiate a trend?

One of the primary reasons for the Yen’s strength is because deflation was a surety. The supply might increase but there was no chance of inflation eroding the holding overnight. Meanwhile, the positive current account balance acted as a counterweight to the increasing money supply. If the BoJ is willing to change their perception of inflationary pressures that’s toxic for the Yen.



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March 12 2021

Commentary by Eoin Treacy

Treasury Yields Surge to Test Key Level in Sudden Selling Bout

This article from  Bloomberg may be of interest to subscribers. Here is a section:

The move started in Australia, where bond futures fell heading into the market’s close to put modest pressure on Treasuries. At around the same time, there was a block sale of 10-year ultra bond futures, followed by a buyer of downside put options -- the hedging of which tends to weigh on the market. The three combined to tip 10-year Treasury futures through Thursday’s session low, which unleashed the wave of selling.

As many as 20,000 contracts changed hands in the next five minutes, the largest activity of the day. The speed and severity of the move left many traders perplexed, with volumes in the cash market comparatively modest.

The moves there were most pronounced in the benchmark 10-year tenor, with the yield curve steepening as two-year rates only rose as much as two basis points. European bonds followed Treasuries, with U.K. 10-year yields up five basis points to 0.79%.

Eoin Treacy's view -

Macro traders make money by sniffing out logical inconsistencies and pushing them until they break. George Soros and his ilk pressuring the Pound’s ERM fix is one such notable example so are the small number of traders that correctly called the demise of the subprime markets.

These kinds of contrarian bets are aided by the fact that crowds thrive on contradiction. The biggest bull markets inevitably breed the biggest contradictions because outlandish forecasts are required to justify buying at extraordinary highs.



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March 11 2021

Commentary by Eoin Treacy

Remit For The Monetary Policy Committee (MPC)

This letter and response between the UK’s Chancellor of the Exchequer and the Governor of the Bank of England may be of interest to subscribers. 

To achieve this objective, the government’s economic strategy consists of:

• operationally independent monetary policy, responsible for maintaining price stability and supporting the economy;
• a credible fiscal policy, maintaining sustainable public finances, while providing the flexibility to support the economy;
• structural reform to level up opportunity in all parts of the UK and to transition to an environmentally sustainable and resilient net zero economy, including through regulation, and an ambitious programme of investment in skills, infrastructure and innovation, in order to sustain high employment, raise productivity and improve living standards;
• maintaining a resilient, effectively regulated and competitive financial system that supports the real economy through the provision of productive finance and critical financial services, while protecting consumers, safeguarding taxpayer interests and supporting the transition to a net zero economy. 6

ACCOUNTABILITY
The Monetary Policy Committee is accountable to the government for the remit set out in this letter. The Committee’s performance and procedures will be reviewed by the Bank of England’s Court on an ongoing basis (with particular regard to ensuring the Bank is collecting proper regional and sectoral information). The Bank will be accountable to Parliament through regular reports and evidence given to the Treasury Committee. Finally, through the publication of the minutes of the Monetary Policy Committee meetings and the Monetary Policy Report, the Bank will be accountable to the public at large.   

Eoin Treacy's view -

Central banks are “operationally” independent. All that means is politicians do not get involved in their day-to-day affairs. The central bank still takes orders from politicians. When elected officials feel the “need” for change they simply announce it in the budget. Today we “need” to save the planet so it is now the central bank’s job to do that.



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March 09 2021

Commentary by Eoin Treacy

'Reddit Raider' Favorite GameStop Soars After Latest Cohen Push

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

Monday’s rally came despite short interest being near the lowest level in at least a year. Roughly one-quarter of shares available for trading are currently sold short, according to data compiled by S3 Partners. That compares to a peak of more than 140% in January.

“Shorts will continue to be squeezed out of their positions as GameStop’s stock price continues to trend upwards,” said Ihor Dusaniwsky, managing director of predictive analytics at S3 Partners.

Shorts sellers are down nearly $6 billion in year-to-date mark-to-market losses, including $609 million in Monday’s trading alone, Dusaniwsky said by email.

Eoin Treacy's view -

The rebound of reflation plays and retail investor favourites is partly a response to short-term oversold conditions. It is also because $1.9 trillion is still a lot of money, even after a decade of printing.

$1400 for individuals and each child as well as extended benefits the unemployed means many families will see bumps of several thousand dollars in the nest month.  According to this calculator a family of four with an income of $70,000 per annum would receive a payment of $5,600 or 8% of income. 



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March 08 2021

Commentary by Eoin Treacy

Email of the day - on gold ETF holdings

On gold, I notice there is now significant weakness in the chart for Total known holdings of gold ETF. Will we need to see this stabilize and turn up before any rise is likely in spot gold prices?

Eoin Treacy's view -

There is undoubtedly some liquidation of gold longs going on at present as investors price in the potential for outsized swift economic recovery. That’s also the main rationale for selling bonds since there is less need for a safe haven.



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March 05 2021

Commentary by Eoin Treacy

Secular Bull Market Investment Candidates Review March 2021

Eoin Treacy's view -

On November 24th I began a series of reviews of longer-term themes which will be updated on the first Friday of every month going forward. The last was on January 8th. These reviews can be found via the search bar using the term “Secular Themes Review”.

The rollout of vaccines to COVID-19 continues to accelerate and that will continue through the balance of the year and 2022. There is encouraging news about the number of different vaccines which have been approved and their success against variants. By the end of the year, the world will be inundated with doses which will provide at least some protection from the virus for anyone who wants it. That’s all the rationale any government needs for reopening the economy.

On Valentine’s Day 2020 Mrs Treacy and I went out for dinner with another couple. We talked about the news of a virus threat from China and how it could potentially cause ructions further afield. We told them we had stocked up on rice, meat, protein bars and batteries just in case. They thought we were crazy crackpots jumping at shadows.

It was hard to imagine then just how disruptive the decision to lockdown was going to be. A similar condition exists today. After a year of being confined to our immediate vicinity it is tempting to think this is how it will always be. The reality, however, is we are going to see a surge back to normalcy much quicker than most believe possible.

Humans are social animals and we yearn for social contact. We’ve been starved of that basic need for a year and we’ll overdose on it when we are able. That suggests we are looking at a boom in consumer activity over the coming couple of years.



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March 02 2021

Commentary by Eoin Treacy

Hiding From The Madness: An Alts Perspective On The Search For Capital Shortage

I attended this zoom call this morning given by Dylan Grice and there were a number of interesting comments I thought subscribers might be interested in.

March 02 2021

Commentary by Eoin Treacy

Banks in Germany Tell Customers to Take Deposits Elsewhere

This article from the Wall Street Journal may be of interest to subscribers. Here is a section:

Interest rates have been negative in Europe for years. But it took the flood of savings unleashed in the pandemic for banks finally to charge depositors in earnest.

Germany’s biggest lenders, Deutsche Bank AG and Commerzbank AG, have told new customers since last year to pay a 0.5% annual rate to keep large sums of money with them. The banks say they can no longer absorb the negative interest rates the European Central Bank charges them. The more customer deposits banks have, the more they have to park with the central bank.

That is creating an unusual incentive, where banks that usually want deposits as an inexpensive form of financing, are essentially telling customers to go away. Banks are even providing new online tools to help customers take their deposits elsewhere.

Banks in Europe resisted passing negative rates on to customers when the ECB first introduced them in 2014, fearing backlash. Some did it only with corporate depositors, who were less likely to complain to local politicians. The banks resorted to other ways to pass on the costs of negative rates, charging higher fees, for instance.

The pandemic has changed the equation. Savings rates skyrocketed with consumers at home. And huge relief programs from the ECB have flooded banks with excess deposits. Banks also have used the economic dislocation of the pandemic to make operational changes they have long resisted.

Eoin Treacy's view -

There are two big questions that arise from charging depositors to hold funds in their bank accounts. The first is the benefit banks receive from now being able to pass on costs to customers. The second is the quandary savers are put in.



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March 01 2021

Commentary by Eoin Treacy

Berkshire Hathaway Preamble to the Annual Meeting

Here is a section:

Berkshire’s investment in Apple vividly illustrates the power of repurchases. We began buying Apple stock late in 2016 and by early July 2018, owned slightly more than one billion Apple shares (split-adjusted). Saying that, I’m referencing the investment held in Berkshire’s general account and am excluding a very small and separately-managed holding of Apple shares that was subsequently sold.

When we finished our purchases in mid-2018, Berkshire’s general account owned 5.2% of Apple. Our cost for that stake was $36 billion. Since then, we have both enjoyed regular dividends, averaging about $775 million annually, and have also – in 2020 – pocketed an additional $11 billion by selling a small portion of our position. Despite that sale – voila! – Berkshire now owns 5.4% of Apple. That increase was costless to us, coming about because Apple has continuously repurchased its shares, thereby substantially shrinking the number it now has outstanding. 6 But that’s far from all of the good news.

Because we also repurchased Berkshire shares during the 21⁄2 years, you now indirectly own a full 10% more of Apple’s assets and future earnings than you did in July 2018. This agreeable dynamic continues. Berkshire has repurchased more shares since yearend and is likely to further reduce its share count in the future. Apple has publicly stated an intention to repurchase its shares as well. As these reductions occur, Berkshire shareholders will not only own a greater interest in our insurance group and in BNSF and BHE, but will also find their indirect ownership of Apple increasing as well. The math of repurchases grinds away slowly, but can be powerful over time. The process offers a simple way for investors to own an ever-expanding portion of exceptional businesses. And as a sultry Mae West assured us: “Too much of a good thing can be . . . wonderful.”

Eoin Treacy's view -

Buying back shares appears to be back on the menu for an increasingly large number of companies. For investors who seldom sell, like Berkshire, that’s good news provided the number of shares in issuance does in fact contract.

One of the most egregious abuses of share buyback programs is that additional shares are issued at a similar pace through executives exercising options. That effectively means buybacks amount to a massive transfer of wealth to company management.



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March 01 2021

Commentary by Eoin Treacy

Housing Booms in Australia as Prices Surge Most in 17 Year

This article from Bloomberg may be of interest to subscribers. Here is a section:

We are seeing a significant increase in demand across all price points and all suburbs,” said real estate agent Ben Collier, who handled the Paddington sale. Usually “you see different markets moving at different speeds, whereas it seems to be somewhat more uniformed right now.”

In New Zealand, where home prices soared 13% in January from a year earlier, the problem is so acute the government will now require the central bank to consider the impact on housing prices when setting interest rates, a change the bank opposed. The Reserve Bank of New Zealand is also reimposing lending restrictions on property investors in an attempt to cool the market.

Fears that Australia’s housing market would be flooded by distressed sales as people were thrown out of work by the pandemic have faded as the economy recovers faster than expected, and people resume paying their mortgages after being offered six-month loan holidays last year.

Instead, a shortage of supply is helping fuel the price boom. The number of houses advertised for sale in the first three weeks of February was down 26% from a year earlier, CoreLogic said.

“Housing inventory is around record lows for this time of the year and buyer demand is well above average,” Lawless said. “These conditions favor sellers. Buyers are likely confronting a sense of FOMO, which limits their ability to negotiate.”

Eoin Treacy's view -

This is a familiar story from all over the world. There is low supply because many people are worried about moving during a pandemic. At the same time there is increased demand because other people feel they have more cash and need to move because of personal circumstances. The combination is leading to rising prices across the board. Record low interest rates are fuelled the advance.



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February 26 2021

Commentary by Eoin Treacy

Chaotic Treasury Selloff Fueled by $50 Billion of Unwinding

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

Market detectives looking to explain the fury of Thursday’s Treasuries selloff will find most of the evidence pointing to technical rather than fundamental reasons.

A combination of supply indigestion, a potential $50 billion position unwind and vanishing liquidity exacerbated moves as traders aggressively repriced the Federal Reserve rate-hike outlook, despite no major economic developments or shifts in tone from policy makers.

“It wasn’t an orderly selloff and certainly didn’t appear to be driven by any obvious fundamental continuation or extension of the reflation thesis,” wrote NatWest Markets strategist Blake Gwinn in a note to clients. A number of more “technical-style” factors were in the mix, against a backdrop of a good-old-fashioned buyers strike, he said.

Eoin Treacy's view -

In a bull market buying the dips always works. When buying the dips stops working, the bull market is over. That might seem tautological but it is the strategy every investor ends up following because buying the dips is the best risk-adjusted way of buying in an uptrend. That question will be discussed in every emergency meeting at fixed income fund management houses today and over the weekend.



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February 25 2021

Commentary by Eoin Treacy

Treasury Yields Surge Past 1.6%, Sounding Alarm for Risk Assets

This article from Bloomberg may be of interest. Here is a section:

The 5-year note is of particular interest to many in the $21 trillion Treasuries market. Earlier this week, tepid demand in an auction of five-year notes brought into focus this key part of the curve, which also reflects medium-term expectations for Fed policy. Then on Thursday, a measure of demand for a $62 billion auction of 7-year Treasury notes came in at a record low.

The rout comes as investors continue to reprice expectations for Fed hikes as the vaccine rollout and the prospect of additional stimulus foster a rosier outlook for the economy. Yields on 2- and 5-year yields are more influenced by the starting point and speed of normalization, said Bank of America Corp. rates strategist Ralph Axel.

“Everything that we see keeps pushing us into sooner, faster, more in terms of removing accommodation,” Axel said.

The surge in yields is hurting riskier assets. Emerging-market currencies such as the South African rand and Mexican peso sold off sharply against the dollar, and the S&P 500 Index dropped as much as 2.6%.

In Europe, peripheral countries have led a bond sell-off, with Italy’s 10-year yield spread over Germany climbing back above 100 basis points. Core debt wasn’t spared, with yields on France’s benchmark debt turning positive for the first time since June.

Eoin Treacy's view -

The 5-year Treasury best approximates the average duration of the US debt market so it tends to attract a lot of notice from bond traders. The surge in yields is being driven by two factors. The first is investors are increasingly willing to price in a quick recovery. The second is the indifference of the Fed to higher rates.



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February 24 2021

Commentary by Eoin Treacy

Long-End Yields Surge in Biggest Treasury Selloff Since January

 This article from Bloomberg may be of interest to subscribers. Here is a section:

The selloff in Treasuries sent the yield on the 30-year bond surging on Wednesday, putting the long-end
benchmark on track for its biggest one-day advance since early January.

Rates climbed across notes and bonds, with the long-end increasing most and the curve steepening. The 30-year yield jumped by around 11 basis points at one stage, hitting a one-year high of 2.29%, while the 10-year rate rose as much as 9 basis points to 1.43%.

Global bond markets are suffering this year amid the prospects for U.S. stimulus and a surging reflationary narrative, with volatility gauges climbing to multi-month highs. That’s prompted fears over a potential tantrum in havens, such as Treasuries and German bonds. While Federal Reserve Chairman
Jerome Powell this week called the recent run-up in bond yields “a statement of confidence” in the economic outlook, the move raises pressure on central banks to keep financing conditions easy.
 

“The market is nervous about additional stimulus, worried about the risks of higher inflation, and concerned about QE tapering,” said Gennadiy Goldberg, senior U.S. rates strategist at TD Securities. “The selloff is likely being exacerbated by convexity hedging and positioning stop-outs.”

Eoin Treacy's view -

Demand for save havens is waning. That’s perhaps the easiest way to explain the run-up in yields; globally. The scale of the flight to quantity because of angst at the lockdowns drove yields down to historic lows almost everywhere.



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February 23 2021

Commentary by Eoin Treacy

Email of the day - on interest rate sensitivity and overbought conditions

At Greatest Risk from Higher Bond Yields? Eoin, we have seen some sizable sell offs in recent weeks from the hottest sectors such as Green Power, and the various Innovation Funds/ETFs as well as Electric Vehicle sector. As you'd pointed out, they are benefit from super low rates as growth is essentially free. What risk for EM though, which otherwise has been on cruise control of late? Today has seen a sizeable sell off, but is this just the first shot across the bow? Which of the EMs would you be most guarded against? What else might be at greatest risk given the run ups we have had in markets over the last 12 months?

Eoin Treacy's view -

The ARK Innovation ETF has pulled back by about 20% over the last six sessions. That’s a sizable pullback but the fund was up 383% since March 2020 so it was due some consolidation. This reaction has broken the 12-month sequence of higher reaction lows so the trend is no longer as consistent as it was on the way up.



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February 22 2021

Commentary by Eoin Treacy

China's Yield Appeal Catapults Yuan to Global FX Big League

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

There have been many false dawns in China’s quest for the yuan to challenge other major currencies. But underpinning the explosion this time lies a torrent of capital flowing into China’s markets, fueled by a frantic search for returns with over $14 trillion of debt globally paying less than 0%.

That appetite for some of the highest-yielding government bonds in the Group-of-20 countries has elevated interest in China to fever pitch and is generating demand for liquidity from investors looking to finance and hedge their investments. It’s also spurring volatility and attracting speculators who overlooked the market for years.

“It’s certainly a top currency in terms of the flow that we’re seeing,” said Kevin Kimmel, New York-based global head of electronic FX at Citadel Securities, one of the world’s biggest market makers. “Trading activity in the yuan has increased significantly.”

The shift comes as China continues to relinquish control -- albeit slowly -- of its tightly-managed currency, a linchpin of Beijing’s long-term plan to encourage its greater global use. China is considering easing restrictions on citizens investing in securities outside its mainland, a move that would facilitate two-way capital flows.

Eoin Treacy's view -

Capital is both global and mobile and it will always flow to the most attractive assets. There are no developed markets where one can pick up a yield above 1% in an appreciating currency. Investors have no other choice than to look elsewhere.

In doing so, they have to weigh how likely it is that tensions with China are likely to escalate. With a new US administration, the potential for surprises is lower and therefore the risk from investing in the renminbi is reduced but not eliminated. This trend of Renminbi strength has been very persistent since March and some consolidation will occur eventually.



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February 19 2021

Commentary by Eoin Treacy

February 18 2021

Commentary by Eoin Treacy

Email of the day on debt

In the 1960s David Cameron's father, Ian who was the head of the Gilts department, taught me when I was working. at Panmure Gordon, that states never repay their debts. They issue new bonds to refinance old ones when they come to maturity. Apart from President Andrew Jackson in 1835, there is no modern example of a state repaying the National Debt. It is about time that experts and journalists stop causing anxiety among older people who think that states are burdening their children and grandchildren with future debt repayments.

Eoin Treacy's view -

Thank you for this personal account. I agree governments never pay back their debts. They always issue more debt. However, the money for the bonds has to come from somewhere. If the yield is high enough it will siphon private savings from the economy to fund the government. If the yield is not attractive, the central bank will have to print the money and buy the bonds.

In the first case, the currency strengthen, growth has a harder time raising capital but value should do well. In the latter, they devalue the currency to fund government. All private savings are eroded. Those with savings pour them into financial assets to hedge against the falling purchasing power of the currency.



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February 17 2021

Commentary by Eoin Treacy

Email of the day on real returns

Where can I find a chart plotting real returns of interest rates Thanks in advance.

Eoin Treacy's view -

Thank you for this question which is not easy to answer. The primary tools used by the market to monitor real returns on fixed income are heavily influenced by Fed actions.

For example, the Fed is buying large swathes of the inflation-protected securities market (TIPS). That’s supressing the yield.



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February 16 2021

Commentary by Eoin Treacy

Treasury Yields Surge to One-Year High as Reflation Bets Thrive

This article by Vivien Lou Chen, Stephen Spratt and Greg Ritchie for Bloomberg may be of interest to subscribers. Here is a section:

None of this is welcome news for those who bought into U.S. auctions last week. Investors snapped up a combined $68 billion of 10- and 30-year debt at yields more than 10 basis points lower than current levels. This week brings a $27 billion 20-year bond auction on Wednesday.

In the U.K., 30-year yields hit the highest level since March after the country hit a milestone in its vaccination program, supporting calls for easing of social restrictions. Germany’s benchmark yield climbed to levels last seen in June amid a significant slowdown in virus cases.

The selloff was broad, with even Italian bonds -- which would typically outperform haven assets such as German bunds when credit spreads tighten and stocks climb -- under pressure. The announcement of a new 10-year benchmark bond sale to take place via syndication saw yields also advance five basis points on Monday. Still, demand on Tuesday set a record of more than 110 billion euros ($133 billion).

Eoin Treacy's view -

Buying the dip has always worked in the bond market. The question for many fixed income investors is what will the catalyst be to stem the slide. The stock market has already priced in reflation. The stock market exceeded its 2019 highs months ago and the recovery in the social and industrial segment of the market continues.



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February 11 2021

Commentary by Eoin Treacy

Almost Daily Grant's

Thanks to a subscriber for this edition of James Grant’s free eletter. Here is a section:

A similar trend is visible in the more speculative corner of the corporate bond market. Analysts from Barclays reported last week that average duration in high-yield debt has jumped to 6.7 years, compared to 6.1 years at the beginning of 2020.  Similarly, the effective yield on the ICE BofA US High Yield Index reached a record low 4.12% yesterday, down from 5.19% a year ago.  Meanwhile, Bloomberg reported Friday that a voracious hunger for yield has left junk bond investors “calling up companies and pressing them to borrow, instead of waiting for bankers to bring new deals to them.” 

“It’s kind of wacky,” Jim Shepard, head of investment-grade bond issuance at Mizuho in New York, told the Financial Times yesterday. “At a time when you would want greater insurance against a rise in interest rates, [people] are buying something more exposed to it.” 

Eoin Treacy's view -

It is impossible for the US government to fund itself given the current trajectory of the deficit and the purchases currently being made by the Fed. That puts upward pressure on bond yields because the government will be more dependent on the market to soak up supply.



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February 10 2021

Commentary by Eoin Treacy

Email of the day on choosing what to write about

Prompted by a recent subscriber’s comment I would just like to mention that I have been a subscriber for many years and can happily say that I have always considered it money well spent. I read and listen to your market commentary most days and very much appreciate your calm insight and intuitive free thinking. I find your choice of topic and charts chosen on any particular day, to be more powerful for the very reason they are your choice of topic and charts chosen for that particular day. Please keep up the great work. Wishing you and your family the very best.

Eoin Treacy's view -

Thank you for your generous feedback. David often described our role as that of behavioural naturalists. We try to observe the crowd by daring to stick our head above the melee to see whether there is an approaching precipice or a source of fresh fuel to rekindle animal spirits. As I monitor markets on a day-to-day basis, there are times I feel like a surfer on the wave of crowd psychology. From that perspective the biggest waves are found closer to shore.  



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February 08 2021

Commentary by Eoin Treacy

Email of the day on gold and fighting the Fed

Thursday's article, “Gold Plunges the most in Four Weeks…” is greatly appreciated.  Despite all the uncertainties and volatility of the past two months you report that you have retained your gold investments and are looking forward to “increase [your] position”.  You express even more confidence in silver.

The attached St Louis Fed Chart showing an accelerating measure of inflation provides good evidence to support your position, long term, but long-term charts, both weekly and monthly show gold is still over-extended. 

If “fighting The Fed” is to be avoided, a bullish gold position may be a courageous act when the world’s central banks will be united in their determination to frustrate gold investors.  There may have been some evidence of that last year.  Also, since silver prices are more easily manipulated, that market seems to be more vulnerable to a combined central bank manoeuvre?

Common sense says that the present world-wide, money creation will end in disaster.  In that situation, precious metals are a safe haven but, in the short term, and even the medium term, risks in those markets appear to be very high. A prudent plan to cover both outcomes seems desirable.  That plan should, perhaps, also incorporate different allocations to gold and silver. Further guidance by you would be invaluable.

Eoin Treacy's view -

Thank you for this email. Fighting the Fed would be holding a gold position in a positive real interest rate environment where one can easily anticipate a positive return from other asset classes. That is not at all what we have at present. We could be looking at a negative real yield for years to come as central banks attempt to loot savings to pay off massive unfunded debts.



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February 05 2021

Commentary by Eoin Treacy

Secular Bull Market Investment Candidates Review February 2021

Eoin Treacy's view -

On November 24th I began a series of reviews of longer-term themes which will be updated on the first Friday of every month going forward. The last was on January 8th. These reviews can be found via the search bar using the term “secular themes review”. 

Highlighting secular themes has been a hallmark of this service for as long as I have been a part of it. I first met David Fuller in Amsterdam in 2003. He was giving a talk to Bloomberg’s clients and we went out for dinner that evening. His way of looking at markets, with a focus on suspending ego to see what the market tapestry is telling us, answered all of the questions I had about how to interpret
markets. I felt honoured when he asked me to come work with him a few months later.

The easy way to find secular themes to is to look at long-term ranges. Prices can so sideways for a long time, sometimes decades, and the whole asset class can be forgotten by investors. These kinds of markets need a catalyst to reignite demand. Once that new theme gathers enough pace, prices break on the upside because the supply side is not capable to responding in a timely manner to the new phenomenon. Sometimes that’s because they don’t believe in the new trend, or it may be because they simply do not have the financial wherewithal to expand. As the power of the new catalyst gathers, it takes time for supply to respond and the market will proceed higher until there is a robust supply response. That can take a long time because demand continues to grow as the new theme increases its dominance of investor attention.



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February 03 2021

Commentary by Eoin Treacy

Email of the day on the US Dollar

I am a not so new subscriber, I started in 2010. And your service is very valuable for me, so thank you! - Your commentary starts my day.

I understand that your view is that the dollar will depreciate over the coming years. Since I am based in the euro area, and have approx. 50% of my investments in USD, this is a topic that interest me very much.

I enclose a report from Nordea Bank, with a slightly different view. I would be very interested to know your take here.

Eoin Treacy's view -

Thank you for patronage over the last decade and for this well-argued report which I’m sure will be of interest to the Collective. Here is a section:

It's one thing to say you will accept inflation overshooting, it's another thing to do it once inflation is decidedly overshooting - especially with global growth numbers booming at the same time. We therefore expect the market to be back in questioning the pace of the Fed's bond purchase program around summer at the latest (the consensus looks for the first tapering some time in H1, 2022 - too late in our view). A further sell-o in US fixed income, or steepening of US curves in relative terms, will at least reduce the downward pressure on the dollar from a double deficit perspective. It will also weigh on various "fair value" models for the EUR/USD.

The big question for a Dollar investor is whether the Fed is going to stick to its stated interest rate policy. They have said, in plain English, they are not going to taper and not going to raise rates until inflation takes off and not just in a transitory way.



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February 02 2021

Commentary by Eoin Treacy

Silver, GameStop Sink as Investor Frenzy Shows Signs of Cooling

This article from Bloomberg news may be of interest to subscribers. Here is a section:

Most-active silver futures declined as much as 5.5% to $27.81 an ounce on the Comex after the CME Group said margins will rise to $16,500 per contract from $14,000, effective Feb. 2. The decision was based on “the normal review of market volatility to ensure adequate collateral coverage," it said.

“Fundamentally I don’t believe that there are any significant short positions in the silver market, as the outlook for silver is robust this year, coming off a strong performance in 2020," Wendt said.

As the frenzy built, BlackRock Inc.’s iShares Silver Trust recorded an unprecedented $944 million net inflow on Friday, followed by another $551 million on Monday after a since-removed post appeared on the WallStreetBets forum that encouraged traders to pile into the exchange-traded product. That move now appears to be fizzling out, with some on Reddit urging their fellow investors to back away from silver.

“We suspect that prices will remain volatile," James Steel, chief precious metals analyst at HSBC Securities (USA) Inc., said in a note before the margin increase was announced. “Beyond this week, and possibly sooner, we believe the new entrants into the market may tire and begin to liquidate silver holdings, with a commensurate price impact. Buyer beware!"

Eoin Treacy's view -

Raising margin requirements for futures trades always has an impact on prices. It’s the primary tool used by exchanges to ensure orderly markets and it has had a negative effect on silver today. That helps to confirm resistance in the region of the upper side of the range and suggests some additional consolidation is likely.



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February 01 2021

Commentary by Eoin Treacy

DoubleLine Round Table 2021

Section 1 Global Macroeconomy: State of Play and Outlook Part 1 and Part 2

Section 2: Financial Markets Part 1 and Part 2

Section 3: Best Ideas

 

Eoin Treacy's view -

I enjoyed this series of roundtables last year and this year did not disappoint. The points made are all relevant to the market environment as we see it today. Ther participants expressed a great deal of fear that we are dangerously close to a bubble peak. There is a lot of worry about valuations, social unrest and the effects on the credit worthiness of the corporate bond market, when the Fed is backstopping it.



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January 29 2021

Commentary by Eoin Treacy

World's Most Vaccinated Nation Struggles With Virus Variants

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

The variant first identified in the U.K., 50% more infectious and possibly more virulent than the original virus, is to blame for the inability so far of the vaccination campaign and the lockdown to curb the spread, Israeli health ministry officials said.

Although the vaccine is believed to work against the variant, the mutation’s more contagious nature means higher infections and hence more hospitalizations. The health ministry’s main goal now is to bring down the numbers of the seriously ill who are overwhelming hospital wards and exhausting medical teams.

The rate of infections in Israel has declined to just over 9% from 10.2% earlier this month, and people seriously or critically ill has stabilized at about 1,100. But the number of patients on respirators has hit a record, Corona Commissioner Nachman Ash has said. More than 4,600 people in Israel have died from the virus, and more than 7,600 people are being diagnosed with it daily.

Balicer said it would likely take another 10 days before the country sees critical cases decline, allowing the economy to begin to return to normal.

Eoin Treacy's view -

Israel offers a valuable preview of what the rollout of vaccines in other countries will look like. The country’s advantages in having a small population, socialised medicine and rapid vaccination program suggest it represents a best-case scenario for what other countries might hope for. As vaccinations roll out and enthusiasm that the light at the end of the tunnel is in view, the spectre of virus variants represents a brake on the pace of reopening.



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January 26 2021

Commentary by Eoin Treacy

Is there a bubble in financial markets?

Thanks to a subscriber for this chartbook from Deutsche Bank which may be of interest.

No doubt that in aggregate US equity valuations are at, or close to, all-time-highs.

Eoin Treacy's view -

There are a couple of things that are worth considering. The first is that identifying a bubble is not a timing indicator. The easy money policies adopted by central banks following the Global Financial Crisis 13 years ago were inevitably going to cause a bubble in something. The new information is that there is evidence of a bubble in a large number of asset classes because zero interest rates made a nonsense of any kind of valuation metric.

The one thing we know about manias from history is they are powerfully attractive. They suck in investors from all over the world and by the time they peak everyone is fully invested. Let’s take a poll. So how are subscribers invested and how much cash do you currently hold relative to what is “normal” for you? By looking at our individual actions, in aggregate, we will probably come up with a better understanding of where the wider investment community is.



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January 25 2021

Commentary by Eoin Treacy

Sunak's Tax Choices to Fix U.K. Debt Range From Wealth to Fuel

This article from Bloomberg may be of interest to subscribers. Here is a section:

 

A more innovative and potentially hugely controversial option that could seek to address growing U.K. inequality would be a wealth tax. Last year, the independent Wealth Tax Commission said the
U.K. could raise more than 260 billion pounds with an annual charge of 1% lasting five years on individual assets above 500,000 pounds. About 8 million residents would be affected.

Wait and See
Sunak could also decide that it’s too early to raise taxes, choosing to tolerate a higher debt load until the U.K.’s recovery is assured. That tactic was mooted last week by a Treasury minister who suggested hikes could be avoided should the economy stage a strong rebound.

“It’s not absolutely obvious therefore that there may be any future need for consolidation, depending on the view you take for taxes,” Financial Secretary to the Treasury Jesse Norman told the House of Commons Treasury Committee. That approach, which removes the risk of premature tightening that could choke off growth, could be achievable after Bank of England bond purchases to stimulate the economy drove U.K. debt-servicing costs below pre-pandemic levels, despite the borrowing splurge.

Eoin Treacy's view -

The prospect of a wealth tax would in all likelihood raise important questions about the attractiveness of London as a bastion for the world’s wealthy. It would also enhance the subjects of the tax to decamp to sunnier climates.

Every one of the potential levers for higher taxation revenue represents a difficult decision. If I had to guess, some form of carbon tax on individuals is much more likely. Each of us is an emitter and we will end up paying for the original sin of simply existing. That's going to be contentious but it will be couched in the verbage of saving the planet. 



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January 22 2021

Commentary by Eoin Treacy

Email of the day - on money printing

As an American investor, it has occurred to me that as we enter an era of money printing the likes of which we probably have never experienced, I really don't have a good handle on the potential risk. It is virtually impossible to allocate one's assets appropriately without a good understanding of a "best case/worst case" scenario. I watch as those in charge in Washington salivate at the prospect of writing checks, checks, checks, and assume that the currency will depreciate, but wonder: how bad might this possibly get? With a pistol to your head, if you had to take a guess at it, what do you see as the range of possibilities here? Might we be another Greece? Thanks for all you do for us - day in and day out.

Eoin Treacy's view -

Thank you for this question which helps to express the uncertainty many people feel after a year of outsized volatility across assets…everywhere. Trillions of dollars in deficits will need to be funded somehow. Right now, the plan is to print the money and devalue the currency. Comparisons with Greece, Zimbabwe or Venezuela miss the point. The USA prints debt in its own currency. It will never default. All of the pressure will be borne by the Dollar.

The Dollar’s Purchasing Power peaked in 1933 and halved by 1948 (15 years). It halved again by 1974 (26 years). It halved again by 1983 (9 years). It halved again by 2007 (24 years) and is well on its way to another halving.  

There is a cottage industry in worst case scenarios and I am reluctant to indulge in that kind of speculation. The one thing we know for sure is investors are being forced to speculate. Cash is a wasting asset when devaluation is in play. That is creating demand for hard assets and preferably those with strong cash flows.



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January 22 2021

Commentary by Eoin Treacy

Don't Bank On the Glut of Savings Being Spent

This article by Gary Shilling may be of interest to subscribers. Here is a section:

From a broader perspective, inflation results from demand exceeding supply, but since globalization commenced three decades ago, it’s been an excess supply world. Asian countries are big producers of exports they send to the West, but they’re weak consumers. China’s consumer spending is just 43% of GDP, compared with 68% for the U.S. So the resulting Asian saving glut generates price-depressing excess supply. Barring a tariff wall that seals off imports from Asia, any revival of U.S. consumer spending wouldn’t be big enough to eliminate global excess supply. And President Joe Biden is less zealous on the trade war with China than former President Donald Trump.

Finally, note that some investors aren’t anticipating surging inflation and interest rates. Technology-related and other growth stocks have low earnings yields, the inverse of price-to-earnings ratios, which are justified by low interest rates. The theory is that their present stock values equal the discounted value of future earnings, so the lower that discounting interest rate, the more their equities are worth
today.

Earnings of $10 in 10 years hence is worth $9.05 today with a 1% discounting rate, but only $5.58 at 6%. So if investors expected a leap in inflation and interest rates, they’d probably be dumping growth stocks now.

Eoin Treacy's view -

Is it different this time? That’s the big question for anyone who has been monitoring the markets for the last few decades. Every time we see a recovery from a major decline, there is evidence of inflationary pressures beginning to rise. In 40 years, they have not proved to have staying power.



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January 22 2021

Commentary by Eoin Treacy

Short-Seller Citron 'Walks Away' After 'Angry Mob' Tried to Silence Him on GameStop (GME), Turning Info Over to Feds

This article from StreetInsider may be of interest to subscribers. Here is a section:

GameStop (NYSE: GME) short-seller Andrew Left of Citron Research says an "angry mob" that owns the stock spent the last 48 hours committing multiple crimes against him and his family that he will turn over to the FBI, SEC, and other government agencies.

He said what he experienced is nothing short of "shameful and a sad commentary on the state of the investment community" and he will no longer be commenting on GameStop.

Left said this was not just name-calling and hacking but "serious crimes such as harassment of minor children."

Left said they are "investors who put the safety of family first and when we believe this has been compromised, it is our duty to walk away from a stock."

Eoin Treacy's view -

Crowds all share common characteristics. The most important from the perspective of monitoring markets is that as the crowd grows, only the basest of emotional responses survive. There is no room for equivocation. Only absolutes are acceptable to the mob. Estimates of future potential stretch to infinity as a result.



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January 21 2021

Commentary by Eoin Treacy

WHO Information Notice for IVD Users 2020/05

This information notice from the WHO may be of interest to subscribers. Here is a section: 

WHO guidance Diagnostic testing for SARS-CoV-2 states that careful interpretation of weak positive results is needed (1). The cycle threshold (Ct) needed to detect virus is inversely proportional to the patient’s viral load. Where test results do not correspond with the clinical presentation, a new specimen should be taken and retested using the same or different NAT technology.

WHO reminds IVD users that disease prevalence alters the predictive value of test results; as disease prevalence decreases, the risk of false positive increases (2). This means that the probability that a person who has a positive result (SARS-CoV-2 detected) is truly infected with SARS-CoV-2 decreases as prevalence decreases, irrespective of the claimed specificity.

Most PCR assays are indicated as an aid for diagnosis, therefore, health care providers must consider any result in combination with timing of sampling, specimen type, assay specifics, clinical observations, patient history, confirmed status of any contacts, and epidemiological information.

Eoin Treacy's view -

The use of PCR testing has been criticised by many commentators as inappropriate for almost as long as the tests have been in use. The reality is that high numbers of cycles tend to give false positives. These tests also have no capacity to differentiate between active and inactive virus. It means that asymptomatic people are forced to quarantine when there is virtually no risk of them being infectious. That is equally true of the more transmissible versions of the virus currently spreading.



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January 20 2021

Commentary by Eoin Treacy

Deflation Threatens to Push Yen Higher on Japan Real Yield Gain

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

“Japan’s real yields are high and are rising with deflation underway,” said Tohru Sasaki, head of Japan markets research at JPMorgan Chase & Co. “The real yield gap widening in the negative is very significant. It may eventually drag the yen higher.”

Consumer price growth in Japan excluding fresh food -- a measure closely watched by the country’s central bank -- has been negative or zero since April. Expectations for future inflation -- derived from 5-year breakeven rates -- sit at minus 0.12%. Equivalent U.S. breakevens are at 2.16%, up over 60 basis points and rising since November, as investors bet further stimulus under new President Joe Biden will help reflate the American economy.

Yen at 100
The result is a higher real yield in Japan, where 5-year inflation-protected notes trade around zero versus minus 1.73% in the U.S., increasing the relative attractiveness of the country’s bonds and its currency.

Eoin Treacy's view -

You know you live in a funny reality when a zero or negative interest rate produces a positive real yield. Japan’s deflationary environment has been an abiding characteristic of the market for decades and the vast quantity of debt accrued in that time is a headwind to risk taking, speculation and economic activity going forward. Attempts to reinvigorate the domestic demand story with immigration were beginning to bear fruit ahead of the pandemic. Japan has weathered the storm better than most so it will face less of a challenge in recovering as the world heads towards reflation.



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January 19 2021

Commentary by Eoin Treacy

Weekly Warm-up: More Stimulus May Mean Less for Markets

Thanks to a subscriber for this report from Mike Wilson at Morgan Stanley which may be of interest. Here is a section:

Eoin Treacy's view -

A link to the full report is posted in the Subcsriber's Area.

The US government expects to issue about $1 trillion more bonds than the Fed currently expects to buy in 2021. Without a clear move to boost the amounts committed to the bond buying program yields will inevitably rise. It’s a simple supply and demand argument. Of course, no one really believes the Fed will fail in its commitment to provide assistance while unemployment is well above trend.



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January 18 2021

Commentary by Eoin Treacy

Email of the day - on the early stages of a secular bull market.

Until the beginning of last year you often spoke on the theme of the early stages of a secular bull market. David had begun speaking about it as long as 4 years ago. But with the onset of the pandemic, you have been largely silent about it. Has it stalled or, in your view, already peaked?

Eoin Treacy's view -

Thank you for this important question. In October 2008, I remember sitting at my desk and looking at the calculation that the S&P500 was sitting on the widest overextension relative to the 200-day ever. Acceleration is always a trend ending and the crash signalled the beginning of the bottoming process. By the time Wall Street reached its nadir in March 2009 many instruments were well off their lows and by the end of the year the leaders were making new highs.

Gold, commodities, ASEAN and technology took off. Of these, technology is the only one which had uninterrupted staying power all the way through the bull market to date.  

I started writing Crowd Money in 2011. At the time a host of big international companies, with global franchises, that dominate their niches were breaking out of long-term ranges. It was a clear signal that a new secular bull market was underway. By the time the book was published in 2013, it was still a minority view that a new bull market was underway.



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January 15 2021

Commentary by Eoin Treacy

Carry Trades

Eoin Treacy's view -

There is nothing in the financial markets that can’t be made better with leverage. That’s the foundation most trading operations are based on. One of the most common trade patterns is to source cheap funding in a currency which is depreciating in value. That way when it comes to paying back the loan, you get to keep the profit on the currency trade as well as any gain from the assets you invested in.

Japan’s zero interest rates made it an ideal candidate for carry trades but the propensity for the Yen to strengthen meant that short yen carry trades tended to be rather volatile. It was common in the decade up to the introduction of Abenomics in early 2012 for unwinding of carry trades to contribute to profit taking across global markets.

As interest rates have trended towards zero across the world the opportunity to access cheap funding in a wide array of currencies has never been greater. The challenge today is to find the currency most likely to decline versus assets with high growth and yield potential.



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January 14 2021

Commentary by Eoin Treacy

Email of the day on financial repression:

Thanks so much for the terrifically informative analysis that you continue to provide. The quality of your work is simply jaw dropping at times. But I wonder if you could please clarify one thing. Would you mind defining more clearly what you mean by the term “financial repression”? I can certainly search this, but I’d like to know what it means to you.

Eoin Treacy's view -

Thank you for your kind words and I’m delighted you enjoy the service. The term “financial repression” is emotionally charged because of its historic significance. After World War II the US government paid back its war debt by inflating it away. That was a deliberate policy where interest rates were held at a low level for a prolonged period, taxes were raised and inflation eroded the debt over decades. From an investors perspective it was akin to the government reaching into your pocket and taking your money.



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January 14 2021

Commentary by Eoin Treacy

Global Money Dispatch

Thanks to a subscriber for this note from Zoltan Pozsar for Credit Suisse. Here is a section:

Eoin Treacy's view -

A link to the full note is posted in the Subscriber's Area.

The absence of a credit multiplier helped to keep inflation under wraps for the decade after the Global Financial Crisis. Banks just did not have the ability to lend, even if they had wanted to. Rebuilding their balance sheets was the number one priority. It was a monumental task. New regulations massively increased the burden of compliance and simultaneously denuded banks of some of their most profitable operations. The result is that the sector has been recapitalised but it is now much more risk averse than before.



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January 11 2021

Commentary by Eoin Treacy

Governance

Eoin Treacy's view -

There is no way the storming of the Capitol can be justified. Overwhelming an unsuspecting police cordon and disrespecting the nation’s seat of power is an affront no government is going to tolerate. That’s on top of what impact it has had on the vast majority of people who live their lives by a code of common decency.

By the same token, riots where private businesses are destroyed, police stations set light and people afraid for the integrity of their homes should also be condemned.

The problem with the polarization of political discourse in the USA is neither side is willing to sharply criticize the actions of their adherents. To do so would be political or busines suicide.

We are currently being treated to commentary fomenting fear that there will be a great deal of unrest at the upcoming Presidential inauguration. It’s a significant risk but it is far from the only form of intimidation.

My doorbell rang on Saturday night while we were sitting down to dinner. I thought it was an Amazon delivery so I went out to see what it was. Two BLM activists were waiting and informed me they were collecting donations. I told them we were in the middle of dinner and closed the door. They left chanting Black Lives Matter.

One way of looking at this encounter is that it was innocuous. Another is that they were indeed innocently collecting donations for their cause. Another is that they were canvasing the leafy suburb to identify who supports them and who doesn’t. For Mrs. Treacy’s part, she saw correlations with the Cultural Revolution.

The challenge is that the rioters during the summer threatened they would come into the neighborhoods. It never happened, but when fund raisers come knocking on the door it feels like they are after protection money. I think our days in Los Angeles are numbered. This is not the city we moved to seven years ago.

President-elect Biden says he wants to heal the country. That’s a tall order but regardless of its success it will mean throwing money at the problem. There is clear potential the USA is now moving towards formal adoption of MMT.



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January 07 2021

Commentary by Eoin Treacy

The Fever Has Broken, Stability is Coming

Thanks to a subscriber for this article by Greg Valliere for AGF which may be of interest. Here is a section:

AN INEPT INSURRECTION FAILED, and there will be an orderly transition of power on Jan. 20; even Trump pledged as much early this morning. He probably won’t be ousted but his legacy will be forever stained, and his sycophants — Josh Hawley, Ted Cruz, etc. — will never recover.

THE TEMPERATURE WILL LOWER SOON: For the next few days, there will be speculation about removing Trump, largely out of fear over what he may do — especially geopolitically — in his final two weeks. And there will be questions about why the Capitol Hill police were so pathetically caught off guard yesterday. But a change is coming . . .

Eoin Treacy's view -

Stoking the mob is always tempting for populists on both sides of the spectrum.

That was abundantly clear in the mass protests, looting and destruction of public property over the summer. Those protests have since abated because the organisers achieved their goal of overthrowing the Trump administration.

The big question now is whether the mob seeking to overthrow the new Democrat controlled government will be chastened by yesterday’s events. My intuition tells me they represent a significant demographic and will form a significant portion of the new opposition, regardless of whether Donald Trump is banned on Twitter/Facebook.



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January 06 2021

Commentary by Eoin Treacy

Banks, Small Caps Power Stock Rally as Tech Drops

This article from Bloomberg may be of interest to subscribers. Here is a section:

Investors poured into financial assets that benefit from a stronger economy after Democrats looked set to take control of Congress, potentially unleashing a torrent of federal spending to revive growth.

Banks and energy producers led gains in the S&P 500 as the Russell 2000 Index of smaller companies climbed 3%. The Nasdaq 100 fell as traders sold out of high-flying stocks such as the Apple Inc. and Amazon.com Inc. The Dow Jones Industrial Average outperformed.

Democrats claimed one of the two Senate seats contested in Georgia and led in the other tight race. Two wins would give President-elect Joe Biden’s party control of Congress and smooth the path for some of his spending policies. That’s fueled bets that increased stimulus will boost the economy and spark inflation. The 10-year Treasury yield powered past 1% for the first time since March, and the dollar fluctuated after earlier weakening toward a six-year low.

“The growth-into-value rotation may be reinforced after the results of the Georgia Senate election amid the prospect of a higher fiscal stimulus bill and steeper yield curve, which would benefit banks and other non-tech companies,” David Bahnsen, chief investment officer of the Bahnsen Group in Newport Beach, California, wrote in a note to clients.

Eoin Treacy's view -

Control of the Senate will give the Democrats greater power to remake policy. It won’t all be plain sailing since such a slim majority will require total unanimity but it certainly means they will have an easier time passing spending measures. If debt financing and Modern Monetary Theory were likely before, they are doubly so today.



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January 06 2021

Commentary by Eoin Treacy

Waiting For The Last Dance

Thanks to a number of subscribers for this article by Jeremy Grantham which may be of interest. 

The strangest feature of this bull market is how unlike every previous great bubble it is in one respect. Previous bubbles have combined accommodative monetary conditions with economic conditions that are perceived at the time, rightly or wrongly, as near perfect, which perfection is extrapolated into the indefinite future. The state of economic excellence of any previous bubble of course did not last long, but if it could have lasted, then the market would justifiably have sold at a huge multiple of book. But today’s wounded economy is totally different: only partly recovered, possibly facing a double-dip, probably facing a slowdown, and certainly facing a very high degree of uncertainty. Yet the market is much higher today than it was last fall when the economy looked fine and unemployment was at a historic low. Today the P/E ratio of the market is in the top few percent of the historical range and the economy is in the worst few percent. This is completely without precedent and may even be a better measure of speculative intensity than any SPAC.

This time, more than in any previous bubble, investors are relying on accommodative monetary conditions and zero real rates extrapolated indefinitely. This has in theory a similar effect to assuming peak economic performance forever: it can be used to justify much lower yields on all assets and therefore correspondingly higher asset prices. But neither perfect economic conditions nor perfect financial conditions can last forever, and there’s the rub.

All bubbles end with near universal acceptance that the current one will not end yet…because. Because in 1929 the economy had clicked into “a permanently high plateau”; because Greenspan’s Fed in 2000 was predicting an enduring improvement in productivity and was pledging its loyalty (or moral hazard) to the stock market; because Bernanke believed in 2006 that “U.S. house prices merely reflect a strong U.S. economy” as he perpetuated the moral hazard: if you win you’re on your own, but if you lose you can count on our support. Yellen, and now Powell, maintained this approach. All three of Powell’s predecessors claimed that the asset prices they helped inflate in turn aided the economy through the wealth effect. Which effect we all admit is real. But all three avoided claiming credit for the ensuing market breaks that inevitably followed: the equity bust of 2000 and the housing bust of 2008, each replete with the accompanying anti-wealth effect that came when we least needed it, exaggerating the already guaranteed weakness in the economy. This game surely is the ultimate deal with the devil.

Eoin Treacy's view -

The challenge for value investors is they tend to see trouble coming way before the rest of the crowd. For many funds the high Cyclically Adjusted P/E ratio has ensured they have been underinvested for years so bearishness is not a new phenomenon even if some are now doubling down on their view.



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January 04 2021

Commentary by Eoin Treacy

December Research Letter

Thanks to a subscriber for this report from Crescat Capital which contains a number of interesting charts. Here is a section:

Contributing to the supply shortage, the number of major new gold discoveries by year, i.e., greater than 2 million Troy ounces, has been in a declining secular trend for 30 years including the cyclical boost between 2000 and 2007. At Crescat, we have been building an activist portfolio of gold and silver mining exploration companies that we believe will kick off a new cyclical surge in discoveries over the next several years from today’s depressed levels.

Gold mining exploration expense industrywide, down sharply since 2012, has been one of the issues adding to the supply problems today. Crescat is providing capital to the industry to help reverse this trend.

Since 2012, there has also been a declining trend of capital expenditures toward developing new mines. From a macro standpoint, gold prices are likely to be supported by this lack of past investment until these trends are dramatically reversed over the next several years. Credit availability for gold and silver mining companies completely dried up over the last decade. Companies were forced to buckle up and apply strict capital controls to financially survive during that period. Investors demanded significant reductions in debt and equity issuances while miners had to effectively tighten up operational costs, cut back investment, and prioritize the quality of their balance sheet assets.

Eoin Treacy's view -

Supply Inelasticity Meets Rising Demand was the catch call of the commodity-led bull market between the early 2000s and 2011. Once identified it represents the beginning of a new bull market.

It takes time to convince investors there is a new bull market. By the time that happens prices have been trending higher for years already. Then it takes time to find and build new mines. That can take anything up to five years. Over that time, the firmness of prices convinces more and more people that the trend of demand dominance is irreversible so miners come under a great deal of pressure to expand capital expenditure or to buy out other operations. That generally occurs around the same time that new mines come online and contributes to a triple waterfall decline. Supply increases, debt is unmanageable and prices declines destroy valuations. Such is the cyclicality of the mining sector.



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December 30 2020

Commentary by Eoin Treacy

How the Fed Will Respond to the Coming Inflation Scare

This article by Tim Duy for Bloomberg may be of interest to subscribers. Here is a question:

For an example of how the economy might recover faster than expected, consider that the consensus estimate for fourth-quarter growth is just under 4% while the Atlanta Fed’s GDPNow current estimate is 10.4%. Although the fourth quarter might not turn out to be quite so rosy given rising Covid-19 cases, the Atlanta Fed number still illustrates the possibility of some very good outcomes for the economy. For another example, consider that the $900 billion fiscal package is about 4.5% of GDP, or just about the size of the output gap. Imagine the possibility of being on the edge of full capacity already when the vaccine has been sufficiently distributed to allow the resumption of normal activities.

To be sure, any estimates of the output or unemployment gaps are just that — estimates. They will raise some worries about reports showing higher rates of inflation yet still leave the Fed hesitant to change the expected path of rate increases. The Fed will believe the economy is operating closer to full capacity if wage growth accelerates meaningfully beyond the 3.5% seen in July 2019, the high of the last cycle. That would help the clear the way to higher interest rates

​My instinct is that getting all three of these pieces to come together makes inflation more of a 2022 story than a 2021 story. At this point, the 2021 story still looks less like real inflation and more like an inflation scare. And with its new policy strategy, the Fed won’t scare easily.

Eoin Treacy's view -

The rebound from a large decline will always have the benefit of a base effect. A decline of 20% requires a rebound of 25% to get back to even. When that occurs in a short period of time it looks like a big move and it affects sentiment. 2021 is going to be a year of reflation because economic contractions are already being repaired as vaccines are rolled out. The rising number of cases at present are as much to do with the higher transmissibility of the new strain as they are about the impatience of consumers to get back to life as normal. That suggests plenty of scope for higher consumption.



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December 30 2020

Commentary by Eoin Treacy

Email of the day on rising inflationary pressures and Ethereum

I hope you are enjoying the holidays and looking forward to a better year next year.

Here’s another one of Charles Gave's excellent articles-the oil price is on the move thus starting to bear out his fear of a 1970s-type repeat.

Secondly, regarding Ethereum, have you been able to quantify any price target and if so, what technical data/events have you chosen to use?

Eoin Treacy's view -

Thank you for this interesting report which repeats Gave’s earlier call for an inflationary boom with which I agree. However, I’m not sure we are in the same kind of bull market in oil that we had in the first decade of this century. The history of secular bull markets in oil points to rising prices lasting as long as it takes new sources of supply to reach market. That is followed by decades of ranging.



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December 17 2020

Commentary by Eoin Treacy

China's Central Bank Going It Alone Spurs an Influx of Capital

This article by Tom Hancock and Enda Curran for Bloomberg may be of interest to subscribers. Here is a section:

One reason it hasn’t leaned on its balance sheet as much as global peers is the PBOC largely handed the task of increasing money supply and lowering interest-rates to state-owned banks. It cut bank reserve-requirements, meaning they had more cash to dole out in loans.

With the economy growing again, policy makers have signaled they want a more sustainable pace of credit expansion. By contrast, the Fed, European Central Bank and Bank of Japan have all announced plans to maintain and step-up stimulus into the next year.

“Advanced economy central banks will try to use negative real interest rates and inflation to erode the real value of their sovereign debt,” said Andrew Sheng, chief adviser to China’s Banking and Insurance Regulatory Commission. “This is why real money flows will go to the economies that show growth, higher productivity” and steady monetary and exchange rate policy, he said.

The difference in yield between Chinese government bonds and U.S. Treasuries is already near record levels, with many market players expecting the gap to widen further next year

Eoin Treacy's view -

The Chinese approach to the pandemic has been to allow companies to issue a lot more debt and to give banks the leeway to facilitate that practice. That has occurred despite the uptick in corporate defaults. That has amounted to an addition CNY5 trillion in debt issuance this year or an increase of about 40% over the peaks of the last four years.



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December 15 2020

Commentary by Eoin Treacy

ECB Lifts Ban on Bank Dividend With 15% Payout Cap on Profit -

This article by Nicholas Comfort may be of interest to subscribers. Here is a section: 

Andrea Enria, head of the ECB’s supervisory arm, said in a Bloomberg Television interview that there’s limited visibility on asset quality and that the bank will revisit its decision in September. He also called for moderation on banks’ variable pay.

The cap makes the ECB one of the more hawkish banking watchdogs in Europe. The Bank of England said last week that it will allow lenders to make payouts that don’t exceed 0.2% their risk-weighted assets, or 25% of cumulative quarterly profits over 2019 and 2020 after deducting shareholder distributions.

Eoin Treacy's view -

Europe’s banks are hamstrung by negative interest rates but they still charge fees for just about everything and don’t pay an interest rate. The most significant factor in their favour is the bad debts issue is slowly being eroded. That particularly true on the periphery. 



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December 08 2020

Commentary by Eoin Treacy

Email of the day on share dilution

Thanks, Eoin, for your considered response. The point I was trying to get at though is that looking at a stock price chart only can hide all manner of sins. If the share count has doubled, all else equal, the price per share should only be worth half what it was previously. Having said that, I wouldn’t be in the least bit surprised if the Robinhood crowd bid up these names as they search for the last remaining recovery names without due consideration for all of the facts. Though in the short-term markets can be a voting machine, in the long term they are a weighing machine, and ultimately these investors will be found out.

Eoin Treacy's view -

Thank you for coming back on this topic. The most basic principle of price setting is to find the balance point between supply and demand. Supply is a present real-world statistic and demand is always going to be about what the future holds. Therefore, the price reflects both what is known and what is expected about any given instrument.



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December 07 2020

Commentary by Eoin Treacy

Email of the day on the risk of dilution

On the weekend review you highlighted Norwegian Cruiselines as one of the deeply impacted stocks along with the likes of Rolls Royce. At what point though should you be considering what has happened balance sheet wise? In their case, at the end of 2019 they had 214mn shares outstanding. At the end of Sept Q that had risen to 271mn (+27%). They have also just issued another 40mn shares to 311mn (+45% on 2019). In addition, they have issued $1.4bn in additional debt as well as convertible notes that can be exchanged for equity at prices lower than today's price. If those notes are converted, another 120mn shares will be issued by 2022, taking the share count to a 431mn, double the 2019 share count. The enterprise value right now is $17.1bn, compared to the Dec 19 enterprise value of $18.5bn. On this basis then, NCLH is within 10% of its pre Covid-high, and so surely, we can't look at the chart and look to the previous trading range for stock price potential. 10% above the current price is roughly $30, rather than the $50 price point the chart might otherwise indicate. The same applies to a host of these sorts of stocks such as Carnival, Royal Caribbean, American Airlines, etc etc.

Eoin Treacy's view -

Thank you for this question which may be of interest to subscribers. There are a large number of companies that have taken on extraordinary quantities of debt this year. That’s true pretty much across the board. Existing shareholders have therefore been heavily diluted.



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December 04 2020

Commentary by Eoin Treacy

Secular Bull Market Investment Candidates Review

Eoin Treacy's view -

On November 24th I posted a review of candidates I believe likely to prosper in the emerging post-pandemic market. It was well received by subscribers so I will post an update on my views on the first Friday of the month going forward. That way subscribers can have an expectation that long-term themes will be covered in a systematic manner and will have a point of reference to look back on.

Media hysteria about the 2nd or 3rd waves has not led to new highs in the number of deaths. The success of biotech companies in deploying vaccines means there is going to be a substantial recovery in the economic activity in 2021 and going forward.

The stay-at-home champions saw their sales growth surge in 2020. It will be impossible to sustain that growth rate in 2021. That’s particularly true for mega-caps. One-way bets on the sector are likely to work less well in the FAANGs going forward.



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December 03 2020

Commentary by Eoin Treacy

Email of the day on inflation

With the growing expectation of rising inflation in 2021 what areas of the world markets would you choose to be positioned in if this proves to be the case? I note you only have a few trades on at present. Ae you likely to broaden these in the future?

https://www.bloomberg.com/opinion/articles/2020-12-03/five-reasons-to-worry-about-faster-u-s-inflation

https://twitter.com/Ole_S_Hansen/status/1334476194218205186

Eoin Treacy's view -

Thank you for this question. Governments are going all in on reflation and they are unlikely to stop until they get the inflationary outcome their desire. When above trend inflation is policy rather than a “nice to have” is has to be a more credible option.



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December 02 2020

Commentary by Eoin Treacy

The Bull Market Rotates Away From Tech-Driven Mega-Companies

This article from Bloomberg may be of interest to subscribers. Here is a section:

At its heart, the rotation is based on the idea that there’s a lot of money in the economy waiting to be spent on things besides video streaming and online shopping. The U.S. personal savings rate was 7.2% at the end of 2019. By April it had surged to 33.7%, and it was still 13.6% in October—almost double where it started the year. Deposits at U.S. commercial banks swelled to almost $16 trillion in November, up from $13.2 trillion at the end of last year. If consumers revert to their pre-pandemic ways, that could set off what Jim Paulsen, chief investment strategist for the Leuthold Group, has called “a growth bomb,” as companies gear up to replace lean inventories.

Fund managers with a value bias say there are still opportunities to take advantage of the change in investors’ tastes. Chris Davis of Davis Funds points to the banks Wells Fargo & Co. and Capital One Financial Corp., whose prices were hammered when lockdowns began in March and still haven’t fully recovered. Davis thinks investors have overlooked how banking regulations enacted after the global financial crisis have made these lenders better able to handle recessions. “When you look at their valuations, the amount of cash they produce, the capital ratios that they have, the reserves they’ve been able to put up—they really have this characteristic of resilience and durability, and yet are priced at this sort of shockingly low level,” he says.

Eoin Treacy's view -

Value has outperformed growth over the last month and yields have been rising. That’s not a coincidence. Value metrics need a discount rate against which to make comparisons while growth sectors tend to do best when interest rates are low.



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November 27 2020

Commentary by Eoin Treacy

Email of the day on the Service

I have been a subscriber for just over 30 years, and in that time, I can't recall many times when a clear and concise analysis of economic and political conditions was as important as it is today. You are doing a wonderful job at keeping the collective informed, allowing us to see a broader picture than our individual biases might otherwise give us. Thanks so much!

And

Congratulations our last subscriber commentary was exceptional. You have done wonders for my confidence and ability to help my clients. Keep up the good work. Best wishes

Eoin Treacy's view -

Thank you both for your kind words and it is enormously gratifying that subscribers find value in the Service. That’s particularly true for veterans who have been with us for decades. Given both the demand and positive response for a reasonably succinct list of thematic investments that cover the prevailing market outlook, I’ll review the list on at least a monthly basis. The first Friday of the month which would coincide with the Big Picture Long-Term audio/video makes sense to me.



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November 27 2020

Commentary by Eoin Treacy

Email of day on gold

What strikes me and many other observers is that Gold is down by 1.5% to 1785 cash (just before Nov. contract expiry date…) but GDX and GDXJ are UP by 0.4% and 0.9%!

Silver is DOWN by 3% (just before Nov. contract expiry date…) while Silver miners SIL is also slightly UP!

As miners normally lead for me the dichotomy between metals and miners is probably due to the bullion banks trying to push down prices for the (RECORD!) deliverable contracts (they are short Gold by about USD 35bn!) and will allow metal prices to rise next week

If so, then this then be in tune with your Nov. 26 turn-around/bottom +- 1-2 trading days for the 10 and 20 day cycles.

Thinking about undoing my residual hedge via JDST before markets close early today….

What is your view on the above?

I much wonder if your bottom-fishing orders for PM’s were triggered today – but I suppose you want to get in at prices closer to 1700 for gold…

Eoin Treacy's view -

Thank you for this question and for pointing out this divergence between gold and gold mining stocks. The proximity of the expiry of gold contracts is relevant not least because of demand for physical metal. It is well within the realm of the possible to think enterprising institutional traders might like to see a lower price ahead of delivery.



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November 25 2020

Commentary by Eoin Treacy

Inflation Regime Roadmap

Thanks to a subscriber for this report from MAN Institute which may be of interest. Here is a section:

So there’s plenty to choose from here and all seven are useful to hold in mind when thinking about inflation. For our part, we think an acceleration in inflation could now be driven by a combination of the following – the first two being critical to our case:

Monetarism – expecting persistent deficit financing causing the money stock (M2) to rise relative to GDP. Some would classify this as demand-pull inflation;

Marxism – believing that it will be impossible to re-impose austerity after the Coronavirus is over and that voters will demand rising real wages to control income inequality. Some would classify this as cost-push inflation;

Neoclassical effects – the just in time, Asia-dominated global supply chain is likely to morph into a just in case, home-grown supply chain, causing a large-scale supply-side disruption;

Environmental effects – on the basis the one should never let a good crisis go to waste, it’s likely that G7 governments now use their new-found balance sheet room to accelerate the capital investment required to make their economies ecologically sustainable, which will have the side effect of raising fixed capital costs for private sector firms.

Eoin Treacy's view -

A link to today's video commentary is posted in the Subscriber's Area.

Some concern has been expressed this week at the impending expiry of the moratorium on evictions in the USA. This is a useful graphic.

It highlights the fact that many states have 30% delinquency on mortgages/rent. Interestingly, despite the widely held view that New York is on the cusp of being denuded of inhabitants, it is far from the worst in terms of delinquency.



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