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August 23 2019

Commentary by Eoin Treacy

Powell Says Economy in Favorable Place, Faces Significant Risks

This article by Craig Torres and Rich Miller for Bloomberg may be of interest to subscribers. Here is a section:

“Trade policy uncertainty seems to be playing a role in the global slowdown and in weak manufacturing and capital spending in the United States,” Powell said in the text of his remarks Friday to central bankers gathered at the Kansas City Fed’s annual symposium in Jackson Hole, Wyoming. “We will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2% objective.”

Eoin Treacy's view -

It is looking like the learning curve for a newly installed Fed chair is about 18 months. Today’s measured statement from Jerome Powell did an excellent job of placating investor fears while leaving open the optionality of how much to cut by. The Fed has made clear they will cut rates if they need to but will not hurry. However, the simultaneous announcement by China that they are increasing tariffs on $75 billion of US goods is likely to be prove the catalyst for deeper cuts.



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August 23 2019

Commentary by Eoin Treacy

Panic Stations

This report by Charles Gave for GaveKal may be of interest to subscribers. Here is a section:

Eoin Treacy's view -

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

The massive move we have seen in European sovereign bonds is definitely representative of a buyer’s panic but the broader question is who is panicking? Pension funds and insurance companies spring to mind. What are they panicking about? There is a real prospect we are going to see the ECB announce negative short-term rates as well as a raft of additional measures which are clearly designed to boost liquidity but will come at the expense of savers. That suggests what we are seeing is potentially a buy the rumour and sell the news phenomenon.



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August 21 2019

Commentary by Eoin Treacy

World's First 30-Year Bond With Zero Coupon Flops in Germany

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

“This shows that there is less demand for 30-year bonds at negative yields,” said Marco Meijer, a senior fixed-income strategist at BNP Paribas SA. Still, Meijer doesn’t “see yields rising a lot in Europe.”

The whole of Germany’s yield curve is now below zero -- the first major market exhibiting such a trait -- meaning the government is effectively being paid to borrow out to 30 years. That’s a reflection of dwindling expectations for inflation and growth over the coming years, while the European Central Bank is widely forecast to introduce a new wave of monetary stimulus next month.

The sale comes as Germany is priming the pumps for extra spending should an economic crisis hit. While the nation is confined to strict laws on running a fiscal deficit, Finance Minister Olaf Scholz suggested Germany could muster 50 billion euros ($55 billion) should a recession hit. The economy contracted in the second quarter.

 

Eoin Treacy's view -

Bond market investors are not quite yet willing to be the Turkeys that vote for Christmas. Even the most bullish of momentum traders can see that locking in a zero return, at best, for maturities out to 2049 does not make for sense for long-term investors. However, it is also worth remembering that this situation is occurring in a global slowdown where growth is still positive. It portends even lower yields during a contraction.



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August 20 2019

Commentary by Eoin Treacy

Italian Premier to Resign After Condemning Salvini's Rebellion

This article by Chiara Albanese and Lorenzo Totaro for Bloomberg may be of interest. Here is a section: 

While Conte’s resignation adds to the uncertainty, bond investors welcomed the fact that an alternative coalition is still on the table, while the chance of snap elections in the fall diminished somewhat. Yields on 10-year Italian bonds touched 1.31%, the lowest level since 2016, while the spread over German bonds -- a key gauge of risk in the nation -- dropped to 200 basis points for the first time in nearly two weeks.

Salvini pulled his support from the governing alliance with the anti-establishment Five Star Movement this month, saying the coalition no longer has a working majority. The 46-year-old anti-immigration hardliner has been seeking to cash in on strong poll ratings and upended the political establishment with a mid-summer power grab while parliament was in recess.

At stake is whether Italy’s mountain of public debt -- a chronic concern for both European officials and international investors -- will be managed by a right-wing ideologue set on confrontation with Brussels. Salvini on Tuesday promised Italians 50 billion euros ($55 billion) of tax cuts and public spending if he can take control of the government.

Eoin Treacy's view -

There was a certain inevitability about the collapse of the merger between right and left-wing populists. In fact, some might reason it is amazing it lasted this long. Italian politics is not noted for the longevity of its administrations. Annual elections are the price to pay as the political establishment strains to come to terms with giving a voice a population at odds with the continued adherence to decades of fiscal austerity.



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August 20 2019

Commentary by Eoin Treacy

The WeWork IPO

This article by Ben Thompson for his Stratechery blog may be of interest. Here is a section:

Frankly, there is a lot to like about the WeWork opportunity. Yes, a $47 billion valuation seems way too high, particularly given the fact the company is on pace to make only about $440 million in gross profit this year (i.e. excluding all buildout and corporate costs), and given the huge recession risk. At the same time, this is a real business that provides real benefits to companies of all sizes, and those benefits are only growing as the nature of work changes to favor more office work generally and more remote work specifically. And, critically, there is no real competition.

The problem is that the “unsavoriness” I referred to above is hardly limited to the fact that WeWork can stiff its landlords in an emergency. The tech industry generally speaking is hardly a model for good corporate governance, but WeWork takes the absurdity an entirely different level. For example:

WeWork paid its own CEO, Adam Neumann, $5.9 million for the “We” trademark when the company reorganized itself earlier this year.

That reorganization created a limited liability company to hold the assets; investors, however, will buy into a corporation that holds a share of the LLC, while other LLC partners hold the rest, reducing their tax burden.

WeWork previously gave Neumann loans to buy properties that WeWork then rented.
WeWork has hired several of Neumann’s relatives, and Neumann’s wife would be one of three members of a committee tasked to replace Neumann if he were to die or become permanently disabled over the next decade.

Neumann has three different types of shares that guarantee him majority voting power; those shares retain their rights if sold or given away, instead of converting to common shares.

Eoin Treacy's view -

WeWork by all accounts creates spaces where people might actually want to work. That’s no mean feat. It’s not cheap but it is laudable. I spent a couple of days a week popping in and out of the Luxembourg Regis office between 2000 and 2003 and it was a pretty grim experience despite the prime location on Boulevard Royal. I would never have volunteered to work there full time if there was a better alternative available.



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August 13 2019

Commentary by Eoin Treacy

Email of the day on the ramifications of negative yields

See yield chart middle page 1.  How low (negative) can govt credit yields (-1%) go till the financial system freezes over?  Serious Q……………this negative yield stuff wasn’t taught in Economics 101.

There must be an absolute level of negative rates that destroys money velocity (V) as it means no one puts money in the bank anymore and lending gets restricted.  At -10% I wouldn’t lend to UBS.  What happens at say -5%?  Assuming a real rate of 3%, bank lending -after a margin of say 2%- would essentially be FREE (0%).  But what does that do to banking system integrity (banks make money but less of it as their margins collapse; their deposit base shrinks as they struggle to increase/ attract deposits………….not only do depositors go on strike but existing depos are decreased annually by negative yields!)….and what about regulatory oversight?….would CBs and regulators afraid of imprudent lending caused by needy borrowers at 0% step in to restrict the very process that they are trying to encourage via making money so cheap?  i.e. will they try to stop “BAD” lending.  How will they judge/enforce?

And where does inflation fit into this calculus?...without any inflation the interest rate structure/ yield curve that might restore banking margins is hard to normalize/ become positive again.

Or should governments everywhere borrow vast sums at negative rates for 50 years to finance a massive infrastructure spend (highways, 5G, clean energy, railways etc.) i.e. “GOOD” lending?  Wouldn’t this raise rates and restore normality?  Then what debt / GDP levels are prudent (see Italy)?  I recall Argentina’s 100-year bond issue in 2017 at 7.9%, 3x over-subscribed by famished yield scavengers.

Investment implications

  • Negative bond yields unattractive versus investment in high quality equities paying well covered dividends, though it is certainly not a good world for poor quality companies who don’t
  • How is any of this bad for gold, whose carry cost is collapsing?

 

Just sharing some thoughts, largely written out of confusion

Eoin Treacy's view -

I think we are all in a state of disbelief at the willingness of investors to pour trillions into bonds with a negative yield. I have long wondered at the absence of any discussion of bond market convexity over the last decade. After all, shouldn’t we all have an interest in the sensitivity of bonds to changes in interest rates?



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August 08 2019

Commentary by Eoin Treacy

As Shale Drillers Stumble, Big Oil Says It Can Do Permian Better

This article by Rachel Adams-Heard for Bloomberg may be of interest to subscribers. Here is a section:

Concho Resources Inc., long considered one of the Permian’s premier operators, was forced to scale back activity after drilling almost two dozen wells too closely together. That move by the Midland, Texas-based producer spooked investors across the industry, with Evercore ISI predicting the “carnage” would have a lasting impact.

Concho’s problem with well spacing highlights the challenges of fracking so-called child wells: Too close to the “parent,” and output is less prolific; too far apart, and companies risk leaving oil in the ground.

Exxon and Chevron say they aren’t as exposed to those problems. Because of their size relative to smaller independent producers, the oil giants are able to lock up acreage, giving them room to be more conservative in their well spacing.

Eoin Treacy's view -

The lower for longer nature of oil pricing over the last few years and probably for the foreseeable future suggests smaller independent oil drillers and producers need to concentrate a lot more on containing costs. That suggests there is scope for consolidation within the Permian where the larger better capitalised companies are likely to have an advantage.



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August 06 2019

Commentary by Eoin Treacy

Families Go Deep in Debt to Stay in the Middle Class

This article by AnnaMaria Andriotis, Ken Brown and Shane Shifflett for the Wall Street Journal may be of interest to subscribers. Here is a section:

Counting all kinds of debt, including mortgages, consumers aren’t nearly as debt-burdened as they once were. In the fourth quarter of 2007, the last year before the financial crisis struck, households devoted 13.2% of their disposable income to debt service. In the first quarter of 2019, that number was 9.9%, largely due to low interest rates.

Partly because of widespread refinancing, mortgage payments since the start of 2017 have claimed the smallest slice of disposable personal income in decades, in the low 4% range, according to Fed data.

Eoin Treacy's view -

Lifestyle creep hits most families. As soon as incomes increase people eat out more, buy more clothes, spoil the kids or indulge in more after school activities, buy a better car and move to a better neighbourhood. That all works out as long as incomes keep up with expectations. It is also why the throwaway remark “a recession is when your neighbour loses his job, a depression is when you lose yours” rings so true. Of course in today’s economy it might be more correct to state it’s a recession when your spouse loses their job and a depression when you both do.



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August 06 2019

Commentary by Eoin Treacy

Going down: Property prices cool as affordability bites

This article by Madeleine Lyons for the Irish Times may be of interest to subscribers. Here is a section:

Latest reports have highlighted a distinct slowdown in growth in the housing sector since the start of the year. Despite a clear need for more houses this is not converting to actual sales. In fact, price drops have become commonplace in the second-hand market, and sales of properties over €500,000 have shown a 21 per cent drop since the start of the year.

All of this points to an affordability issue for buyers, and a gradual market realisation that prices need to be adjusted accordingly. Add to this fears over Brexit and Central Bank mortgage lending restrictions and the slow 2 per cent growth in number of mortgage drawdowns in the first quarter begins to make sense. Compare this with growth rates in 2018 of about 20 per cent.

Meanwhile, the throughput of housing stock for sale is strong. “June and July have been unseasonably strong with the flow of stock coming through,” said Angela Keegan, managing director of property website MyHome.ie. “It’s possible people are more confident about the market because, remember, if they are selling they are buying too. We know interest rates are not going up in the near term and there are excellent fixed-rate mortgages available too.”

Eoin Treacy's view -

Declining demand for higher priced homes suggests consumers and investors are trimming their expectations for continued economic strength. There is no country likely to do worse from a hard Brexit than Ireland.

It will be for historians to parse whether the backstop gambit was an historic mistake or a masterful stroke. Meanwhile the stock market is rolling over and the housing market is softening. That occurring against a background where interest rates are close to zero and the ECB is about to restart QE.



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August 02 2019

Commentary by Eoin Treacy

Germany's Whole Yield Curve Dives Below 0% for the First Time

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

The move will add to fears that the region’s economic slowdown is being driven by more structural factors akin to Japan’s “lost decade.” Germany’s bond market is widely perceived as being one of the world’s safest, with investors lured in by the liquidity and credit quality offered. Funds still looking to extract a positive return from European sovereign assets have been forced further out the yield curve or into riskier debt markets such as Italy.

“It underlines that the hunt for yield, or rather hunt to avoid negative yields, is accelerating day by day,” said Arne Lohmann Rasmussen, head of fixed-income research at Danske Bank A/S. “It just makes things more complicated.”

Yields on 30-year bunds fell almost 10 basis points to -0.002%. Those on 10-year securities dropped five basis points to -0.50%, also a record low and below the European Central Bank’s -0.40% deposit rate.

Eoin Treacy's view -

Investors are paying the German and Swiss governments to take their money at every maturity and in Japan out to 15-year maturities. Bond investors have concluded the only possible way to manage the debts and unfunded liabilities that have built up over decades is with money printing. That will be facilitated by central banks buying the newly minted bonds and that contributes to the momentum move. The victims are currencies which is why gold is rallying.



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August 01 2019

Commentary by Eoin Treacy

Trump Ratchets Up Trade War With New China Tariffs

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

President Donald Trump abruptly escalated his trade war with China, announcing that he would impose a 10% tariff on $300 billion in Chinese imports that aren’t yet subject to U.S. duties.

The new tariff will be imposed beginning Sept. 1, Trump said in a tweet Thursday that broke a tentative trade cease-fire between the world’s two biggest economies. The 25% tariff already imposed on $250 billion in Chinese goods will remain in place, he said.

A draft list of $300 billion worth of targets published by the Trump administration in May included a raft of consumer and technology goods, including most of Apple Inc.’s major products such the IPhone, along with toys, footwear and clothing. The final list hasn’t yet been released.

“These are the tariffs on many of the consumer goods that were spared in the previous tariff rounds,” said Neil Dutta, head of economics at Renaissance Macro Research in New York, in a note. “This is a small hit to growth but will likely be more obvious to consumers. Keep in mind that margins have come in somewhat already, not sure firms can simply eat the cost.”

Eoin Treacy's view -

Jay Powell’s statement yesterday that the cut to interest rates was more of a mid-cycle insurance cut than a response to the end of the credit cycle led to some unwinding of bets on a 50-basis point but. As the news was digested this morning the majority of markets were in positive territory and at one point has almost completely unwound yesterday’s decline. That was until President Trump announced additional tariffs. That is going to set off a scramble for inventory ahead of the busy fourth quarter retail period.



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August 01 2019

Commentary by Eoin Treacy

Negative-Yield World Lures Central Bankers to Canada Muni Market

This article by Esteban Duarte and Paula Sambo for Bloomberg may be of interest to subscribers. Here is a section:

The fact that foreign money managers are delving into Canadian municipal bonds -- which account for just 1% of trading in the country’s C$2 trillion public sector fixed-income market -- is a testament to how hungry they’ve become for high quality, higher-paying assets in a world where at least $13.8 trillion of debt is now in negative-yield territory. Throw in the fact Canada has given little indication it will follow the global move toward easier monetary policy, and the market is fast becoming a magnet for sophisticated investors seeking to boost returns.

“If you’re sitting in the Middle East, Asia or Europe and you’ve got all this negative yielding debt, it makes a lot of sense to look for the hidden gems such as these excellent quality municipals,” said Avi Hooper, a portfolio manager at Invesco, which has $1.2 trillion under management, including bonds issued by the city of Montreal. “One has always to be careful with the liquidity of course. Big institutional investors are not going to get involved with $50 million deals.”

Eoin Treacy's view -

The paradox of the bond markets is the biggest debtors tend to have the most liquid bonds. Better credits don’t tend to borrow as much and therefore tend to have less liquid issues. Ahead of the credit crisis companies like General Motors and Hypovereinsbank had their own yield curves because they had outstanding debt at every maturity that was highly liquid. At the time no one seemed to pay much attention to the fact that they had so much debt it represented a threat to repayment of principal.



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August 01 2019

Commentary by Eoin Treacy

Your Next iPhone Might Be Made in Vietnam. Thank the Trade War

This article by Raymond Zhong for the New York Times may be of interest to subscribers. Here is a section:

Samsung has since closed all but one of its smartphone plants in China. It now assembles around half of the handsets it sells worldwide in Vietnam. Samsung’s subsidiaries in the country, which employ around 100,000 people, accounted for nearly a third of the company’s $220 billion in sales last year.

A Samsung spokeswoman said about 90 percent of those sales involved goods shipped from Vietnam to other countries. That implies Samsung alone accounted for a quarter of Vietnam’s exports in 2018, although even that might not fully capture the company’s effect on the wider economy. Samsung’s success in Vietnam helped convince many of its South Korean suppliers that they needed to be here, too.

“When you are a big company and you move to a place, everything follows you,” said Filippo Bortoletti, the deputy manager in Hanoi at the business advisory firm Dezan Shira.

Some Vietnamese business owners say the blessings are mixed, though. Foreign giants, they say, come to Vietnam and work largely with vendors they already use elsewhere, leaving little room in their supply chains for local upstarts.

Samsung has 35 Vietnamese suppliers, the spokeswoman said. Apple declined to comment.

When Samsung first set up in the country, it bought some of the metal fixtures used on its assembly lines from a local firm, Vietnam Precision Mechanical Service & Trading, or VPMS. But then more of Samsung’s South Korean partners started coming into the country, and after a year, Samsung and VPMS stopped working together, said Nguyen Xuan Hoang, one of the Vietnamese company’s founders.

Price and quality were not the issue, Mr. Hoang said, over the hissing and clanging of machinery at his factory near Bac Ninh. The problem was scale: Samsung needed many more fixtures than VPMS could deliver.

Eoin Treacy's view -

The sheer scale of China’s manufacturing operations is not going to be easily repeated elsewhere. However, no one ever thought China would achieve the manufacturing might it now possesses either. The history of major manufacturing hubs is they evolve where labour, land, transportation and electricity are cheapest and where the tax and regulations are most lax.



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July 31 2019

Commentary by Eoin Treacy

Email of the day - on lead indicators in this cycle:

Hope all is well.

 I had a question about the comment you made at the end of your video today. You mentioned that the indicator that we should focus on which will lead to this current cycle unwinding is Private equity and the success of their investments, plus on government debt and the deficits they are building.

Are you able to expand on what we can track (tangibly) for these 2 issues?

Thanks v much

Eoin Treacy's view -

Thank you for this question. I am very conscious of the temptation of generals to always be fighting the last war. In 2005 and 2006 there was some talk of a housing bubble in the USA but few people understood just how massive the liar loans problem was. Consumers had become extraordinarily overleveraged. As interest rates ground higher the first signs of trouble appeared in the underperformance of banks, rising credit card delinquencies and the collapse of leveraged hedge funds at major investment banks. The big question we need to ask is whether it will be these factors which are most relevant in this cycle?

Let’s think about the economy as made up of consumers, corporations and the government. After a decade of extraordinary monetary policy total debt has gone up but the US consumer has been de-levered while corporations and the government have seen their debt loads balloon.



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July 30 2019

Commentary by Eoin Treacy

A Generational Change at the Fed

Thanks to a subscriber for this note by Tony Dwyer at Canaccord Genuity. Here is a section:

Eoin Treacy's view -

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

The global economy has slowed meaningfully, Germany is flirting with a recession and China’s economy is suffering from the trade war. All other factors being equal it would be very hard for the Fed to continue to raise rates against that background. The upward pressure that would put on the Dollar would unwind any relative strength argument that is supporting the USA’s growth differential. Therefore, the Fed is at the top of the interest rate cycle and regardless of whether they cut by 25 or 50 basis points tomorrow, a new trend of cuts rather than hikes is emerging.



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July 29 2019

Commentary by Eoin Treacy

Foreigners Sell Rand Assets at Record Pace as Eskom Woes Mount

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

Fitch Ratings Ltd. followed on Friday by cutting its outlook for Africa’s most industrialized economy to negative. JPMorgan Chase & Co. said the same day that a rally in the rand since the start of June was more to do with a supportive global environment than improvements in conditions locally.

“We now believe levels are stretched enough to enter outright rand shorts,” JPMorgan analysts including London-based Anezka Christovova and Robert Habib in New York said in a note. “South Africa’s fundamental picture remains very challenging with a ballooning fiscal deficit and structurally low growth.”

Citigroup Inc. recommended to clients on Monday that they short the rand against the Turkish lira. The Wall Street bank’s analysts see the latter strengthening about 7% versus the South African currency over the next three months.

Eoin Treacy's view -

The mismanagement of utilities in emerging markets whether in South Africa or Venezuela is often one of the most apparent signs of low or deteriorating standards of governance. Utilities provide essential services but are mostly state run, they have reliable cashflows and the cost of upkeeping vital pieces of infrastructure can be delayed for years without apparent loss of service. That makes them perfect candidates for political rent seeking or theft.



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July 25 2019

Commentary by Eoin Treacy

Draghi Urges "Significant" Fiscal Response to an Economic Slump

This article by Catherine Bosley and Jill Ward for Bloomberg may be of interest to subscribers. Here is a section:

and Jill Ward for Bloomberg may be of interest to subscribers. Here is a section:

Despite years of exceptional ECB support, the euro-area economy is in the throes of a slowdown in growth and inflation remains weak. In Germany, typically the region’s stalwart, manufacturing is mired in a slump as trade tensions weigh on exports and auto factories struggle to cope with changes in the industry.

With borrowing costs at historic lows, Draghi has repeatedly stressed the need for structural reforms, and he reiterated that call at a press conference in Frankfurt on Thursday.

“Monetary policy has done a lot to support the euro area and continues to do a lot,” he said. “If there were to be a significant worsening in the euro-zone economy, it’s unquestionable that fiscal policy, a significant fiscal policy, becomes of the essence.”

Just before Draghi spoke, German Finance Minister Olaf Scholz brushed off warning signals for Europe’s largest economy, saying the government has no concrete plans to spur economic growth.

“We are not in a situation that makes it necessary or wise to act as if we were in a crisis, we are not,” he said in an interview with Bloomberg Television.

Eoin Treacy's view -

There was a little “sell the rumour to buy the news” evident in Euro trading this morning. The rally did not hold through the close and looks like little more than some steadying in the region of the previous lows.



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July 25 2019

Commentary by Eoin Treacy

RBA Chief Says He's Ready to Ease Again, Sees Rates Staying Low

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

“But if demand growth is not sufficient, the board is prepared to provide additional support by easing monetary policy further,” he said. “Whether or not further monetary easing is needed, it is reasonable to expect an extended period of low interest rates. On current projections, it will be some time before inflation is comfortably back within the target range.”

Lowe’s speech, which made the case for maintaining the RBA’s current policy framework despite prolonged low inflation, was his most explicit that further easing remains on the table. The Reserve Bank cut rates in June and July to a record low of 1% and signaled at the time that it would wait to see how the easing filtered through the economy.

Since then, consumer confidence has actually fallen and the currency has risen -- the latter due to an easing bias among major central banks -- in contrast to RBA’s hopes. Indeed, the Federal Reserve is expected to cut as soon as next week. Westpac Banking Corp. Chief Economist Bill Evans on Wednesday predicted Lowe and co. would cut in October and February to push the cash rate to 0.5%.
 

Eoin Treacy's view -

Australia’s administration is attempting to forestall the decline in domestic property prices by cutting interest rates, embarking on an aggressive fiscal stimulus and implementing direct supports for the property market.



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July 24 2019

Commentary by Eoin Treacy

Five Reasons to Oppose the Budget Deal

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

The proposed budget deal would lift spending caps for the next two years by a combined $320 billion, which over the next decade will result in $1.7 trillion of additional projected debt. Negotiators explicitly chose not to extend the Budget Control Act (BCA) caps, which will expire in 2021. The Congressional Budget Office (CBO) will thus assume discretionary spending rises with inflation after 2021 in its baseline, leading to roughly $1.5 trillion more of outlays through 2029. Netting interest and offsets brings the total cost to $1.7 trillion.

2. The Budget Deal Would Cost Nearly As Much As the Tax Cuts

While we and many others have decried the cost of the unpaid-for 2017 tax law, passing this deal would enshrine nearly as much debt as the tax cuts did. According to CBO, the 2017 tax law will cost $1.9 trillion over a decade, including the dynamic effects from economic growth and interest. We project that the proposed budget deal will enshrine $1.7 trillion of debt over a decade, including interest. As a result, lawmakers will have added almost as much to the debt with this round of spending increases as they did with tax cuts.

Eoin Treacy's view -

This is what Modern Monetary Theory looks like. They don’t ring a bell when slipping through trillions of additional spending, but the effect is the same. It is never really that much of a hurdle to get politicians to spend more. The question is only ever over what to spend the money on. Admittedly, they do occasionally adopt a posture of fiscal probity but it never lasts very long and the debt totals just continue to increase. The big point is this deal to increase spending received cross party support and is a foretaste of what the next US administration plans regardless of hue.



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July 24 2019

Commentary by Eoin Treacy

Johnson;s Acerbic Brexit Mastermind Wants a Political Revolution

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

Since the referendum, he has retreated from public politics, offering only the occasional blog post, often thousands of words long, setting out his views about government, technology and educational systems, but especially on why he believed the government was making a mess of Brexit.

His tone was often contemptuous: Brexit Secretary David Davis was “thick as mince, lazy as a toad and vain as Narcissus.” Pro-Brexit MPs were “useful idiots” who spent their time “spouting gibberish.”

In 2018 he described Theresa May’s approach to Brexit as a “surrender” and said that Article 50 -- the divorce process with the EU -- was triggered too early, akin to “putting a gun in your mouth and pulling the trigger.’’ He said the success of Brexit won’t be known for decades, and tweeted in 2017 that there are “possible branches of the future’’ where leaving will have been an error.

Cummings’s main thesis is that Britain’s system of government is “systematically dysfunctional” and designed to keep the U.K. as closely tied to the EU as possible. He’s called for a radical shake-up of Whitehall, saying Brexit cannot be delivered without it.

Eoin Treacy's view -

As I’ve said on many occasions before, the only way to negotiate is to project a credible argument that you are willing to walk away if you do not get what you want. In a two-way negotiation, where the opposing party believes they have a superior position, it is the only price discovery tactic that has any hope of working. It finally appears the UK administration has got the message.



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July 24 2019

Commentary by Eoin Treacy

July 23 2019

Commentary by Eoin Treacy

Europe Bank Earnings to Offer Peek Into Negative-Rate Abyss

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

The second quarter will probably provide more evidence how damaging zero or negative rates are for an industry that at its core depends on clients paying to borrow money. Revenue at eight of Europe’s top lenders is set to decline 2.7% on average from a year earlier, according to filings and analyst estimates. That compares with a 0.5% gain for the top U.S. peers, many of which still managed to post record earnings after nine interest rate increases by the Federal Reserve since late 2015.

“The focus for European banks is really on revenue,” said Jonathan Tyce, an analyst at Bloomberg Intelligence. “Rates are set to go down, which means lower loan loss provisions, but that doesn’t make up for the loss in revenue. All this keeps bringing you back to costs.”

And here is a section on Deutsche Bank

Deutsche Bank (July 24) unveiled its biggest overhaul in decades this month, including a plan to exit its underperforming stock trading business. The move was partly driven by low interest rates and the company now assumes that European short-term rates will rise to just 0% in 2021. Deutsche Bank also offered insight into second-quarter earnings with a 5.9% slide in revenue. Costs and profit figures fell short of expectations, even before the bank said it expects 3 billion euros of restructuring charges in the period. Deutsche Bank says about 75% of the investment banking businesses it wants to keep will have a top five market position, and the release this week will 

Eoin Treacy's view -

The basic business model of banks, borrowing short-term to lend long-term, doesn’t work if there is no spread. It is complicated by negative deposit rates which see banks pay a fee to sustain Tier 1 capital ratios. The most LTRO program was paltry in comparison to the previous one and therefore represented a tightening of credit conditions for European banks.  This week’s earnings announcements will give us some insight into how they are faring.



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July 23 2019

Commentary by Eoin Treacy

The enduring link between demography and inflation

This report by Mikael Juselius and Előd Takáts for the Bank of International Settlements may be of interest to subscribers. Here is a section:

Our paper builds on recent empirical work. Focusing exclusively on ageing, Anderson et al (2014), Yoon et al (2014) and Bobeica et al (2017) find significant deflationary effects from an increasing share of older population cohorts. Juselius and Takáts (2015) and Aksoy et al (2015) take the age structure more fully into account and find that an increase in the number of dependants, young and old, is generally inflationary. Juselius and Takáts (2015) also show that the deflationary effects of ageing found in previous studies are driven primarily by the very old (80+ year old) cohort. A common feature of these studies, as noted above, is that they rely exclusively on post-war data, which makes it difficult to separate the age structure effect in inflation from other global secular factors that may be related to trend inflation.

The uncovered link is policy-relevant, because global ageing will substantially increase the share of the old-age population in almost all countries (eg Goodhart et al (2015)). Increased longevity and stagnant or declining birth rates will affect both advanced and emerging economies. While slow, such large-scale demographic shifts have the potential to materially affect trend inflation. For instance, we find that accounting for the age structure leads to substantially lower estimates of endogenous inflation persistence. Hence, past historical periods of high inflation persistence might have reflected, in part, persistent demographic changes. This implies that the role of conventional endogenous drivers, such as inflation expectations, may have been overstated. If so, this could account for the current conundrum with well-anchored long-term inflation expectations and persistently low inflation rates. The stability of the relationship furthermore suggests that this may help us forecast longer-term inflation trends, as previously noted by McMillan and Baesel (1990) and Lindh and Malmberg (2000). Our estimates indicate that inflationary pressures are likely to rise in future due to the increasing share of older population cohorts and a declining share of younger ones, which has not been emphasized in the literature.

Eoin Treacy's view -

I found this a fascinating report not least because it runs contrary to the accepted view, right now, that inflation is not something we need concern ourselves with.  



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July 22 2019

Commentary by Eoin Treacy

Email of the day on global growth

Can you please expand on this statement from Friday's commentary:

"There is potential we are currently at the trough in global growth which could support the stock market in its breakout."

Eoin Treacy's view -

Expectations for global growth has been pegged back on successive occasions over the last 18 months as the trade tensions rose between the USA and Canada, Mexico, the EU, Japan, South Korea and most pointedly with China. More recently, the increasingly taut relationship between Japan and South Korea has been making headlines.



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July 19 2019

Commentary by Eoin Treacy

Email of the day on gold and negative yields

Hope you are doing well. I just thought you may find interesting this Financial Times story on gold - 

In particular, it has a chart showing that “the correlation between the growing volume of negative-yielding bonds and the rising value of gold is striking.” And, also, “Gold as a zero-yielding asset will look even more attractive versus an asset that is guaranteed to lose money,” said Paul Wong, a former senior portfolio manager at Sprott Asset Management.

Eoin Treacy's view -

Thank you for this link and I am enjoying some warmer weather by playing tennis with my children in the afternoons. It’s a been a long cool spring in Southern California and considerably wetter than any we’ve seen since we moved here. It looks like the long winter of discontent with precious metals is over too.

One of the best ways to think about gold, in an environment where an increasingly large chunk of global sovereign debt is trading with negative yields, is as a zero-coupon perpetual bond. It rises in value as yields decline and most particularly as the risk of competitive currency devaluation becomes more realistic.



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July 17 2019

Commentary by Eoin Treacy

Paradigm Shifts

This article by Ray Dalio is one of the most eloquent arguments for gold I have read in a long time. Here is a section from the conclusion:

That will happen at the same time that there will be greater internal conflicts (mostly between socialists and capitalists) about how to divide the pie and greater external conflicts (mostly between countries about how to divide both the global economic pie and global influence). In such a world, storing one’s money in cash and bonds will no longer be safe. Bonds are a claim on money and governments are likely to continue printing money to pay their debts with devalued money. That’s the easiest and least controversial way to reduce the debt burdens and without raising taxes. My guess is that bonds will provide bad real and nominal returns for those who hold them, but not lead to significant price declines and higher interest rates because I think that it is most likely that central banks will buy more of them to hold interest rates down and keep prices up. In other words, I suspect that the new paradigm will be characterized by large debt monetizations that will be most similar to those that occurred in the 1940s war years.

So, the big question worth pondering at this time is which investments will perform well in a reflationary environment accompanied by large liabilities coming due and with significant internal conflict between capitalists and socialists, as well as external conflicts. It is also a good time to ask what will be the next-best currency or storehold of wealth to have when most reserve currency central bankers want to devalue their currencies in a fiat currency system. 

Most people now believe the best “risky investments” will continue to be equity and equity-like investments, such as leveraged private equity, leveraged real estate, and venture capital, and this is especially true when central banks are reflating. As a result, the world is leveraged long, holding assets that have low real and nominal expected returns that are also providing historically low returns relative to cash returns (because of the enormous amount of money that has been pumped into the hands of investors by central banks and because of other economic forces that are making companies flush with cash). I think these are unlikely to be good real returning investments and that those that will most likely do best will be those that do well when the value of money is being depreciated and domestic and international conflicts are significant, such as gold. Additionally, for reasons I will explain in the near future, most investors are underweighted in such assets, meaning that if they just wanted to have a better balanced portfolio to reduce risk, they would have more of this sort of asset. For this reason, I believe that it would be both risk-reducing and return-enhancing to consider adding gold to one’s portfolio. I will soon send out an explanation of why I believe that gold is an effective portfolio diversifier.

Eoin Treacy's view -

Delayed gratification is not exactly popular. The world runs instead on a “what have you done for me lately” mentality. Nobody understands that better than politicians. When it comes to elections, they get very good at making promises and the only ones that ever seem to get fulfilled are commitments to spend more. Sure, there are occasionally efforts to rein in spending, but they never tend to last that long. That has been particularly true of more developed countries where poor demographics highlight the issue of unfunded liabilities in stark terms.



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July 17 2019

Commentary by Eoin Treacy

Most of the World's Companies Are Duds

This article by Vildana Hajric for Bloomberg may be of interest to subscribes. Here is a section:  

Investors have heard this refrain before, that just a scant few pull the pack. And it’s easy to see their outsize influence: Microsoft, Apple, Amazon.com and Facebook Inc. account for more than 20% of the S&P 500’s returns this year. That number is even starker for the tech-heavy Nasdaq 100, for instance, where those four companies account for about 50% of gains.

But Bessembinder and his team, including two co-authors from Hong Kong Polytechnic University and Goeun Choi of Arizona State, are among the first to look at the phenomenon long-term. The best-performing 306 firms accounted for about three-quarters of global net wealth creation during the 28-year period of the study, they found. Just 811 companies could be framed as accounting for all of it.

Their findings echo Bessembinder’s previous work. In looking at nearly nine decades of U.S. stock and bond performance, he found that out of 26,000 stocks, about 58% underperform Treasury bills in their lifespan.

Eoin Treacy's view -

There are two lessons from this data. The first is it has been hard to outperform bonds during one of the greatest bull markets in history. With forty years of history that is a lot of empirical data to base conclusions on. However, it also assumes the status quo remains intact indefinitely.



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July 11 2019

Commentary by Eoin Treacy

Powell Says Fed Has Room to Cut, May Have Kept Policy Too Tight

This article by Craig Torres and Reade Pickert for Bloomberg may be of interest to subscribers. Here is a section:

Powell told Senators that the so-called “neutral rate,” or policy rate that keeps the economy on an even keel, is lower than past estimates have put it -- meaning monetary policy has been too restrictive.

“We’re learning that interest rates -- that the neutral interest rate -- is lower than we had thought and I think we’re learning that the natural rate of unemployment is lower than we thought,” he said. “So monetary policy hasn’t been as accommodative as we had thought.”

Federal Reserve officials in fact marked down their estimate of the longer-run policy rate to 2.5% in June, from 2.8% in March.

Investors fully expect a quarter-point cut at the Fed’s July 30-31 gathering, according to pricing in interest-rate futures, though odds were dialed back a bit after a stronger-than-expected U.S. inflation report earlier on Thursday.

Eoin Treacy's view -

The Fed keeps downgrading its expectations for what the neutral rate of interest is. In other words, their guesstimate of the optimal level to contain inflation but support full employment. That is the rationale used to justify the move to lower rates which has already been priced in.



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July 10 2019

Commentary by Eoin Treacy

Powell Signals Rate Cut as Trade War Outweighs Strong Job Market

This article by Craig Torres and Katia Dmitrieva for Bloomberg may be of interest to subscribers. Here is a section:

Powell carefully explained the reasons why the policy committee has shifted its views this year, and noted that “crosscurrents have reemerged, creating greater uncertainty.” Despite a current trade war truce with China, he continued to stress downside risks to the outlook.

“Uncertainties about the outlook have increased in recent months,” Powell said in the text of his remarks. “Economic momentum appears to have slowed in some major foreign economies, and that weakness could affect the U.S. economy. Moreover, a number of government policy issues have yet to be resolved, including trade developments, the federal debt ceiling, and Brexit.”

He noted that policy makers are carefully monitoring developments including the risk that weak readings on inflation could be “even more persistent than we currently anticipate.”

In addition, Powell pointed to a slowdown in business investment, decelerating global growth, and declines in housing investment and manufacturing output.

“It strongly suggests they’re going to be inclined to ease at the meeting later this month,” Michael Feroli, chief U.S. economist at JPMorgan Chase & Co., said in a Bloomberg Television interview. “He continued to highlight the uncertainties that are weighing on the outlook rather than highlighting the better jobs report.”

Eoin Treacy's view -

The Fed has been saying for a decade that they are going to be data dependent. However, that leaves a lot of leeway over what kind of data they will be swayed by. This graphic of the rate at which people are voluntarily quitting their jobs overlaid with the Fed Funds Rate suggests the domestic US consumer is confident about the economy but the Fed is still getting ready to cut rates.



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July 10 2019

Commentary by Eoin Treacy

The Future of Housing Rises in Phoenix

This article by Ryan Dezember and Peter Rudegeair for the Wall Street Journal may be of interest to subscribers. Here is a section:

The house in Tolleson is one of several thousand around the city that Opendoor and two competitors—listings giant Zillow Group Inc. and Offerpad Inc.—have bought since 2014 in an attempt to perfect programmatic house flipping. Last year, they bought nearly 5,000 houses in the metro area, roughly one in every 20 existing homes sold. They’re after real-estate transaction fees and anything they can make on reselling the property. Margins are low, so volumes must be high.

Eoin Treacy's view -

The majority of mortgage lending in the USA is performed by non-bank lenders i.e. shadow banks. These kinds of highly leveraged business models work in an upswing but tight margins, acute price sensitivity represent significant medium-term threats. Then there is the fact that by running a volume model, real estate AI companies are contributing to flow but could suffer in a downturn as liquidity evaporates.



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July 09 2019

Commentary by Eoin Treacy

Sub-Zero Yields Start Taking Hold in Europe's Junk-Bond Market

This article by Laura Benitez and Tasos Vossos for Bloomberg may be of interest to subscribers. Here is a section:

The number of euro-denominated junk bonds trading with a negative yield -- a status until recently associated with ultra-safe sovereign borrowers -- now stands at 14, according to data compiled by Bloomberg. At the start of the year there were none. Cheap money policies since the financial crisis have kept interest rates at, or near, all-time lows for the last decade.

That’s prompted many investors to buy riskier assets that yield enough for them to meet their liabilities, driving bond markets higher and yields lower. The European Central Bank said on Monday it’s ready to add more stimulus to the euro zone, indicating that an end to the age of ultra-low borrowing costs is far from over.

Eoin Treacy's view -

Wimbledon is on the TV and the air conditioning is humming so we are definitely in summer but negative yield on junk bonds suggest we are in silly season.

Negative yields on a sovereign can be at least partially justified by their appeal as safe havens. Junk bonds carry that moniker because of the unreliability of cash flows. It took me a while to corroborate the claims made in this article and while I could not find negative yielding bonds for all of the issuers there are definitely instances of junk bonds that have been bid up to these levels.



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July 05 2019

Commentary by Eoin Treacy

Betting Against The Gods Is Now Impossible

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

Eoin Treacy's view -

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

Every mania has a contradiction at its centre. In the 1980s, it was the Imperial Palace in Tokyo really was worth more than the entire state of California. In the 1990s it was earnings don’t matter. In 2000s it was CDS could absolve everyone of default risk. In this decade it is that no one loses money from negative yields.



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July 04 2019

Commentary by Eoin Treacy

Swiss Standoff With EU Belies Country's Deep Economic Dependence

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

An EU attempt to compel Switzerland to agree to the treaty by denying the country’s bourse recognition under EU equivalence rules seems to have had little or no impact, with the benchmark SMI Index closing at a record high on Tuesday. There may be more salvos to come.

The EU could up the ante by refusing to revise an agreement on technical barriers to trade, which would hit several companies, notably in the medical-technology sector. There’s also Switzerland’s participation in EU research programs like Horizon 2020, which would thwart universities and research and development activity.

“They’re in a position where they’re highly dependent on the EU - just look at the map,” said Nicholas Veron a senior fellow at the consultancy Bruegel in Brussels.

Like Brexit
Switzerland’s issues with the EU are not that different from those of Brexit backers in the U.K. Many in Switzerland are upset about high levels of immigration and regard the 28-member bloc as a dysfunctional bureaucracy. Unlike the U.K., however, Switzerland was never part of the bloc, and instead has a special relationship based on 120 agreements, which the EU now wants to consolidate and streamline into one new treaty.

That’s proved to be a contentious undertaking. The EU made concessions on a dispute arbitration panel, but with labor unions up in arms about wages -- fearing they would face downward pressure in high-income Switzerland -- Bern wouldn’t sign on to the so-called framework deal. Certainly not ahead of a general election in October.

Eoin Treacy's view -

How much of the increasing acrimonious relationship between the EU and Switzerland is about the new treaty and how much is about the impending Swiss election and the desire to look strong and independent to a wavering population?



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July 03 2019

Commentary by Eoin Treacy

High Profits at Low Rates - The Benefits of Bond Convexity -

This article from portfoliocharts.com contains a number of highly informative graphics and may be of interest to subscribers. Here is a section:

This chart is one of my favorites that I’ve made in a while, as not only does it contain a lot of interesting information but I also learned a lot by making it. Here are a few of the most important takeaways:

1. At high interest rates the coupon is most important, and at low rates capital appreciation is king

2. Short and intermediate term bonds (typically capped at about 10 years) are much less sensitive to interest rates at all levels than long term bonds

3. Low-interest 30-year bonds are very volatile! In fact, the range of returns is similar to what you might expect from the stock market.

4. Note that the spread of total returns for long term bonds is not symmetrical. Because they are increasingly more sensitive with every drop in rates, for the same +/-1% change they actually have more upside than downside.

5. One thing that’s not obvious from the chart is that interest rate sensitivity declines as bonds age. A new 30-year bond will start on the red line. When it only has 15 years left, it has the volatility of the green line. And when it only has 5 years left it has the predictable tight range of the purple line. Just like people, bonds get less active as they mature.

But if you take only one point away from this post let it be this:

Because of convexity, bonds have way more income potential at very low or even negative rates than most people realize.

Eoin Treacy's view -

This is one of the more explanatory and informative reports I have seen on the bond markets and helps to explain the continued momentum driven move despite the fact nominal yields are at objectively unattractive levels. However, it is also worth considering that the most compelling arguments for the success of a momentum strategy almost always appear during the acceleration phase of a bull market



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July 02 2019

Commentary by Eoin Treacy

Lagarde to Succeed Draghi as ECB Chief As Economy Weakens

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

In moving from Washington to Frankfurt, Lagarde will be tasked with driving monetary policy in a 19-nation economy which Draghi has already signaled will need more help, likely in the form of lower interest rates and possibly with the resumption of quantitative easing. Inflation is running at barely half the ECB’s goal of just under 2% despite years of negative rates and 2.6 trillion euros ($3 trillion) of bond purchases.

Investors will likely bet that as a seasoned crisis-fighter, Lagarde will share Draghi’s taste for aggressive and innovative monetary policy, especially as her appointment means the more hawkish Bundesbank President Jens Weidmann misses out.

Financial markets are already pricing an ECB rate cut by September, in line with predictions by ECB watchers at Bloomberg Economics and Goldman Sachs Group Inc.

Lagarde last week described the world economy as hitting a “rough patch” and advised central banks to continue to adjust their policies in response. In June 2014, she said she would “certainly hope” the ECB would conduct QE if inflation stayed sluggish -- months before it announced it would do so.

Eoin Treacy's view -

Christine Lagarde fits the bill of a credible dove. Her candidacy ensures the ECB is moving back toward quantitative easing and negative interest rates. That’s good news for the liquidity fuelled bull market.



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July 01 2019

Commentary by Eoin Treacy

BIS Says It's Time to Fire Up All Engines to Boost World Growth

This article by Catherine Bosley and Anna Andrianova for Bloomberg may be of interest to subscribers. Here is a section:

The Switzerland-based BIS, which promotes cooperation among the world’s monetary officials, used its annual economic report to urge politicians to “ignite all engines” to overcome a global soft patch. They should make structural reforms and strengthen fiscal and macroprudential measures, instead of relying on ever-lower interest rates in a debt-fueled growth model that risks turbulence ahead.

“The continuation of easy monetary conditions can support the economy, but make normalization more difficult, in particular through the impact on debt and the financial system,” the BIS said. “The narrow normalization path has become narrower.”

U.S.-led protectionism has dented economic confidence and slowed growth, forcing central banks to prepare to ease policy again even if they haven’t yet returned to their pre-crisis settings. The Federal Reserve and the European Central Bank are expected to cut interest rates this year, while nations including Australia, Russia, India and Chile have already started.

Economists at Citigroup Inc. estimate that while fiscal policy in the major industrial countries will be expansionary this year it will be less so in 2020 as past measures in the U.S. wear off.

Eoin Treacy's view -

There is a confluence of factors that are leading to support for Modern Monetary Theory. On the one hand we have central banks stating that the fuel from monetary accommodation is not as effective any longer. They are telling governments to engage in fiscal stimulus and decluttering of the regulatory environment to boost growth. Governments for their part are saying to central banks that they will pursue massive deficit spending if interest rates don’t shoot up immediately afterwards.



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June 25 2019

Commentary by Eoin Treacy

Fed Lowers Long-Run U.S. Rate Outlook as Growth Outlook Dims

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

“This is really important,” said Torsten Slok, chief economist at Deutsche Bank Securities, who expects a rate cut in July. “For many years, the Fed has been arguing that monetary policy was easy and accommodative and supporting growth and inflation. After a decade of easy monetary policy, the Fed has decided that policy is no longer stimulative.”

Reasons listed for the lower neutral rate include ongoing fallout from the financial crisis, weaker productivity, continued slackness in the labor market and an aging population, which when combined leave the economy structurally weaker and so more vulnerable to rate hikes.

The upshot is the Fed may have to lower rates if it wants to boost expansion to offset global headwinds, including slow global growth and trade disruptions from President Donald Trump’s tariff battles.

Powell will give his view of policy in a speech on Tuesday to the Council on Foreign Relations in New York.

Eoin Treacy's view -

The trend of the Fed Funds Rate is downwards. There is a clear succession of lower major rally highs since the early 1980s and the failure of the Treasury yield to hold the move above 3% late last year suggests another lower high is now in place. If we accept the conclusion the peak of the interest cycle has now passed the next big question is just how low can rates go?



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June 20 2019

Commentary by Eoin Treacy

Currency war is the next phase of global conflict and Europe, the chief parasite, is defenceless

This article by Ambrose Evans Pritchard for the Telegraph may be of interest to subscribers. Here is a section:
 

The deflationary cancer is now so deeply lodged in the eurozone that it would take helicopter money or People's QE -- monetary financing of public works -- to fight off any future global slump. Such action would violate the Lisbon Treaty and would test to destruction Germany's political acquiescence in the euro project.

In truth QE in Europe has always worked chiefly through devaluation. The euro's trade-weighted index fell 14 percent a year after Mr. Draghi first signalled in 2014 that bond purchases were coming. That was powerful stimulus. When the euro climbed back up the eurozone economy stalled.

It takes permanent suppression of the exchange rate to keep euroland going. As the Japanese have discovered, it is very hard for an economy with near zero inflation and a structural trade surplus to stop its exchange rate from rising unless it resorts to overt currency warfare. That is exactly what Mr. Trump is not going to allow.

Every avenue of monetary stimulus is cut off in the eurozone. Only fiscal stimulus a l'outrance -- 2 or 3 percent of GDP -- will be enough to weather a serious crisis. That too is blocked.

“The ECB has masked the fragility over the last seven years and nobody knows when the hour of truth will come,” said Jean Pisani-Ferry, economic adviser to France's Emmanuel Macron and a fellow at the Bruegel think tank.

“There is no common deposit scheme for banks. Cross-border investments are retreating. The vicious circle between banks and states could come return any moment,” he said.

Mario Draghi's rhetorical coup in July 2012 worked only because he secured a partial approval from Germany for the ECB to act as lender-of-last resort for Italy's debt (under strict conditions). That immediately halted an artificial crisis. The situation today is entirely different. The threat is a deflationary slump. The ECB has no answer to this.

Markets thought they heard a replay of "whatever it takes" in Mr. Draghi's speech and hit the buy button. But economists heard another note in Sintra: a plaintive appeal for EMU fiscal union before it is too late.

The exhausted monetary warrior was telling us that the ECB cannot alone save the European project a second time.

Eoin Treacy's view -

It is arguable how much the USA needs an interest rate cut with full employment, compressed bond yields and a consumer which is in rude health. Low yields are spurring a mortgage refinancing binge and the decline in oil prices is also putting money in people’s pockets.



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June 19 2019

Commentary by Eoin Treacy

Fed Scraps `Patient' Rate Approach in Prelude to Potential Cut

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

While inflation near the goal and a strong labor market are the most likely outcomes, “uncertainties about this outlook have increased,’’ the Federal Open Market Committee said in the statement following a two-day meeting in Washington. “In light of these uncertainties and muted inflation pressures, the Committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion.”

The FOMC vote was not unanimous, with St. Louis Fed President James Bullard dissenting in favor of a quarter-point rate cut. His vote marked the first dissent of Powell’s tenure as chairman.

Policy makers were starkly divided on the path for policy. Eight of 17 pencilled in a reduction by the end of the year as another eight saw no change and one forecast a hike, according to updated quarterly forecasts.

In the statement, officials downgraded their assessment of economic activity to a “moderate” rate from “solid” at their last gathering.

The pivot toward easier monetary policy shows the Fed swinging closer to the view of most investors that President Donald Trump’s trade war is slowing the economy’s momentum and that rates are too restrictive given sluggish inflation.

Eoin Treacy's view -

This statement tees up a rate cut in July. That is what the bond market has been pricing in and it got confirmation of that assumption today. Investor focus will now turn to the expectation that another cut will follow in September.



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June 19 2019

Commentary by Eoin Treacy

Email of the day on gold in other currencies and stock market/commodity ratios:

I am enjoying the commentary as usual. 

I had two questions for which I would be grateful for your opinion:

I don't understand why gold should be priced differently in different currencies. One would have thought that the market would arbitrage out the differences. 

The second one is more general and applies to looking at long term trends such as that for oil versus the stock market. Could it not be argued that technology changes such as the advent of green energy or electric cars or indeed new modes of producing oil (fracking, oil sands etc) render these charts ineffective as predictors of future price action?

I thank you and look forward to hearing from you in due course. 

Eoin Treacy's view -

Thank you for these questions which I’m sure will be of interest to other subscribers. Gold is a commodity and subject to supply and demand fundamentals just like everything else but it is also a monetary metal. That means it tends to trade more like a currency than a commodity.



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June 19 2019

Commentary by Eoin Treacy

U.K. Inflation Returns to BOE Target on Air Fares, Car Prices

This article by Jill Ward and Andrew Atkinson for Bloomberg may be of interest to subscribers. Here is a section:

The figures come a day before the BOE’s latest policy decision. As many central banks around the world shift into a more dovish mode, U.K. officials have been trying to push in the other direction, repeating a message that interest rates may have to rise more than the market currently anticipates if there’s a smooth Brexit.

Investors haven’t taken much heed given the continuing uncertainty over Britain’s exit from the European Union. Certainly in the short term, the latest inflation figures give policy makers breathing space to wait and keep interest rates on hold.

The BOE expects inflation to fall back below target this year. In May, it forecast that price growth would average 2.1% this quarter, easing to about 1.6% by late 2019.

Eoin Treacy's view -

The Bank of England is protective of its independence, especially amid the continued contentious discussion about the merits or otherwise of Brexit. Nevertheless, with central banks all over the world signalling a willingness to cut rates, it seems foolhardy of the Bank of England to continue to signal its willingness to raise rates.



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June 18 2019

Commentary by Eoin Treacy

ECB Rate Cut Is Weapon of Choice as Draghi Threatens Action

This article by Paul Gordon and Piotr Skolimowski for Bloomberg may be of interest to subscribers. Here is a section:

ECB President Mario Draghi appeared to set a low bar for action on Tuesday when he said additional stimulus will be needed “in the absence of any improvement” to the outlook for growth and inflation. He specifically cited rate reductions as an option, sending the euro lower and prompting money markets to price in a 10 basis-point cut by December.

Investors subsequently brought forward their expectations to September after Bloomberg’s report. Commerzbank now predicts such a policy step in July.

“Draghi is going to finish his tenure with a cut,” said Claus Vistesen, chief euro-zone economist at Pantheon Macroeconomics. “The door is now open and I don’t see how they can not walk through it.”

Eoin Treacy's view -

There is a first principles question that governments have no appetite to grasp. “How do you recover from a debt bust?” We know what the answers are. You default, recapitalise and try not to make the same mistake again. The problem in Europe is the creditors are Northern European pension funds and the debtors were peripheral banks, who have had much of their debt absorbed by their respective governments. The prospect of debt forgiveness, therefore, has massive issues of moral hazard and was untenable politically, even though it remains necessary if the debt mountains are to be dealt with and growth prospects renewed.



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June 18 2019

Commentary by Eoin Treacy

Are Valuations Irrelevant?

This presentation by Rob Arnott for Research Affiliates may be of interest to subscribers.

Eoin Treacy's view -

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

This is a robust defense of Shiller P/E which, at 30, is at it second highest peak in history; surmounted only by the Tech Bubble. Let’s for a moment consider that it would be unwise to expect the best performers of the last decade to be the best performers of the next decade. After all, it only makes sense when we consider the base effect. It is obviously more difficult to double from a market cap of $1 trillion than from $1 billion.



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June 18 2019

Commentary by Eoin Treacy

The Man Who Inherited Australia's Downturn Just Isn't That Fazed

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

That’s all put the economy on track for its weakest fiscal year since the last recession in 1991. Even the Reserve Bank, which rarely wades into political territory, is urging more government stimulus after cutting interest rates for the first time in almost three years.

But whether boxed in by his sunny disposition or pledges to deliver a budget surplus made ahead of the government’s shock re-election last month, Frydenberg appears unfazed. While he’ll push to pass tax cuts when parliament resumes on July 2 and ramp up infrastructure spending, that’s about it, leaving the heavy lifting of stimulus to the central bank.

“I’ve found the treasurer to be remarkably sanguine,” said Danielle Wood, an economist at the Grattan Institute, an independent think tank in Melbourne. “When you’ve got the central bank governor coming out and talking about perhaps moving to stimulatory fiscal policy as well as the need for more long-term structural reforms, I’d be hoping for a more substantive response.”

Eoin Treacy's view -

The RBA cutting interest rates to previously unimagined levels, with more to come, is a bonus for consumers with floating rate mortgages, but the wider concern is about the health of the Chinese economy which Australia depends on for export demand growth.



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June 12 2019

Commentary by Eoin Treacy

US Policy Mix Flips and Will Take the Dollar with It

This article by Marc Chandler for Bannockburn Global Forex may be of interest to subscribers. Here is a section:

The policy mix of tighter monetary policy and looser fiscal policy provides a steroid-like boost to currencies.   This is what the US had under Reagan-Volcker.  It is was the policy mix in Germany after the Berlin Wall fell that led to the ERM crisis of the early 1990s and then Maastricht Treaty and the euro.  It helped fuel the dollar's gains last year.  Now that policy mix is reversing.  Fiscal policy is tightening, and monetary policy is poised to loosen.  That policy mix is associated with under-performing currencies.  

The third significant dollar rally since the end of Bretton Woods is in jeopardy.  Coordinated intervention marked the end of both the Reagan-Volcker and Clinton-Rubin dollar rallies.  Intervention in the foreign exchange market won't be necessary; the self-proclaimed "Tariff Man" has found another way the proverbial cat can be skinned.  

The last phase of a significant dollar rally has been marked by the movement of interest rate differentials against the US.  This been happening.   The two-year differential between the US and Germany peaked last November a little above 355 bp, which appears to be a modern extreme. It finished last week below 250 bp, the lowest in more than a year.   Similarly, the US two-year premium peaked against the UK around the same time a little shy of 220 bp.  It is now approaching 125 bp.   Against Japan, last November, the US two-year premium of nearly 310 bp was the largest in 11 years.  It is threatening to break below 200 bp.  

Eoin Treacy's view -

Quantitative tightening has been the single most important factor in the Dollar’s strength over the last 18 months. Reducing the size of the Fed’s balance sheet has contracted the supply of Dollars and created a supply inelasticity-based argument to support the currency.



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June 12 2019

Commentary by Eoin Treacy

Transcript of Felix Zulauf's interview by Grant Williams -

Thanks to a subscriber for this summary of the discussion at the recent Mauldin conference which may be of interest. Here is a section:

Eoin Treacy's view -

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

The response of the stock market last week to the whiff of easing rhetoric from the Federal Reserve suggests investors are still willing to give the benefit of the doubt to the positive effect loose monetary and potentially fiscal policy can have on asset prices and by extension the economy.



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June 07 2019

Commentary by Eoin Treacy

Bets on July Fed Rate Cut Gain Momentum After U.S. Jobs Report

This article by Susanne Barton, Katherine Greifeld and Liz Capo McCormick for Bloomberg may be of interest to subscribers. Here is a section:

Bond traders’ conviction that the Federal Reserve will cut interest rates within months in response to a weakening growth outlook and escalating trade tensions firmed after a batch of weaker-than-expected U.S. jobs data.

Fed funds futures show a quarter-point cut almost fully priced in for July, and indicate about 70 basis points of easing by the end of 2019. The two-year Treasury yield fell as much as 11 basis points to 1.77%, close to the 2019 low reached Wednesday, and it was on course for its fifth weekly decline.

The last time that happened was back in July 2016, when the U.S. central bank’s target range was 2 percentage points lower than right now.

Eoin Treacy's view -

Lead indicators for future problems are flashing orange. If the Fed were to persist in its policy of continuing to raise rates and reducing the size of the balance sheet it would contribute to recession risk. If it steps on the monetary accelerator once more it risks further inflating a bubble, not least in the nonbank lending and private equity sectors.



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June 07 2019

Commentary by Eoin Treacy

June 06 2019

Commentary by Eoin Treacy

Investors Signal Draghi Is Running Out of Time and Ammunition

This article by Paul Gordon, John Ainger and Piotr Skolimowski for Bloomberg may be of interest to subscribers. Here is a section:

While Draghi is using similar tactics to U.S. Federal Reserve Chair Jerome Powell in promising to react to any deterioration in the outlook, the challenge is that he’s seen as having less room for maneuver. ECB rates are still at record lows and the balance sheet hasn’t started to be wound down.

Moreover, he has less than five months left in office and there’s no clear sign who his successor will be, nor whether they’ll have the same commitment to the radical measures that hallmarked the Italian’s eight-year term.

“The market believes Draghi’s take on inflation is wishful thinking,” said Christoph Rieger, head of fixed-rate strategy at Commerzbank AG, which predicts the ECB will cut the deposit rate toward the end of this year and extend its low-rate pledge to mid-2021. “The talk about contingencies is cheap, but to reverse the decline in inflation expectations he will have to walk the walk.”

Eoin Treacy's view -

The ECB only ended their QE program in December so it is going to take some time to rebuild appetite for additional easing measures. The market is convinced of the need, particularly with German, Italian and French PMI’s in negative territory, however the ECB is unwilling to act prematurely.

 



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May 30 2019

Commentary by Eoin Treacy

Could Stock Picking Matter More Than Sector Positioning This Year?

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

Eoin Treacy's view -

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

The Federal Reserve aggressively tightened policy last year by both raising rates and reducing the size of its balance sheet simultaneously. That has had more of an effect on international growth than domestic growth but the underperformance of the banking and industrial sectors is a testament to slowing activity. We are at the point in the cycle where we can expect easier policy. The big question is whether the Fed will act soon enough to avoid negative economic figures.



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May 29 2019

Commentary by Eoin Treacy

Trade Not the Only Risk; Markets Agree Adjusted Yield Curve Is Inverted; Higher Volatility Is Coming

Thanks to a subscriber for this report from Morgan Stanley. Here is a section:

Eoin Treacy's view -

A link to the full report and a section from it are posted in the Subscriber's Area.

The commonality in the compression of global sovereign yields is a clear sign bond investors, everywhere, have concluded we are at the top of the interest rate cycle. If interest rates are unlikely to rise, they can fall and the big question is when that is likely to happen.



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May 28 2019

Commentary by Eoin Treacy

Europe's Populists Don't Look So Healthy Now

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

According to the new parliament’s seat distribution based on preliminary results, 15 PINE parties throughout the European Union made gains in the election and 12 lost seats. In total, they gained just 25 seats – 3.3% of the total of 751. Without Italy, they would have come out even with the 2014 result. In a small number of countries there has been no change in PINE support.

The rise of Italian nationalism and what one could call an anti-establishment revolution there make the country the EU’s biggest trouble spot for the next legislative period. It’s unclear what the bloc can do about it except wait for Italians to become disappointed in Matteo Salvini’s League (and the national conservative Brothers of Italy, or FDI, party) – something that might come with painful economic side-effects.

The U.K. is the other obvious problem, but perhaps a receding one – either because Brexit will eventually happen or because it won’t. Last week’s election delivered a net loss of seats to British PINE parties. The success of Nigel Farage’s Brexit Party was as spectacular as the downfall of his former project, the U.K. Independence Party, and the ruling Conservatives faced a catastrophic loss that doesn’t augur well for them in the next general election. All this is for the British voters to sort out, though: The EU can hardly help at this point and it’s wise for it to wait out the crisis.

Other than the two obvious hot spots, eastern Europe remains somewhat problematic for the “ever closer union” project because of the strength of Hungary’s Fidesz and Poland’s Law and Justice (PiS). These aren’t exactly euroskeptical parties, but they are focused on not giving up any more national sovereignty, and they’re resolutely illiberal. The parties work to defang the independent media and build up propaganda machines that make them immune to scandals (PiS survived a whole strong of them in the run-up to the European election) and they tighten the political control of the courts.

Eoin Treacy's view -

The European election results reflect a rumbling sense of discontent but did not deliver the ground swell of support for populist or ant-EU to upend the centrist status quo. If we look under the surface there is a clear battle going on, but the opposition is split between populists and, the left leaning, Green movement which has allowed the centrist bloc to continue to hold sway.



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May 24 2019

Commentary by Eoin Treacy

The hardest Post to Write

This blogpost by Kevin Muir may be of interest to subscribers. Here is a section:

Last October there was a full hike priced in, but now those expectations have completely collapsed to the point where there is two cuts already embedded into the Eurodollar futures curve.

Although it’s not quite this simple, to make money at the short end, the Fed will have to cut more than twice in the next year and a bit. Could that happen? For sure. No doubt about it. Maybe the economy hits a real air pocket and the Fed cuts aggressively. Or there is some geopolitical event and the Fed is forced to slash rates.

But the point to ask yourself is whether that is a good bet? I contend that with everyone leaning so heavily one way, the surprise will not be how much money they make, but instead if things don’t play out exactly as ominously as forecasted, how quickly the trade goes sour.

There is little room for error. Or put it another way, the global economy better collapse as quickly as these bears believe as even a lengthening of the process will make their trade unprofitable.

And in case you are bullish the long end of the curve and believe a slow-to-cut Fed is your best friend, don’t forget what Tariff Man has done to inflation. Next year should see a rise of 50 basis points across the board to core inflation. Sure commodities are falling hard, but that helps more with China’s inflation situation than with America’s.

Eoin Treacy's view -

The bond market is indeed pricing in rate cuts by the end of the year. The big question is how much of that is hedging of fears about the potential for a slowing global economy and resulting US Dollar outperformance and how much is about the need for an end to quantitative tightening in order to fend off fears about an impending recession?



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May 23 2019

Commentary by Eoin Treacy

Email of the day on the impact of currency on global investment decisions:

Again, very grateful thanks for the very interesting and thoughtful comments you post each day. They are helpful to both newer investors and the more experienced who may get locked into their way of thinking. I count myself in that category! One factor that does not get mentioned perhaps as often as it should is the impact of currency movements on investment portfolios. Those of us using pound sterling as our home currency may feel particularly sensitive to this at this time. Those of us that assess gold as a possible investment often check gold in different currencies to determine whether a broad-based uptrend is evolving (eg compare gold in USD, Euro where the pattern looks quite different.) But I suspect fewer investors factor in currency movements when buying stocks in the USA, Europe, India, Japan and China. What are your thoughts on this?  

Eoin Treacy's view -

Thank you for this question which I believe will be of interest to other subscribers. From everything I have witnessed over the years large institutional investors look for three attributes when deciding to invest in markets beyond assets denominated in their domestic currency. These are potential for currency market appreciation, potential for capital market appreciation and yield differentials. I see no reason why investors of all hues shouldn’t follow the same rationale. That is the basis for thinking as a globally oriented investor and why this is a Global Strategy Service.



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May 22 2019

Commentary by Eoin Treacy

Shorts Beware, Your Archenemy in the Stock Market Is Revving Up

This article by Lu Wang and Vildana Hajric for Bloomberg may be of interest to subscribers. Here is a section:

The dips may have, in fact, provided good buying opportunities for companies to step in and buy at lower prices, said Jim Paulsen, chief investment strategist at Leuthold Group.

“There’s something to be said about insiders showing confidence that their stock is probably going to go up. They think it’s relatively cheap or a good opportunity to buy it back,” said Paulsen. “It’s typically a good sign that has led to higher stock prices.”

Buybacks have climbed in recent years even as they’ve come under pressure from politicians who are focusing on corporate governance as an election issue. While far from being a consensus view, repurchases have been a bull case that strategists like David Kostin at Goldman Sachs have cited for the 10-year rally to keep going.

Corporate appetite has dwarfed that from all other investors as the biggest source of demand for U.S. stocks. Net purchases from corporations totaled $1.6 trillion during the past three years while investors from pensions to mutual funds to individuals were sellers, according to data from Goldman Sachs.

While it’s only one bank’s client flows, BofA’s data demonstrated a similar pattern. Over the last three weeks when stocks slipped, companies stepped up buying while hedge funds and individual investors retreated. During the stretch, buybacks totaled more than $7 billion. By contrast, selling from the other two categories reached almost $1 billion.

Eoin Treacy's view -

Regardless of how one feels about the merits of share buybacks they have been the primary transition mechanism for monetary and fiscal easing to enter the stock market. If that conclusion is correct then only a significant downtrend in corporate earnings or a need to defend the company’s credit rating is likely to change the spending priorities of big corporations.



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May 20 2019

Commentary by Eoin Treacy

Email of the day on the potential for the Euro to breakup

re the EURO If the Euro currency breaks up, for example, if weak Italy or strong Germany leave, the transition to something else will have to be managed , to avoid chaos; either there is a new Euro, or regional Euros, or the countries go back to their old currencies. Something entirely digital could be invented overnight, perhaps through temporary dollarisation of prices now in Euro. If currency has to be printed, this would take weeks. The French destroyed their Franc printing presses back in 2000/ How would you see the transition ? How would this affect the Swiss Franc ? 2) REQUEST for INCLUSION of the following stock in Chart Library: Tanzanian Gold Corporation ( TNX), listed in Toronto. present price 0, 93 CAD Thank you

Eoin Treacy's view -

Thank you for this question which may be of interest to other subscribers. I believe thinking there is a difference between the Deutsche Mark and the Euro is one of the most common misconceptions of investors. The “creation” of the Euro was more about extending the umbrella of the Deutsche Mark to the whole continent, with its low borrowing costs, than forming a new currency out of nowhere.



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May 17 2019

Commentary by Eoin Treacy

DoubleLine Asset Allocation Webcast -

I tuned into this webcast on the 14th and here are the slides which may be of interest to subscribers.

Eoin Treacy's view -

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

Jeff Gundlach has a good record of spotting trouble early and he appears to share the view espoused by Ray Dalio that the Federal Reserve is going to need to adopt even more extraordinary measures to tackle the next downturn because of the quantity of debt outstanding.



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May 16 2019

Commentary by Eoin Treacy

Di Maio Says Italy Doesn't Want Debt to Spiral Toward 140%

This article by Jerrold Colten and Chiara Albanese for Bloomberg may be of interest to subscribers. Here is a section:

Days after his coalition partner roiled markets by threatening to breach European Union fiscal rules, Deputy Prime Minister Luigi Di Maio of the Five Star Movement said Italy’s government wants to rein in the debt load to avoid it spiraling.

“Nobody wants to go over 140%,” Di Maio said during an event in Florence. “Otherwise, the debt-to-GDP level would be out of control.” He added that some investments could be financed by increasing the deficit level provided that it boosts economic output, limiting the debt ratio.

The country’s debt-GDP level was 132.2% at the end of last year.

"I think that 130% is already a lot," European Commissioner for Economic and Financial Affairs Pierre Moscovici told reporters in Brussels when asked about Italy’s debt.

Eoin Treacy's view -

Italy has a domestic economy that is struggling and a group of high-profile exporters heavily reliant global growth. Trade war worries are weighing on sentiment particularly as the populist government seeks to modestly breech EU fiscal deficit limits.



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May 13 2019

Commentary by Eoin Treacy

A Fed Cut This Year Is Now Being Priced In as a Near Certainty

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

The rate on the January fed funds futures contract implies that the central bank’s benchmark will fall to 2.075% by the end of 2019. This is more than 25 basis points below where the effective fed funds rate stood Friday, showing traders are fully pricing in a quarter-point reduction. The implied rate on the contract ended last week at 2.15%.

This is happening as China threatens retaliatory tariffs on some American imports, an escalation in the trade war with U.S. President Donald Trump. The clash is fueling concern about economic growth, prompting a key part of the U.S. yield curve to invert again -- a sign to many that the risk of a recession has increased.

While “China/U.S. trade ripple effects certainly affect the Fed’s outlook, I think this is more of a macro move,” said Todd Colvin, senior vice president at futures and options broker Ambrosino Brothers in Chicago. “It’s not about whether or not the Fed sees policy shifts, that is, as much as it’s looking at
global growth woes, or increased market volatility.”

Eoin Treacy's view -

Jay Powell probably didn’t bargain for the environment he has been presented with since taking the helm of the Federal Reserve. Reducing the size of the balance sheet was supposed to be part of the re-arming of monetary policy to provide for the next crisis. It turned out to be the primary cause of the volatility last year and offered graphic evidence of just how addicted to liquidity the market is.



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May 10 2019

Commentary by Eoin Treacy

Fed Seen as More Likely to Cut Rates After U.S. Tariff Boost

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

The Federal Reserve probably will be more inclined to cut interest rates now that President Donald Trump has followed through on his threat to increase tariffs on U.S. imports from China. But it won’t rush into doing so.

While the higher levies will put upward pressure on inflation by raising import prices, the central bank will likely be more attentive to the potential drag they’ll exert on the economy by depressing consumer and business spending, Fed watchers said.

“We would expect the Fed to initially focus on the growth implication and look past the inflation impact,’’ Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York, said in a May 7 note to clients.

Eoin Treacy's view -

The Federal Reserve is highly unlikely to raise rates against a background of low domestic inflation and heightening international tensions. That has been one of the primary reasons bond market investors have concluded we are at the top of the interest rate cycle.



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May 03 2019

Commentary by Eoin Treacy

It's Time to Look More Carefully at "Monetary Policy 3 (MP3)" and "Modern Monetary Theory (MMT)"

This article by Ray Dalio is well worth taking the time to read over the weekend. Here is a section:

Modern Monetary Theory is one of those infinite number of configurations that is in my opinion inevitable and shouldn’t be looked at in a precise way. For those of you who don’t know what Modern Monetary Theory is, it’s described here (link). It’s described differently by different folks so it has slightly different configurations. For example, some might change fiscal policy so that there is a wealth tax that is used to eliminate student loans, and others might change taxes and spending in other ways, and there are an infinite number of ways these changes can be configured that we shouldn’t delve into at this stage because that will drive us into the weeds and the particulars that will stand in the way of seeing the big important things. Also, people who are focusing on MMT as a package will limit their thinking to the specifics of that package rather than thinking about the wider range of MP3 policies to find the best one. 

MMT’s most important configuration is the fixing of interest rates at 0% and there is the strict controlling of inflation via the changing of fiscal policy surpluses and deficits, which will produce debt that central banks will monetize. In other words, whereas during the times we have become used to, interest rates moved around flexibly and fiscal deficits (often) and surpluses (rarely) were very sticky so interest rates were more important in producing buying power and the cycles, in the future interest rates will be very sticky at 0% and fiscal policies will be much more fluid and important and the debts produced by the deficits will be monetized. In case you didn’t notice, that is by and large what has been happening and will increasingly need to happen. In other words, interest rates are now pinned near 0% in two of the three major reserve currencies (the euro and the yen) and there is a good chance that they will be pinned there in the third and most important reserve currency (the dollar) in the next economic downturn. As a result, fiscal policy deficits that are monetized is the contemporary stimulation configuration of choice. That existed long before there was a concept called “Modern Monetary Theory,” though MMT embraces it. Putting labels aside, it is certainly the case that the configuration of having 1) an interest rate fixed at around 0%, 2) more flexible fiscal policies with debt monetization to fund the resulting deficits with 3) rigorous inflation targeting exists and is increasingly likely, necessary, and possible in reserve currency countries. An added benefit of this approach is that the money and credit created can be better targeted to fund the desired uses than the process of having the central bank buy financial assets from those who have financial assets and use the money they get from the central bank to buy the financial assets they want to buy. There are many historical cases of this happening (see the 1930s-1940s prewar and war periods which, as you know, I think are analogous), which offer worthwhile lessons about how this was and could be engineered. 

The big risk of this approach arises from the risks of putting the power to create and allocate money, credit, and spending in the hands of politically elected policy makers. In my opinion, for these MP3 policies to work well, the system would have to be engineered in a way that decision making would be in the hands of wise, not politically motivated, and highly skilled people. It’s difficult to imagine how the system will be built to achieve that. At the same time, it is inevitable that we are headed in this direction.  

Eoin Treacy's view -

The final paragraph above puts me in mind of Plato’s progression of democracy through tyranny and back again. Someone can only be considered wise after the fact and if recent events have told us anything it is that history is endless revisable.



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May 03 2019

Commentary by Eoin Treacy

U.K. Voters' Brexit Backlash Leaves May And Corbyn Bruised

This article by Robert Hutton and Alex Morales for Bloomberg may be of interest to subscribers. Here is a section:

“I think there was a simple message from yesterday’s elections to both us and the Labour Party: Just get on and deliver Brexit,” May said in a speech to Conservatives in Wales. “An arrangement has to be made, a deal has to be done and Parliament has to resolve this issue,” Corbyn said later, in comments welcomed by May. “I think that is very, very clear.”

Eoin Treacy's view -

The Conservatives and Labour risk being eviscerated at the next general election. That gives them both a clear incentive to conclude the Brexit impasse before then. That is the real deadline, rather than October, because it represents career risk for politicians and that is all they are truly interested in.



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May 02 2019

Commentary by Eoin Treacy

Melting Up Is Hard to Do

May 02 2019

Commentary by Eoin Treacy

Central Bank Total Assets and Deficit Spending

Eoin Treacy's view -

I first created the total central bank assets chart in 2014. A couple of years ago I shared the formula with Ben Hunt at Epsilon Capital in a gesture of goodwill following his mention of the size of central bank balance sheets in one of his missives. He subsequently used it and since then the measure has proliferated. I have seen it in a considerable number of investment bank reports, but I have never received a favourable mention for creating it. In future I will be keeping the calculation of indicators proprietary, for the benefit of subscribers.



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May 01 2019

Commentary by Eoin Treacy

Powell Says Policy Appropriate With No Bias to Hike or Cut

This article by Christopher Condon and Steve Matthews for Bloomberg may be of interest to subscribers. Here is a section:

The committee repeated language from its previous meeting, saying it “will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate,’’ according to a statement Wednesday following a two-day gathering in Washington.

The unanimous 10-0 decision left the target range for the benchmark federal funds rate at 2.25 percent to 2.5 percent.

The Fed’s emphasis on subdued inflation prompted knee-jerk buying of government debt as traders added to positioning for a rate cut. However, that initial rally reversed on Powell’s comments on appropriate policy and transient inflation.

Eoin Treacy's view -

The Dollar has been particularly firm against a wide basket of currencies for the last six months and that is despite the announcement from the Fed last year that they are not going to raise rates. Therefore, there must be another reason for the currency’s strength.



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April 26 2019

Commentary by Eoin Treacy

April 18 2019

Commentary by Eoin Treacy

Instability at the Fed

Thanks to a subscriber for this report by Daniel Oliver for Myrmikan Research may be of interest to subscribers. Here is a section:

Eoin Treacy's view -

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

There is a consensus view among bond fund managers that the ability of Fed to ease in the next recession will be constrained by the zero bound. That is supported by the belief it has nowhere near as much room for easing as it had in other cycles. In turn that will create the much foretold “pushing on a proverbial string” where efforts to stoke inflation and asset prices will be ineffectual.



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April 10 2019

Commentary by Eoin Treacy

Credit Bubble Dynamics: The Bursting of an Historic Bubble

Thanks to a subscriber for this report by Doug Noland, formerly of Prudent Bear, not at McAlvany. Here is a section:

Eoin Treacy's view -

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

I feel a strong emotional identification with this argument. Surely it makes sense that continued bouts of credit creation will eventually result in the debts coming due and a massive round of defaults resulting in crashes for multiple asset classes? The increasingly vocal concerns about inequality and the rise of populism as a response to that are very real and likely to continue to be a factor that needs to be incorporated in our thinking. The biggest question is how urgent are the warnings?



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April 09 2019

Commentary by Eoin Treacy

Italy Raises Deficit Target, Risking Fresh Conflict With The EU

This article by Chiara Albanese, John Follain and Lorenzo Totaro for Bloomberg may be of interest to subscribers. Here is a section:

The wider deficit forecast could revive tensions with the Commission after months of wrestling at the end of 2018 which resulted in a promise from Italy to stick to a deficit of 2.04 percent of GDP. With growth lower than expected, the money to keep the promise isn’t forthcoming. Nor is the government keen on measures that would dampen growth, with Finance Minister Giovanni Triastating recently that restrictive fiscal moves would be “absurd.”

Italy stocks extended losses after the report, with the FTSE Mib index down 0.4 percent at 3.00 p.m. in Milan. The spread between Italian and German 10-year bonds widened by 4 basis points.

"The deficit is the most thorny issue for Italy and could spark tensions with the European Union," said Vincenzo Longo, an analyst of IG Markets in Milan. "We are expecting negative growth in the first part of the year and the numbers the government is going to debate seem too optimistic. The government isn’t likely to push the issue however until after the European vote in May."

Eoin Treacy's view -

The fiscal austerity program the EU is abiding by is designed to harmonise government debt to GDP ratios ahead of introducing pan European institutions like a deposit insurance corporation and a federal transfer mechanism. It offers no leeway for subpar economic growth which is what Italy is dealing with at the moment. That represents a significant challenge for the system because it greatly increases the potential for rebellion.



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April 09 2019

Commentary by Eoin Treacy

Big-Data Infusion for CPI Starts With Apparel

This research note by Jeff Kearns for Bloomberg may be of interest to subscribers. Here is a section: 

The BLS change may add volatility in clothing prices, but the impact on the main index will be relatively small, subtracting maybe 0.1 percentage point from the annual CPI rate, according to Michelle Girard, chief U.S. economist for NatWest Markets Securities and the most accurate CPI forecaster in Bloomberg’s latest ranking.

“While, theoretically, this shift should not introduce a downward or upward bias in the data, we believe that prices captured using actual transactions data are more likely to be biased lower,” Girard wrote in a report. “Transactions data could capture lower price points from a flash sale that a data collector may not have observed.”

Goldman Sachs Group economist Spencer Hill estimates the change could reduce core inflation in March by around 0.05 ppt from the monthly change. Omair Sharif, senior U.S. economist at Societe Generale, also sees a possible drag from apparel. The BLS plans to collect more alternative data directly from companies, an avenue that could ultimately account for almost 32% the index, Konny and her colleagues outlined in a February paper. Examples include scraping fuel prices from the GasBuddy website.

Eoin Treacy's view -

The clear conclusion from the introduction new data sets is the Bureau of Labor Statistics has no interest in developing a measure that does anything other than help to depress the inflation gauge.



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March 26 2019

Commentary by Eoin Treacy

Gold: Ringing the bell

Thanks to a subscriber for this note from UBS which may be of interest. Here is a section:

Eoin Treacy's view -

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

The clearest rationale for a positive view on gold is when we have evidence of negative real interest rates. That is becoming an increasingly likely scenario since global central banks are desperate to stoke inflation and are willing to allow their economies to run hot in order to achieve a self-sustaining cycle. That further supports the argument we are at the top of the interest rate cycle.



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March 26 2019

Commentary by Eoin Treacy

The debate over Modern Monetary Theory

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

Eoin Treacy's view -

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

The discussion about Modern Monetary Theory is inconvenient because it brings into the public eye what governments and central banks have been doing all along. It is very convenient to sport a façade of adherence to the ideal of balanced budgets, spending within your means, low inflation and preservation of purchasing power. However, if we look at the history of government these ideals are rarely realised. Meanwhile, deficit spending, lavish social programs and rising debt ratios are the rule rather than the exception.



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March 25 2019

Commentary by Eoin Treacy

Beware Misreading Inverting Yield Curve

This article by Mohamed A. El-Erian for Bloomberg may be of interest to subscribers. Here is a section:

“The extraordinary abrupt end to central bank hiking cycle + Fed paranoia of credit event is uber-bullish credit & uber-bearish volatility,” strategists including Michael Hartnett wrote.

While negative yields on paper suggest that investors lose money just by holding the obligations, bond buyers could also be looking at price gains if growth stalls and inflation stays low. But along the way, risk assets may be entering the danger zone.

“We’ve never seen monetary easing so long, so broad, so big,” said Brian Singer, head of dynamic allocation strategies at William Blair, a Chicago-based fund manager that oversees $70 billion overall. “What’s happened after every significant period of accommodation is a reckoning. This time the bubble is lower-rated credit and illiquid private assets.”

Eoin Treacy's view -

There is always an argument about the efficacy of an inverted yield curve as a lead indicator. It was exactly the same back in 2005 when the yield curve first became inverted. There were calls that this occasion is different because of the bull market in commodities, the rise of China and the strength of the housing market all of which proved to be fallacious.



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March 25 2019

Commentary by Eoin Treacy

Investment Strategy: 'Trading Sardines?'

Thanks to a subscriber for this note from Jeffrey Saut who I had the pleasure of meeting at the American Association of Professional Technical Analysts's (AAPTA) conference on Friday. Here is a section:

"When investors hear yield curve inversion, they automatically think 'recession.' That’s because every recession since 1962 has been preceded by an inversion. But, not every inversion has been followed by a recession, so keep that in mind."

Myth number two is that we are into the late part of the business cycle. If that is true why are the late cycle stocks acting so poorly? I have argued that the economic downturn was so severe, and the recovery so muted, that what we have done is elongate the mid-cycle. This implies there is much more time until the mid-cycle ends and the late cycle begins.

Myth number three has it that earnings are going to fall off a cliff. I do not believe it. Certainly earnings momentum has slowed, but earnings continue to look pretty good to me. And, if the earnings estimates for the S&P 500 are anywhere near the mark, the SPX is trading at 16.3x this year’s earnings and 15.5x the 2020 estimate. I think with 2Q19 earnings myth number three will evaporate.

As for Friday’s stock market action, readers of these missives should have found last week’s action as no surprise. I have talked about the negative “polarity flip” that was due to arrive last week for a few weeks. How deep the pullback/pause will be is unknowable, but I have stated I do not think it will be much. It was not only the economic data, and PMIs, that sacked stocks, but as I have repeatedly stated it was also the Mueller Report. The result left the senior index lower by ~460 points and the S&P 500 (SPX/2800.71) resting at the lower end of my support zone of 2800 – 2830.

Eoin Treacy's view -

As a brief aside. I am now the membership chair for the organisation, which is a member of IFTA. If anyone would like to pursue membership, has at least seven years of professional experience using technical analysis, and enjoys a collegiate environment for sharing ideas and methodolgy please reach out. 

The focus of Jeffrey’s Saut’s talk at the conference was to reiterate his view we are in a secular bull market. I felt a lot more comfortable when I went to conferences and was the only person making that call. It is not a majority opinion today but there are definitely more people espousing it.



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March 21 2019

Commentary by Eoin Treacy

Traders' Rate-Cut Bets Shift Goalposts for Fed Playing Catchup

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

Money-market traders have proven skeptical in recent years -- and much of the time rightly so -- about just how much the central bank might be able to push rates back up toward more historically normal levels. Officials on Wednesday scaled back from two to zero the number of rate increases they foresee in 2019.

Futures markets, which were already leaning toward a cut this year, have pushed the probability of easing to about 50 percent. For next year, a cut is fully priced in. The turnaround in Fed expectations in recent months has been accompanied by a rebound in stocks, which tumbled in December amid concern about the economy and the prospect of rate hikes.
 

“The Fed got the signal from markets last year as they were crashing and were pretty much devouring the economy,” said Robert Tipp, chief investment strategist at PGIM Fixed Income, which oversees about $716 billion. “A cut this year is possible. This is a good environment for U.S. fixed income,” and the 10-year yield has room to fall, he said.

Eoin Treacy's view -

The big question after the Fed’s about face on raising rates is, are they moving early enough to avoid an economic contraction? The logic is reasonably straight forward. The Fed would not have announced such a major shift in policy unless they were worried about the economic and market outlook. By going on pause and waiting for additional information they are signaling a willingness to listen to what the market is telling them.



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March 20 2019

Commentary by Eoin Treacy

Fed Sees No 2019 Hike, Plans September End to Asset Drawdown

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

“This was definitely a dovish outcome and even a bit of a surprise,” said Ben Emons, managing director of global macro strategy at Medley Global Advisors in New York. “The Fed took out the entire rate hike scenario for this year.”

Reaction in markets confirmed the dovish interpretation. Stocks pared losses, the dollar turned lower and Treasuries rallied. Traders lifted the odds of the Fed cutting rates. In a separate statement Wednesday, the Fed said it would start slowing the shrinking of its balance sheet in May -- dropping the cap on monthly redemptions of Treasury securities from the current $30 billion to $15 billion -- and halt the drawdown altogether at the end of September. After that, the Fed will likely hold the size of the portfolio “roughly constant for a time,” which will allow reserve balances to gradually decline.

Beginning in October, the Fed will roll its maturing holdings of mortgage-backed securities into Treasuries, using a cap of $20 billion per month. The initial investment in new Treasury maturities will “roughly match the maturity composition of Treasury securities outstanding,” the Fed said. The central bank is still deliberating the longer-run composition of its portfolio and said “limited sales of agency MBS might be warranted in the longer run.”

Eoin Treacy's view -

The Fed has cemented its about turn around with today's statements. That confirms a somewhat bearish tilt in their reasoning since the only way a pause can be justified is if growth figures are downgraded.



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March 20 2019

Commentary by Eoin Treacy

Italy set to formally endorse China's Belt and Road Initiative

This article from the Financial Times may be of interest to subscribers. Here is a section:

Chinese investments have become increasingly contentious in the EU. Diplomats in Brussels and influential western European capitals have long worried the 16+1 grouping of China and central and eastern European states, including 11 EU members, is a Trojan horse to divide the bloc. Beijing has denied this suggestion.  EU member states such as Germany and France have pushed for tougher screening criteria for Chinese investments. They want the bloc to develop a more unified strategy amid rising tensions over the security implications of using Chinese technology from companies such as Huawei, the telecoms group. Other countries including Greece and Portugal, where Chinese groups have invested billions of euros since the financial crisis, have adopted a more lenient approach.

Eoin Treacy's view -

I can’t help but think of the adage “a drowning man will clutch at a straw”. Italy’s populist administration has need of both funds for investing in public works and also a desire to snub the federalist ambitions of Northern European creditors. Meanwhile, China has a clear ambition to draw European countries within its sphere of influence in an effort to cement export markets and to weaken the chances of a concerted effort to blunt its expansionism.



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March 18 2019

Commentary by Eoin Treacy

What the Federal Reserve Got Totally Wrong about Inflation and Interest Rate Policy: Getting Real About Rents

Thanks to a subscriber for this report from Cornell research Academy of Development, Law and Economics by Daniel Alpert. Here is a section:

The foregoing factors present perceptional problems especially when met with sizable gains in employment that would normally result in rapid household income growth. It is tempting to see rent and OER increases as only the result of higher levels of demand. But despite recent glimmers of meaningful wage growth (mostly in lower wage, lower hours employment sectors) and the longer term reduction in U-3 unemployment to historically low levels, median U.S. household income in 2018, adjusted for inflation, remained less than 4% higher than it was at the turn of this century, 18 years ago (see Figure 13).

So there is something else going on here. As Figure 5 illustrates, the contribution of rent and OER to core CPI inflation hit a historic high of 81% in the summer of 2017. While such contribution moderated some in 2018, it remains the lion’s share of core inflation and is again increasing in proportion.

This begs another question, what would be the level of core inflation without price growth in rent and OER? There was evidence at the end of Q4 2018 that rents declined nationwide on an annual basis for the first time in more than six years, according to the Zillow Group real estate database9.  Now this data, if the trend continues, will take some time to percolate through to the BLS and BEA data - even longer for it to migrate from rents to OER estimates – but if it persists it will clearly result in materially lower inflation data in 2019. Far lower than the FOMC was banking on to support its monetary policy actions of 2018.

Eoin Treacy's view -

I found this to be a very interesting and educative report not least for its breakdown of the composition of CPI figures. The Fed dot plot which will be released on Wednesday, along with its rate decision, is being eagerly anticipated by investors for some perspective of just how dovish the Committee has become.  



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March 13 2019

Commentary by Eoin Treacy

Brookfield to Buy Marks's Oaktree to Make Alternatives Giant

This article by Gillian Tan and Scott Deveau for Bloomberg may be of interest to subscribers. Here is a section:

As the private equity industry gathers near record sums of assets, institutional investors aim to make big allocations to fewer firms with a wide range of products. Today’s deal creates such a one-stop-shop: it bolsters the credit business of Brookfield, which has traditionally focused on real estate, and provides Oaktree, a specialist in distressed debt, exposure to assets that thrive outside turbulent economic times.

“We had difficulty, up until now, meeting the strict terms of some of those mandates,” Brookfield Chief Executive Officer Bruce Flatt said in a phone interview. “Very few firms in the world are able to do that.”

Oaktree co-Chairman Howard Marks said in the interview that the two firms mesh “culturally and in terms of product lines without competing and overlapping.”

Eoin Treacy's view -

Warren Buffett has been preaching for years about the merits of owning a piece of a business and private equity investors have been listening. Private equity has taken private exactly the same kinds of companies Buffett favours, which are generally those with niche businesses, strong cashflows and low leverage.



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March 07 2019

Commentary by Eoin Treacy

More Action Is Less With Draghi's Policy Package

This note by Jamie Murray and David Powell for Bloomberg Economics may be of interest to subscribers. Here is a section:

The ECB recalibrated its rates guidance today, indicating no rate hike will come this year. With financial markets already pricing in no hike until mid-2020, this does not create additional stimulus. And at the margin, it could even reduce it if investors come to interpret the guidance as meaning the first rate hike will come in 1Q.

What the rates guidance does insure against is an earlier tightening of financial conditions if the economy beats forecasts this year.

The ECB also announced a third round of targeted longer-term refinancing operations (TLTRO). However, the terms are less favorable than the TLTRO II loans. The new maturity will only be two years. Previously, the funds were available for four years. In addition, the cost of borrowing will be indexed to the main refinancing rate. That now stands at 0%. Previously, it could have been as low as the deposit rate, which is currently -0.4%.

In addition, it seems the new loans won’t completely replace the funding provided by the old ones. The next lending operation won’t be launched until September. However, in order to meet regulatory requirements for their net stable funding ratios, banks need to have funding with a maturity of at least one year. That means fresh funds from the ECB won’t be available in June to replace the loans expiring in June of next year.

Even though a big dose of stimulus is absent, we think GDP growth will begin to pick up in any case and that the labor market will continue to tighten.

Eoin Treacy's view -

The ECB made a mistake in caving to political pressure and ending its quantitative easing program. Confidence is a fragile thing and the big mismatch in Target2 balances, with capital accruing in Germany while there is a paucity of capital on the periphery is a clear signal that the market has no faith in the ability of the bloc’s economic expansion to self-sustain without the support of stimulus.



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March 07 2019

Commentary by Eoin Treacy

How a Chinese Exodus is Exacerbating Australia's Property Slump

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

Reserve Bank Governor Philip Lowe noted the withdrawal of foreign buyers in a speech Wednesday as he sought to explain the drivers of Australia’s property slump. The central bank is closely watching the decline, especially as it’s starting to impact household spending and slow the economy.

“Another demand-side factor that has influenced prices is the rise and then decline in demand by non-residents,” said Lowe. “The timing of these shifts in foreign demand has broadly coincided with –- and reinforced –- the shifts in domestic demand.”

While Chinese buyers helped inflate the property bubble, they’re unlikely to return in sufficient numbers to stabilize the market. For one thing, shifting money abroad from China is tougher these days as authorities there are strictly enforcing rules aimed at curbing capital outflows.

There are other domestic factors suggesting prices could keep declining too. Australian banks have turned gun-shy on lending following an inquiry that exposed widespread misconduct in the industry and more homes are coming to the market.

Eoin Treacy's view -

While in Melbourne last April, all anyone wanted to talk about was the impact of the Royal Commission’s inquiry and the price of property. Prices are high relative to incomes and Australia’s private sector debt to GDP is among the highest in the world. With short fixes on mortgage rates and floating rates dominating, the Australian consumer is very interest rate sensitive and has a lot of net worth locked up in property.



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March 01 2019

Commentary by Eoin Treacy

Summary Edition Credit Suisse Global Investment Returns Yearbook 2019

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

Eoin Treacy's view -

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

The long-run average of returns is indeed somewhere between 3.5% and 4%. However, despite the neat mathematics of the 119-year history we know from experience that manias occur and are inevitably followed by bear markets where valuations correct.



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February 15 2019

Commentary by Eoin Treacy

Earnings Recession Is Here

Thanks to a subscriber for this report by Michael Wilson for Morgan Stanley. Here is a section:

Eoin Treacy's view -

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

Is the trade war the primary reason behind lower expectations for earnings in 2019? That’s a big question for the wider market because if the USA and China can come to an accord that will improve confidence which will allow companies to begin to make plans on a sounder footing than they have today. However, there are other important factors that are worth considering.



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February 15 2019

Commentary by Eoin Treacy

ECB Moves Closer to Global Dovish Shift as Coeure Mulls Loans

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

The European Central Bank took a step closer to injecting fresh stimulus into the weakening euro-area economy as one of its top policy makers said discussions are under way on offering banks new long-term loans.

The comments by Benoit Coeure, the ECB Executive Board member in charge of markets, provided the strongest signal yet that euro-area policy makers are considering another round of funding. He also echoed ECB President Mario Draghi that there must be a monetary policy case for such action.

Central banks around the world are following the Federal Reserve in reining in plans to tighten monetary policy. The ECB itself has already changed its language to warn of downside risks to the outlook, while India’s central bank unexpectedly cut interest rates last week and easing inflation bolstered bets that more reductions could be on the cards.

With the euro-area outlook deteriorating, the ECB is expected to cut its economic growth forecasts at its next meeting in March. That gathering is also at the center of speculation about new loans, known as TLTROS.

Eoin Treacy's view -

With Mario Draghi exiting his position as head of the ECB later this year, a policy hawk is very unlikely to replace him. There is no way the ECB can return to anything approximating normal monetary policy against a background where the banking sector is hobbled by a legacy of Japan-style bad loans which will take years to come to terms with.



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February 13 2019

Commentary by Eoin Treacy

A record 7 million Americans have stopped paying their car loans, and even economists are surprised

This article by Tanza Loudenback for Business Insider may be of interest to subscribers. Here is a section:

The delinquency figure represents a new high in the auto-loan market — more than 1 million more people are behind on auto-loan payments now than at the end of 2010. More people have auto loans now than in 2010, so while the overall rate of delinquency is down, the total number of people who have fallen at least 90 days behind their payments is higher.

The Fed has been tracking the auto-loan industry for more than five years, the economists said in the blog post, and it's not the first time the group has sounded the alarm. In 2017, a quarterly report from the Fed highlighted the near doubling of the rate of delinquencies in subprime auto loans originated by auto-finance companies since 2011, Business Insider's Matt Turner reported.

Turner also reported at the time that Wall Street was expressing concern over the subprime-auto-loan market as well. Meanwhile, Business Insider's Lauren Lyons Cole reported that Americans borrowed more money to buy cars than to attend college between 2016 and 2017.

Eoin Treacy's view -

There are a couple of points that immediately come to mind on reading this article. The first is that the delinquency rate for auto loans is definitely climbing and number of auto loans outstanding has increased substantially.



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February 12 2019

Commentary by Eoin Treacy

The Weak Spot in the Oil Market That Traders Are Missing

This article by Stephanie Ying for the Wall Street Journal may be of interest to subscribers. Here is a section:

Faltering demand in Germany has preceded weak industrial data, which raised fears of a continued slowdown in Europe’s largest economy. Industrial production dropped for the fourth straight month in December, and Germany’s economy contracted in the third quarter of 2018 for the first time since 2015.

Standard Chartered analysts warn that the weakness could spread to other parts of Europe, further undermining demand for oil.

German demand makes up a minor fraction of the world’s oil consumption; the country was the 10th largest oil consumer in 2016, accounting for 2% of the global total, according to the U.S. Energy Information Administration. Since China made up 13% of oil consumption as of 2016, a drop in Chinese demand growth would likely have a comparatively larger impact.

Additionally, signs of slowing demand in other parts of Europe haven’t materialized, Mr. Horsnell noted.

Eoin Treacy's view -

Saudi Arabia continues to cut back on supply which buoyed the market today. However, the reasons for this move are not only to support prices but also in response to the slowdown in the global economy which is being led by Europe and China.



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February 11 2019

Commentary by Eoin Treacy

Fear of Filing? Some Taxpayers Finding Tax Bills, Not Refunds

This article by Ben Steverman and Laura Davison for Bloomberg may be of interest to subscribers. Here is a section: 

“Most people don’t know how much they pay in taxes,” said Bob Kerr, who leads the National Association of Enrolled Agents, a trade group for tax preparers. “But the refund is the wrong
metric to measure it.”

Right or wrong, the drop in expected refunds is creating fear and anger in accountants’ waiting rooms. “Every single person” who walks in is dreading how much they’re going to owe the IRS, said CPA Gail Rosen, who heads the Martinsville, New Jersey, office of WilkinGuttenplan. “They come in and they worry.”

But telling people they paid fewer taxes throughout the year doesn’t help the sticker shock felt by filers who’ve become accustomed to getting a check, not writing one. Only about 5 percent of taxpayers -- about 7.8 million people -- are expected to pay more under the new law. But about 5 million, according to the Government Accountability Office, will find their typical tax refund replaced by a tax liability. “A lot of people are going to be surprised,” Rosen said.

Eoin Treacy's view -

Every politician knows that when it comes to policy, perception is often much more important than substance. If people had been asked whether they would prefer more money every month in lieu of receiving a chunky refund cheque they might not be nursing a surprise now. The reality is many people are likely coming out better off. However, if they had been using the refund as a saving mechanism, instead of saving monthly from their paycheques, this situation is going to feel like a tax hike.



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February 05 2019

Commentary by Eoin Treacy

Email of the day on Modern Monetary Theory

Thank you for mentioning MMT in the service

The most of us agree that applied MMT not necessarily leads to more growth (especially because in the reality part of the government spending is wasted in less than transparent submission processes, bureaucracy and corruption, hence it does not flow 100% into the economy process) but to more debt for future generations

However, it gives a useful framework for investors to better understand our modern world of FIAT currencies. A world in which classic economical doctrine and orthodoxy as I (we) learnt at university (pure monetarism, Fisher Theory and Schumpeterist “creative destruction”) fails to explain the modern world and the political influence

As you point out populism gels perfectly with MMT. And as long as populism is on the rise, we should maybe devote more time to understand MMT and try to profit as investors.

Interesting are the aspects related to the effect of interest rate hikes by the FED which MMT claims are inflationary and not disinflationary because hikes add income to the private sector that holds the government securities. In the same way they claim QT add interest bearing securities to the economy (via the banking system) and are also not disinflationary.

Also interesting is the stress on government spending as a source of Aggregate Demand and not just on the Debt with which this demand is financed. So national debt is the “private sector” asset.

I don’t know if I am a correct but from the perspective of an investor MMT is insofar useful as it opens a new perspective and try to explain markets behavior by looking at what is happening.

For example, from an MMT perspective we should continue have a strong economy as long as government spending is on the rise (i.e. the corporate sector profits and equities are a buy), the USD should weaken the more debt is added and the more the FED tries to stem inflation by hiking rates and engaging in QT (latter is counterintuitive) because it adds income to the system. Likewise, Bonds are a sell because of rising inflation while gold and hard assets are a buy.

Actually, if we look at reality and at countries that control their own currency that involve in profligate fiscal policies, they all tend to have depreciating currencies, high interest rates and a rising national debt. To me Turkey, Argentina, Venezuela come to mind first. However even the US under Trump is moving in this direction. Hence the USD bearishness (the US have still a big advantage though i.e. that they are reserve currency)

On the other end countries with a tight fiscal discipline, that apply QE and ZIRP or NIRP tend to have deflationary economies, zero or negative yields and strong currencies. Examples are Switzerland and the EU (where the leading countries impose deflationary austerity and real deflation on the weakest Union members). Indeed, notwithstanding all the problems in some members of the EU, the EUR has been extremely resilient over the years.

What do you think?

Eoin Treacy's view -

Thank you for this wide ranging and thought-provoking email. I agree with most of the points you make although I believe the reason for the Euro’s stability has to do with a lack of supply rather than inherent strength in the domestic Eurozone economy. The biggest issue right now is there is a clear trend towards profligate spending, fiscal stimulus, deficit spending or however you might wish to describe it. Modern Monetary Theory is the academic rationale for this spending which is being latched onto by politicians. In ages past this was referred to as devaluing the currency to point where it causes a rebellion from the bond market. 



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February 01 2019

Commentary by Eoin Treacy

Modi Woos Voters With $13 Billion Largesse Before India Election

This article by Abhijit Roy Chowdhury, Bibhudatta Pradhan, Shruti Srivastava and Siddhartha Singh for Bloomberg may be of interest to subscribers. Here is a section:

The government will allocate 750 billion-rupee ($10.6 billion) a year for the cash plan for about 120 million farmers and give taxpayers 185 billion rupees of relief in the year to March 2020, Finance Minister Piyush Goyal said in his budget speech in New Delhi on Friday.

In the process, the government will widen its fiscal deficit targets for the current financial year and next to 3.4 percent of gross domestic product and borrow more. Bonds and the rupee fell on news of the debt plans, while the tax cuts helped to buoy stocks.

“Ongoing slippage from the government’s budgeted fiscal deficit targets over the past two years, and our expectation that the government will face challenges meeting its target again this coming fiscal year does not bode well for medium term fiscal consolidation,” said Gene Fang, an associate managing director at Moody’s Investors Service. “We view this continued slippage as credit negative for the sovereign.”

Eoin Treacy's view -

Narendra Modi made history by getting an outright majority for the BJP at the last election and was the first person from a low caste to become Prime Minister. The big challenge heading into the election this year will how to hold onto those gains. The answer so far has been to emphasise Hindu nationalism and to boost spending. It was inevitable Modi would try to buy the election and the budget is the clearest signal how much he is willing to spend.



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January 31 2019

Commentary by Eoin Treacy

Everything you wanted to know about MMT (but were afraid to ask)

Thanks to Kevin Muir for this post from his themacrotourist.com blog which is relevant to the current discussion on Fed policy, fiscal policy and political jockeying. Here is a section:

If I am correct, I suspect we will see many Democrat candidates (perhaps all?) adopt MMT as a tenant of their platform. And here is a crazy thought for you - what if Trump beats them to it?

I have long argued that eventually we will hit a period where governments will spend and Central Banks will facilitate their deficits. MMT provides academic justification of where we all know we are headed anyway.

In one of the interviews I watched with Professor Kelton, she said that the idea of deficits being funded with bond issuance is purely a self-imposed limitation. It’s required by law, but in reality, it doesn’t need to be done. The law can be changed. The government could simply spend $100 while only taking in $90 and directly writing cheques against the Federal Reserve to pay for the $10.

Think about how inflationary this will be! But isn’t that the whole goal?

I have always chuckled at the idea that governments were powerless to create inflation. If they want to create inflation - they can. There just needs to be the political will. And it looks like that will has finally arrived.

Eoin Treacy's view -

Left-wing politicians in the USA are jockeying for who can announce the largest tax on the “super-rich”. Last week the media were discussing an upper band of 70%, today Bernie Sanders is suggesting a 77% tax and the re-imposition of a heavy estate tax on fortunes over $3.5million. Meanwhile more and more politicians are adopting President Trump’s mantra that deficits don’t matter.



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January 25 2019

Commentary by Eoin Treacy

Email of the day on reliable dividend companies

Your copy on global pay-out ride is coming back to earth is timely. The well-regarded fund manager Neil Woodford has given Imperial Brands a significant 8% asset allocation in his flagship income fund. Imperial pays a hefty dividend, growing at 10% rate. It generates good cash, but has huge BBB+ debt outstanding. It has come down quite a bit from its peak, but it’s valued at 17 times earning which may roll back to the 10 times earnings it had around 2000. Is there a case for holding Imperial Brands as primary source for dividends for the long run? I wonder if you could review some good dividend paying companies, net cash global companies with strong balance sheets, that will not get caught in the pending investment grade bond crunch. Thanks!

Eoin Treacy's view -

Thank you for this question which I’m sure is something a number of subscribers are pondering. More than half of all investment grade bonds are rated BBB and approximately $600 billion are up for refinancing this year. Against a background of tightening liquidity conditions that represents a risk some companies are going to have issues sourcing funding at the highly attractive rates which have been on offer for the last decade.
 



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January 24 2019

Commentary by Eoin Treacy

Mario Draghi Is Watching His ECB Rate Hike Slip Over the Horizon

This article by Brian Swint and Carolynn Look for Bloomberg may be of interest to subscribers. Here is a section:

With the economy threatened by trade tensions, European politics and temporary factors such as a slump in German car production, “we’ll probably have to wait until the June meeting before the dust has settled,” said Carsten Brzeski, an economist at ING. “However, it will require a very benign outcome on all these risk factors to see Draghi hiking rates before he leaves office.”

UBS Group AG President Axel Weber, a former ECB policy maker and Bundesbank president, said at the World Economic Forum in Davos this week that the ECB has already missed its chance to normalize policy in this cycle.

Eoin Treacy's view -

Mario Draghi is unlikely to raise rates during his tenure at the ECB and his successors are going to have equally grim prospects of returning to normal monetary policy



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January 21 2019

Commentary by Eoin Treacy

Asking Prices for London Homes Slump to Lowest Since 2015

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

 

London home asking prices fell to their weakest level in 3 1/2-years in January as sellers spooked by
Brexit held off putting their properties up for sale.

Asking prices in the capital slipped 1.5 percent from December to 593,972 pounds ($765,000), the lowest level since August 2015, according to Rightmove. New listings in the first two weeks of the year were 10 percent lower than in 2018 as owners were deterred by the cost of moving and concern about the political backdrop, the property website said.

After years of outsize gains in home values, London and its surrounding areas have so far borne the brunt of Brexit, with a lack of clarity over the future relationship with Europe causing both households and firms to hold off on investment decisions.

Listing prices in the capital have declined from a peak of almost 650,000 pounds in May 2016, the month before Britons voted to leave the European Union.

Nationally, values rose 0.4 percent to 298,734 pounds, with the biggest gains in the north of England. Rightmove’s data is compiled from 70,068 properties put on sale by agents across the country from Dec. 9 to Jan. 12.

A separate report by Acadata, which incorporates all house transactions, showed national home prices rose 0.6 percent in the year to December. Excluding London and the south east, values climbed 1.4 percent.

Eoin Treacy's view -

There was another news story today on how Citadel Investment Management’s CEO Ken Griffin paid, a discounted £95 million, for 3 Carlton Gardens which is about half a mile of open park land from Buckingham Palace.



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January 18 2019

Commentary by Eoin Treacy

Elections in 2019

Eoin Treacy's view -

I’ve been discussing the rise of populism, for two years, as a revolt against the status quo which is leading to a lurch to the fringes of political opinion. The clarion call for people everywhere demanding change is “What about me?” The only way governments know how to placate disaffected people is to give them more money. That is why we have seen so many countries pursuing fiscal stimulus/deficit spending measures.



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January 18 2019

Commentary by Eoin Treacy

China Is Said to Offer Path to Eliminate U.S. Trade Imbalance

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

China has offered to go on a six-year buying spree to ramp up imports from the U.S., in a move that would reconfigure the relationship between the world’s two largest economies, according to officials familiar with the negotiations.

By increasing annual goods imports from the U.S. by a combined value of more than $1 trillion, China would seek to reduce its trade surplus -- which last year stood at $323 billion -- to zero by 2024, one of the people said. The officials asked not to be named as the discussions aren’t public.

The offer, made during talks in Beijing earlier this month, was met with skepticism by U.S. negotiators who nonetheless asked the Chinese to do even better, demanding that the imbalance be cleared in the next two years, the people said.

Economists who’ve studied the trade relationship argue it would be hard to eliminate the gap, which they say is sustained in large part by U.S. demand for Chinese products.

Eoin Treacy's view -

On the face of it this is good news because it at least suggests the USA and China are engaging in productive discussions and some initiatives to end of the impasse are being discussed. The stock market continues to unwind the overextension relative to the trend mean as it prices in optimism that a deal with be struck.



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January 14 2019

Commentary by Eoin Treacy

Don't Fear a Potential Recession; Embrace It

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

Eoin Treacy's view -

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

The markets have quickly turned from giving credence to the Fed’s prognostication that they would raise rates as many as two times this year to pricing in none and a cut in 2020. However, it is also worth considering that for the moment, at least, the market is pricing in one cut not a succession of cuts. The extent of the decline seen to date, therefore, has been to price out any net positive from the tax cuts; netting off trade frictions now to the earlier, and possibly temporary, bump to consumer demand.



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January 10 2019

Commentary by Eoin Treacy

Mnuchin Massacre Christmas Eve Bottom?

This article by Muir for his Macro Tourist blog may be of interest to subscribers. Here is a section:

Remember back a half-dozen years ago when all the hedgies were bearish and David Tepper came out and said something to the effect of; “if the economy weakens, then the Fed will ease and stocks go up. If the economy strengthens, then stocks will go up because earnings will be rising. Therefore I am buying.”

Well, I think it’s almost the exact opposite situation today. If the economy strengthens then Powell will hike and stocks will fall from the liquidity withdrawal. If the economy weakens, then Powell has shown he is loathe to come to the market’s rescue and he will be slow to lower rates.

I don’t think you need to overthink this. The Fed has tightened into either a slowdown, or a recession. The market sniffed it out, but the Fed ignored the signals for a bit and made the sell-off worse. Now the market is in the process of correcting that overreaction by rallying.

But don’t forget that Powell has absolutely no stomach for frothy financial markets, so beware getting too excited about the Fed’s recent dovish talk. This is not Yellen or Bernanke’s Fed. Powell has a different set of beliefs, and although he has succumbed to market pressures for the moment, it won’t take much for the old tone-deaf Powell to return.

Eoin Treacy's view -

Powell reiterated his view today in expressing the Fed’s patience with interest rate hikes but committing to continued balance sheet run-off. The market has already priced in the opinion the Fed will not raise rates again and will probably be cutting rates in 2020.



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January 10 2019

Commentary by Eoin Treacy

Email of the day on yield curve inversions

Before Xmas I forwarded an article by EPB Macro Economics who assessed that the Fed had already tightened too much and that a marked slowing of the economy was inevitable.  The latest EPB report (see attached) highlights that there has already been an inversion in US Treasuries, and that the Fed interest rate cycle has now peaked, but deteriorating economic data will cause more volatility in equity markets.

Eoin Treacy's view -

A link to the full report and a section from it are posted in the Subscriber's Area.

I agree we are late in the cycle and that has been a constant theme in the Subscriber's video for the last 18 months. The inconsistency in the trends on Wall Street, with evidence of completed top formations until proven otherwise is a clear indication that this is a particularly important time to pay attention to liquidity and credit conditions. Here is a section from the report:



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January 09 2019

Commentary by Eoin Treacy

Outlook for 2019: The Game Has Changed

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

Eoin Treacy's view -

A link to the full report and a section from it are posted in the Subscriber's Area. 

The broad global adoption of fiscally stimulative policies is unlikely to be as coordinated as the monetary response to the credit crisis was. The big arbiters of how much liquidity is provided to the global economy and eventually the markets will be in which large countries adopt fiscal stimulus. Germany, China and Brazil are the big additional potential sources of stimulus so it is their political machinations that are most worth watching.



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January 04 2019

Commentary by Eoin Treacy

Powell Pledges Flexible Fed Policy, Won't Quit If Trump Asks Him

This article by Jeanna Smialek and Rich Miller for Bloomberg may be of interest to subscribers. Here is a section:

Federal Reserve Chairman Jerome Powell said the central bank can be patient as it assesses risks to a U.S
economy and will adjust policy quickly if needed, but made clear he would not resign if President Donald Trump asked him to step aside.

“With the muted inflation readings that we’ve seen, we will be patient as we watch to see how the economy evolves,” Powell said Friday on a panel with his predecessors Janet Yellen and Ben Bernanke at the American Economic Association’s annual meeting in Atlanta.

“We will be prepared to adjust policy quickly and flexibly and to use all of our tools to support the economy should that be appropriate to keep the expansion on track,” he said, adding “there is no pre-set path for policy.”

Eoin Treacy's view -

The financial markets have been busying pricing out the potential for additional rate hikes this year in the aftermath of the last Fed meeting. That was a clear message to policy makers that they were making a mistake in signaling a willingness to persist in raising rates and running off the balance sheet concurrently.

The above statement begins to suggests the Fed is alert to the message being sent by the markets. The stock market responded positively to this change of emphasis by Powell and rallied to countermand yesterday’s weakness; reinvigorating the reversionary rally hypothesis.  

The above statement begins to suggests the Fed is alert to the message being sent by the markets. The stock market responded positively to this change of emphasis by Powell and rallied to countermand yesterday’s weakness; reinvigorating the reversionary rally hypothesis.  

 



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