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May 25 2017

Commentary by Eoin Treacy

May 25 2017

Commentary by Eoin Treacy

OPEC, Allies to Extend Oil Cuts for Nine Months to End Glut

This article by Nayla Razzouk, Golnar Motevalli and Laura Hurst for Bloomberg may be of interest to subscribers. Here is a section:

"The market seems to be a bit disappointed as there is no ‘something extra,’” said Jan Edelmann, a commodity analyst at HSH Nordbank AG. “It seems as though OPEC fears letting the stock-draw run too hot.”

The Organization of Petroleum Exporting Countries agreed in November to cut output by about 1.2 million barrels a day.

Eleven non-members joined the deal in December, bringing the total supply reduction to about 1.8 million. The curbs were intended to last six months from January, but confidence in the deal, which boosted prices as much as 20 percent, waned as inventories remained stubbornly high and U.S. output surged.

OPEC agreed earlier Thursday to prolong their own output cuts by nine months. Nigeria and Libya will remain exempt from making cuts and Iran, which was allowed to increase production under the original accord, retains the same output target, Kuwait’s Oil Minister Issam Almarzooq said after the meeting.

That deal gave the Islamic Republic room to increase output to a maximum of 3.797 million barrels a day.

 

Eoin Treacy's view -

The oil markets rallied ahead of today’s OPEC announcement on the expectation that the production cuts would be extended. The fact the announcement came in line with expectations has resulted in a clear “buy the rumour sell the news” response. Oil prices pulled back sharply today to confirm the progression of lower rally highs with a downside key day reversal. 



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May 25 2017

Commentary by Eoin Treacy

Some reflections on Japanese monetary policy

This article by Ben Bernanke for The Brookings Institute may be of interest to subscribers. Here is the conclusion:

If all goes well, the BOJ’s current policy framework may yet be sufficient to achieve the inflation objective. We’ll have to wait and see. If not, there are relatively few options available. The most promising possibility—should we get to that point—is more explicit coordination of monetary and fiscal policies. Monetary policy that is aimed at limiting the impact of fiscal expansion on the government’s debt could both make fiscal policymakers more willing to act and increase the impact of their actions. The BOJ may be reluctant to take such a step. In the possible future state that I am contemplating, however, there would be no real alternative other than to abandon the fight to raise inflation and, perhaps, even to accept a new bout of deflation. After such a long and valiant effort to end deflation and raise interest rates from their effective lower bound, that would be a most disappointing outcome.

Eoin Treacy's view -

Japan has had modest success with attempting to foment inflation but so far has failed to embed the belief prices are going to rise among the populace. The deflationary forces of technological innovation and lower energy prices have particular meaning for Japan quite apart from the fact the yield curve is flat and at nominally low levels. 



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May 25 2017

Commentary by Eoin Treacy

Are Cryptocurrencies Becoming a New Asset Class?

Thanks to a subscriber for this article by Mark Chandler at Brown Brothers Harriman for FinancialSense. Here is a section:

The volatility also does not lend itself to being a store of value (another agreed upon function of money). Consider that it is not unusual in recent days for the price of the Bitcoin to change by 2%-3% a day. The US dollar, in contrast, rarely moves one percent a day, and while the Bitcoin has appreciated by nearly 50% over the past month, the Dollar Index has fallen 2.3%.

Crypto-currencies appear easy to buy but are more difficult to liquidate. Reports suggest that even modest amounts take days to complete. It appears that a small part of the float actually trades, and the supply is limited. There are around 16.3 mln Bitcoins and 1800 new ones a day.

The rising price for crypto-currencies and new interest does not alter our assessment. These are not currencies in any meaningful sense. To the extent that some retailers accept them is a bit of a novelty and marketing fluke. Some of the larger businesses, like Virgin, who previously indicated a willingness to accept Bitcoins as payment, reportedly convert such payments into hard currencies. It is a gimmick, not confirmation of its currency status.

Leaving aside questions on the origin of money, under conditions of modernity, money facilitates exchange and is used to pay taxes and settle debts. When crypto-currencies can be used to pay taxes, and/or are generally accepted to retire debt, then their money status needs to be reviewed. Under present condition, none of the functions of money are met by crypto-currencies. They are hardly used as a means of payment. They are poor stores of value. They are not units of account.

People can still make and lose money trading them. They are part of the universe of paper assets, with their own niche rules governing supply. One can use some crypto-currencies to conceal transactions, but do not expect the taxman, the landlord or grocer to accept them anytime soon. They are currencies to the extent that contacts on Facebook are friends and that "grande" means medium at Starbucks.

 

Eoin Treacy's view -

Bitcoin has been discovered by US investors. At least that is what the flow on fiatleak.com tells me. When I was looking at the website in March, China accounted for the vast majority of traffic but today US volumes outpaced China by 5:1. The other largest buyers are the EU, Russia, Brazil and South Africa. 



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May 25 2017

Commentary by Eoin Treacy

May 24 2017

Commentary by Eoin Treacy

May 24 2017

Commentary by Eoin Treacy

The Big Green Bang: how renewable energy became unstoppable

Thanks to a subscriber for this article by Pilita Clark for the FT which may be of interest. Here is a section: 

“I have been early twice in financing the low carbon energy transition,” says Bruce Huber, cofounder of the Alexa Capital advisory group. “But we feel it’s third time lucky.”

One reason for his optimism is what he calls the “tectonic plateshifting” in the car industry that is driving down the cost of energy storage. Storing clean power has long been a holy green grail but prohibitive costs have put it out of reach. This has begun to change as battery production has ramped up to meet an expected boom in electric cars.

Lithium ion battery prices have halved since 2014, and many analysts think prices will fall further as a slew of large battery factories are built.

The best known is Tesla and Panasonic’s huge Nevada “gigafactory”. Tesla claims that once it reaches full capacity next year, it will produce more lithium ion batteries annually than were made worldwide in 2013.

It is only one of at least 14 megafactories being built or planned, says Benchmark Minerals, a research group. Nine are in China, where the government is backing electric cars with the zeal it has directed at the solar industry.

Could this lead to a China-led glut like the one that helped drive solar industry writeoffs and crashing prices after the global financial crisis?

“It’s something to watch,” says Francesco Starace, chief executive of Italy’s Enel, Europe’s largest power company.

The thirst for electric cars, not least in China, means “the dynamics of demand are completely different” for batteries than for solar panels, he adds.

Still, Enel’s internal forecasts show battery costs falling by about 30 per cent between 2018 and 2021 and it is among the companies already pairing batteries with solar panels to produce electricity after dark in sunny places where power is expensive, such as the Chilean desert.

Eoin Treacy's view -

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

The main objections to renewable energy are focused on intermittency and their reliance on subsidies. However economies of scale and the application of technology represent reasons for why we should be optimistic these can be overcome over the medium term. That represents a significant challenge for both the established energy and utility sectors. 

Right now we are talking about a time when solar and wind will be able to compete without subsidies on an increasing number of projects. However if we continue on that path there is potential for the sector to be a victim of its own success because the lower prices go and the more fixed prices are abandoned the greater the potential for volatility in energy pricing. 



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May 24 2017

Commentary by Eoin Treacy

Global gold study: Find your 'safe place'

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

In a volatile macro environment, follow the cash flow & avoid the debt laden 
The USD gold price has rallied +10% this year, following a sustained sell-off post the U.S. election in Nov 2016. Markets remain focused on global growth prospects (and U.S. rate hikes), but rising tensions in the Middle East and Asia, along with concerns around U.S. policy disappointment & the Chinese property market pose risks to the pro-growth trade. We believe the global gold sector presents a compelling investment thesis despite our neutral outlook on gold. Costs have fallen across the sector, lifting free cash flow (average FCF yield of 6% this year), while debt levels are falling (average net debt/EBITDA now 1.2x). The sector is trading on an undemanding 7.6x EV/EBITDA, but we believe the companies best positioned to manage price volatility are still those with the highest quality portfolios. Evolution (13% FCF yield), Barrick Gold (12%) & St. Barbara Mining (10%) are the best cash generators. Newmont (8% FCF yield) has the best balance sheet amongst the majors (0.6x net debt/EBITDA), is trading on 0.8x P/NPV, and is our top pick amongst global majors. 

Divergent trends amongst the global large-cap, mid-cap and small-cap sectors
Global gold majors remain focused on reducing costs, increasing cash flow and repairing balance sheets. Gearing amongst majors remains elevated (29% average), offsetting appealing cash flow metrics; we believe the majors will continue to progress longer term growth options while retaining free cash to pay down debt. Mid-cap gold miners are in better positions, with stronger balance sheets & internal growth options. The mid caps are trading on 7.6x EV/EBITDA (8.5x for global majors), highlighting the discount applied by the market for lower reserves. Small cap golds provide compelling value opportunities, with strong cash flow (St Barbara 10% FCF yield, Regis 9%) and the best 3-year production growth prospects across the sector. OceanaGold (Hold) has a clear growth mandate, while Alacer Gold & Dacian Gold (both 0.5x P/NPV) are building new projects, are fully-funded and screen deep value. 

 

Eoin Treacy's view -

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

The lack of free cash flow yield was one of the reasons the gold mining sector was unable to perform when gold prices were closer to $1900 because they were investing so much of their revenue and indeed borrowing against it to fund new supply. That all changed when prices declined. Investment was cancelled and a major process of rationalisation ensued. The result is that the gold mining sector generally has sounder balance sheets today than when prices for their products were considerably higher. 



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May 24 2017

Commentary by Eoin Treacy

China's Markets Get a Double Dose of Caution From Moody's, MSCI

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

Moody’s Investors Service unveiled a surprise downgrade of China’s sovereign credit rating, citing concerns about its continued buildup of debt. Earlier, the head of one of the world’s top stock-index compilers suggested China had more work to do to get its onshore stocks into emerging-market gauges. With a June 20 deadline looming, “there’s still a lot of issues to resolve,” MSCI Inc. Chief Executive Officer Henry Fernandez said.

Underlying the critique from both: issues stemming from the Chinese leadership’s preoccupation with control. Few analysts expect painful reforms to be unleashed ahead of the Communist Party’s leadership reshuffle due later this year. While officials preach the need to rein in credit, ensuring the economy hits a 6.5 percent growth target remains the top priority.

Moody’s highlighted that policy makers’ are fixated on economic growth targets, meaning already-high leverage will continue to build. For MSCI, concerns include authorities placing restrictions on financial products abroad that would incorporate Chinese stocks.

 

Eoin Treacy's view -

Trying to lean on the shadow banking sector, while also stimulating the economy is a tough goal while also achieving an outsized growth rate. However it is also worth considering that only about 12% of China’s debt is held externally. The caveat of course is that a good portion of that has been raised by property developers recently through US Dollar bond issuance. 



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May 24 2017

Commentary by Eoin Treacy

The Chart Seminar 2017

Eoin Treacy's view -

The Chart Seminar 2017 

Our remaining venue for the 48th year of the seminar are:

London November 16th and 17th TBA

If you are interested or would like to suggest a venue please contact Sarah at [email protected]  I would be more than happy to plan a US based seminar this year if we have the critical mass to make it viable .

The full rate for The Chart Seminar is £1799 + VAT. (Please note US, Australian and Asian delegates, as non EU residents are not liable for VAT). Subscribers are offered a discounted rate of £850. Anyone booking more than one place can also avail of the £850 rate for the second and subsequent delegates.



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May 23 2017

Commentary by David Fuller

Brussels Prepares 'Grand Bargain' to Save Broken EU Project

The European Commission is to unveil radical plans for a eurozone fiscal union, pushing for an embryonic treasury with powers to fight economic recessions and to cope with shocks in hard-hit regions.

The EU budget authority will be backed by a joint eurozone unemployment fund, akin to social security in the US. The proposal entails an unprecedented level of shared risk among the EU eurozone states and marks a profound shift in thinking after years of rigid austerity and lack of investment.

Valdis Dombrovskis, the EU commissioner for the euro, said there would be a 'stabilisation fund' with resources to help blighted areas escape downturns. "We will give a bigger role to the aggregate fiscal stance of the whole eurozone in setting policy," he said at the European Business Summit in Brussels.

It is a belated admission that the narrow focus on debt-reduction during the eurozone debt crisis led to a contractionary bias, drawing the whole currency bloc into a deflationary vortex that ended in a 'Lost Decade' and proved counter-productive even in its stated goal of controlling the debt trajectory.

"This is something that will set alarm bells ringing in Northern Europe," said Guntram Wolff, director of the Bruegel think-tank in Brussels.

"However you design this, it will lead to fiscal transfers. All forms of insurance lead to moral hazard and then you have to deal with it," he said.

The Commission's long-awaited 'Reflection Paper' on how to relaunch monetary union on a better footing - due in early June - will call for a “fund for the protection of public investment during recessionary phases”, according to leaked papers obtained by the Frankfurter Allgemeine.

It would come under the "democratic oversight" of the European Parliament, giving it crucial legitimacy at federal level. This would rein in the over-mighty Eurogroup that effectively runs the eurozone today and acts as a law unto itself, operating in total secrecy and answering to no elected body.

While the new fund would not exactly be an EU treasury or finance ministry, it would be a major step in that direction if ever accepted by Germany and the northern creditor powers.  

Mr Dombrovskis was careful to stress that the 'grand bargain' is not a fiscal give-away to improvident high-debt states. "Every member state is responsible for guaranteeing the stability of its public finances. Where there is risk sharing, there must also be risk reduction," he said.

Yet the plan is a major shift in policy. It is similar to proposals made by French president Emmanuel Macron during France's election campaign and suggests that the policy elites in Brussels are lining up behind him, as are the Italians and Spanish.

German Chancellor Angela Merkel must now move with care. She has refused to countenance 'eurobonds' or shared liability for legacy debt - and once said they would only happen over her dead body - but has now opened the door slightly to some sort of joint issuance for future debt. 

David Fuller's view -

A visionary 39 year old President of France has shocked Angela Merkel and other senior EU politicians by attempting to open the door to fiscal union.  It is a logical step, assuming Germany actually wants the EU to become a Federal State.

Theoretically, it may have at some early stage of thinking. However, judging from Angela Merkel’s ‘over her dead body’ comment immediately above, she would sooner hold hands with Donald Trump than her European neighbours.  

A PDF  of AE-P's article is posted in the Subscriber's Area.



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May 23 2017

Commentary by David Fuller

Email of the day 1

On Quants:

I thought about your move to London and starting CAL nearly 50 (!) years ago...as I read this article from Varchev Financial Services about Quants. In my mind Chart was a forerunner to the latest craze, and, again, the computer has transformed yet another industry

David Fuller's view -

Well remembered! Chart Analysis Limited helped to popularise the use of price charts, if only to see what was actually going on in markets, and to also make behavioural assumptions based on the price action. We received plenty of leg pulling 50 years ago but the efficiency and weight of money logic behind price trends soon made Technical Analysis indispensable for traders.

However, it is certainly a quantum leap (pun intended) to compare Behavioural Technical Analysis (BTA) to Quants.  They have little in common. BTA monitors crowd action.  Some Quants try to manipulate crowd action, which they can do with sufficient funds in leveraged markets. 

This makes leveraged trading more dangerous for everyone else. Within a decade or two, I think artificial intelligence will wipe out Quants, because it will know so much more about market action than the teenage Russian-born software engineer mentioned by Varchev. 



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May 23 2017

Commentary by David Fuller

Email of the day 2

On India’s uptrend:

Is the following trend likely to reduce the regularity of 20% market corrections?

David Fuller's view -

Thanks for your question and also the Bloomberg article.

Following Narendra Modi’s landslide victory in the May 2014 General Election India’s Mumbai Sensex Index has only experienced one significant correction of approximately 26%, falling throughout 2014 before bottoming with a decisive Type 1 of three endings as taught at The Chart Seminar in 1Q 2016. 

This item continues in the Subscriber’s Area.



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May 23 2017

Commentary by David Fuller

The Markets Now

Here is the brochure for our session on Monday 12th June at London’s Caledonian Club.  

David Fuller's view -

This seminar is over half full so don’t delay if you are interested; another sell-out is likely.  

Meanwhile, can you think of a more interesting investment environment?  Volatility has increased somewhat recently and I am hoping it results in a sufficient setback for some high-flying tech shares to create another buying opportunity.  Don’t miss Dr David Brown on this topic.



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May 23 2017

Commentary by Eoin Treacy

May 23 2017

Commentary by Eoin Treacy

Global cyberattack 'highly likely' linked to North Korea group

This article by Sherisse Pham for CNN may be of interest to subscribers. Here is a section:

But here's the puzzling thing -- Symantec says that despite the links to Lazarus, "the WannaCry attacks do not bear the hallmarks of a nation-state campaign."

Cyberattacks backed by governments "are usually impeccable, they don't make rookie mistakes," said Thakur. "In the case of WannaCry, we saw some of those mistakes."

For example, early versions of WannaCry had a bug in the code that prevented victims from paying the ransom.

While it's possible Lazarus thought they could make a lot of money with WannaCry, "they totally botched it up and got almost nothing," Thakur said.

The ransomware has so far collected about $108,000 in ransom. Security researchers and government agencies advised businesses not to pay the ransom.

 

Eoin Treacy's view -

The latest global ransomware attack might have been botched but that didn’t stop it from causing a great deal of inconvenience for consumers not least in the UK where trains didn’t run and hospital appointments were cancelled. The problem of course is that even if this attempt was not as successful as the originators hoped if will act as inspiration for ambitious criminal organisations to get it right next time. 



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May 23 2017

Commentary by Eoin Treacy

Euro Area Warned That Shock-Proof Markets Won't Be Forever

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

For a start, Britain’s Brexit vote prompted a quick response from the nation’s central bank, which cut the key interest rate, revived asset purchases and pledged to act again if needed.
“In the U.K., the Bank of England responded strongly to the outcome of the referendum, averting a tightening in financial conditions.”

In the U.S., the financial shock stemming from Trump’s election came amid an economic upturn that cushioned the blow, and the expectation that however uncertain his policies might be, they would probably be good for companies.

“The rally in U.S. risky asset prices reflected the strong situation of the U.S. business cycle, reinforced by expectations about business and financial sector-friendly policies from the new administration.”

The study follows other theories over why volatility is so low, and concludes with a look at what this might mean for the euro area, should an avowed opponent of the single currency gain power, or should the debt crisis in a member country heat up again.

“The main lesson to be learned from a euro-area financial stability perspective is that similarly large economic-policy uncertainty shocks could, in the absence of offsetting shocks, seriously tighten domestic financial conditions and raise risk premia.”

So far this year, the currency bloc has managed to avoid anti-euro politicians coming to power in the Netherlands and France. If anything though, the region’s history has shown that the next crisis is always just around the corner. The next focal point could come as early as Monday, when euro-area finance ministers meet in Brussels to try yet again to break an impasse on lightening Greece’s debt burden.

 

Eoin Treacy's view -

“Monetary policy beats most other factors most of the time” is an adage David developed decades ago and it is no less true today. Negotiations about how to grant Greece’s next tranche of bailout funds without losing face, the Dutch election, French Election (presidential and parliamentary), the German election and Brexit negotiations all represent considerable sources of political and market uncertainty for the Eurozone.  



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May 23 2017

Commentary by Eoin Treacy

Noble Group 'Fighting for Its Life' as S&P Sees Default Risk

This article by Jasmine Ng and Denise Wee for Bloomberg may be of interest to subscribers. Here is a section:

The Hong-Kong based trader’s troubles are deepening after two turbulent years that have been marked by losses, asset sales, and accusations of improper accounting that it has denied. Since surprising investors two weeks ago with a quarterly loss, the shares have tumbled to multiyear lows and the price of its bonds has fallen by more than half. S&P’s warning follows downgrades from Moody’s Investors Service and Fitch Ratings Ltd. in recent days.

There’s “potential that the company will face distress and a nonpayment of its debt obligations over the next 12 months,” S&P said in a statement late Monday as it cut the company’s ratings by three steps to CCC+. “The company’s capital structure is not sustainable,” S&P said.

The shares plunged as much as 32 percent to 40 Singapore cents, and were at 42 cents as the halt kicked in after just 36 minutes of trade on Tuesday morning. The stock has lost 75 percent this year, following a 44 percent drop in 2016 and 65 percent plunge the year before. The company’s 2020 bonds sank to an unprecedented 39.4 cents on the dollar.

Eoin Treacy's view -

Investment banks concluded the commodity bull market is over a few years ago as they shuttered or sold-off trading operations en masse and largely exited the business. Noble Group is a major commodity trader, at least for the moment. Its current difficulties beg the question whether market participants are taking positions at odds to the company’s best interests in an effort to initiate a forced sale. 



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May 22 2017

Commentary by David Fuller

Trump Flees Washington Knives to Relax Among Sunni Kings

David Fuller's view -

In the last two weeks we have seen the worst and the best of President Donald Trump.  He appeared unhinged before leaving the country for the Middle East. Impeachment talk was rife. Even Republicans were fed up with the annoying tweets, his self-pitying narcissism and amateurish, unilateral changing of policies on an almost daily basis. 

Has any previous US President ever manage to irritate so many people from the two branches of government with whom he must be able to work?  I doubt it and Trump was fortunate to be leaving Washington on his first overseas trip with a large entourage from his Cabinet. 

Trump was clearly relaxed on arrival in Saudi Arabia to meet first with King Salman bin Abdulaziz, who presented him with an impressive bit of bling - the Collar of Abdulaziz Al Saud Medal, the kingdom’s top civilian honour, at the Royal Court in Riyadh.

In fairness to Trump, the self-described ‘greatest dealmaker in history’, he did sign the single largest arms deal with Saudi Arabia, worth possibly $350bn over 10 years.  Similarly, the visit to Israel was also a success with Trump being appropriately presidential.  These moves should temporarily dampen criticism in Washington, but I am sure Trump is already thinking about his next overseas trip.  

 

Apologies for Login problems which delayed the posting of this copy.



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May 22 2017

Commentary by David Fuller

Donald Trump's Path-Independent Theory of Mind

Here is this interesting article on the President’s state of mind by Cathy O’Neil:

People have been discussing how Donald Trump interacts with other humans, guessing at the extent to which he is capable of anticipating or understanding how they think. Some believe he has no such "theory of mind." I disagree: He has one, but it’s path-independent.

Remember when he thought people would like the fact that he’d fired FBI Director James Comey? Or the multiple times when he changed his story on why he did something? Those are the tell-tale signs.

Most people, when they try X as an explanation, won’t try “not X” afterwards, for the simple reason that they know their audience will know they were either lying before or they’re lying now. But Trump will try stuff until one of his attempts “works,” defined as eliciting approval. He's path-independent, in the sense that he's completely unconstrained by his previous words and actions. If neither "X" nor "not X" works, he'll assume that it's his audience that is being irrational.

In a prior column, I discussed the notion that Trump behaves like a machine learning algorithm. Well, his path-independent theory of mind fits perfectly into that metaphor.

When Google is trying some new shade of blue in the background of their ads, they will perform what’s called an “A/B test” to see what generates more clicks. If more people go for the ad with a lighter shade of blue, they will stick with it. What they won’t do, critically, is consider the possibility that their audience liked the light shade of blue only because it came after the darker shade. They will assume that the audiences are independent of each other, constantly refreshed and “new."

The same approach might have worked well for Trump as a businessman. He probably would have encountered a wide range of scenarios: For every deal that went through, dozens might have failed. So trying X one day and Y the next would be like a real science experiment. Over time, he might develop pattern recognition, figuring out which tactic works best in certain kinds of situations. I assume that’s where he learned to put pressure on business partners for unreasonable terms and to demand oaths of loyalty from his employees.

Similarly, when Trump was campaigning, he actually did have a fresh audience on a daily basis. He could try out new things while re-using things that worked previously in similar situations, honing his craft with the direct and immediate feedback that he craves. His audience, in the context of a rally, was being refreshed constantly, just like Google’s ad customers.

I’d argue that Trump's path independence operates on multiple levels. It's evident at a meta-political level when he takes a stab at sweeping campaign promises that he never intends to fulfill. It's also visible at the micro level, even within a given sentence: In his very strange recent interview with The Economist, for example, he kept attempting to adjust his message to obtain approval from his interviewers. He keeps things vague, and then pokes his way into a given explanation, but leaves himself room to change direction in case he senses disapproval.

It doesn’t always work for him. That said, he probably can’t act any other way. Consistency has no attraction for him, because he is fundamentally principle-free.

Trump's problem now is that the audience isn’t refreshing. It’s all of us, nationwide and globally. We remember what he said and did yesterday. We notice when he changes his story, and we’re not amused. Meanwhile, he’s left truly confused as to why things aren’t working out in his favor.

David Fuller's view -

This is a fascinating and quite possibly logical analysis of Trump’s “path-independent” personality.  It is also a little scary but so are many things about politicians, not least insufficient levels of competence.  



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May 22 2017

Commentary by David Fuller

After Her Election Victory, Theresa May Must Develop an Economic Programme

Just as the Labour Party has recently moved to the left, so Mrs May has moved, at least presentationally, towards the centre, and in some respects to the left of centre. This seems curious, unless you give importance to the ambition of supplanting the Labour Party as the natural party of government in just about all parts of the country. But what is the point of supplanting the Labour Party if in order to do this you have to become the Labour Party?

I am suspending judgment. We are in an electioneering phase, when politicians are liable to say extraordinary things. Mrs May would be well advised to keep her economic and financial policy prognostications as vague as possible. In particular, she should avoid making expensive spending promises that use up fiscal room for manoeuvre, and she should avoid restricting the Chancellor of the Exchequer’s options on tax by making pledges not to raise one sort of tax or another.

In that regard, last week’s manifesto was just about acceptable, despite some continuing guarantees on the state pension, the re-affirmation of “free at the point of use” for the NHS, and the pledge not to raise the rate of VAT.

But some ideological issues need to be straightened out. There seems to be a presumption in Mrs May’s circle that government intervention is good for “the many”, whereas markets are good only for “the few”. This presumption is completely wrong. When markets work well they work for everybody, especially for people at the bottom end of the income distribution, who lack the contacts and sharp elbows to further their interests in a system dominated by controls and rationing. Markets give them power and choice.

Of course, markets do not always work well. And this should provide the defining theme of Mrs May’s new government. But there are many parts of the economy where what we need is not less of the market but more, including in the provision of health and education services, especially for the “JAMs”, the “Just About Managing”.

David Fuller's view -

In attempting to seize Labour seats, Mrs May should not be alienating her most loyal constituency.  She will need their support and energy in the post-Brexit environment.  To succeed in the manner every current supporter of Brexit wishes, the UK economy will need to be very attractive, not least to entice inward investment from other countries and their companies.

There are two advantages which can be achieved immediately following the June 8th General Election: 1) Lower taxes for individuals and also corporations; 2) Competitive employment policies to increase the talent available for 21st Century industries. The UK should be a beacon for talent, much of it home grown but with Companies free to import the skills sets which they may not be able to find locally.  It is ludicrous for the Government to impose a tax on talent from overseas of £2000 per annum per person as it is currently doing. 

(See also: UK companies to pay £2,000 a year for each non-EU worker, from Quell)

A PDF of Roger Bootle's column is posted in the Subscriber's Area.



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May 22 2017

Commentary by Eoin Treacy

May 22 2017

Commentary by Eoin Treacy

RBI Board Members, Rating Agencies To Advise On Resolution Of Large Accounts

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

On 5 May, 2017, the President of India cleared an ordinance proposed by the central government amending the Banking Regulation Act, giving the RBI greater powers to deal with stressed assets. The amendment was considered to be necessary to help resolve nearly Rs 10 lakh crore in stressed loans in the Indian banking sector. Through the Ordinance, the RBI hopes to speed up decision making which has been stuck due to the reluctance of bankers to take tough calls.

Immediately after the government’s ordinance was released, the RBI too released guidelines to allow the use of S4A and strategic debt restructuring (SDR) schemes as part of the corrective action plan (CAP) devised by joint lender forums (JLFs). The regulator also revised the minimum threshold to approve a CAP to 60 percent by value of the loan and 50 percent by the number of banks in the JLF. Banks that did not want to adhere to the JLF decisions were asked to leave the JLF by selling their loan exposure.

The framework released on Monday will likely be followed by operational guidelines. Key to these guidelines will be triggers used to invoke a specific course of action such as initiating bankruptcy proceedings.

Creating committees and expanding the size and scope of the OC seem like good measures. However, we must remember that the OC is only a group that checks for compliance. The key is still resolution, for which the RBI needs to come out with a clear strategy.

Eoin Treacy's view -

India is in something of a sweet spot right now. Nevertheless, the issue most institutional investors are worried about are valuations and the bad loans sitting on bank balance sheets. 



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May 22 2017

Commentary by Eoin Treacy

If you bought $100 of bitcoin 7 years ago, you'd be sitting on $75 million now

This article from CNBC highlights the current spate of excitement about bitcoin. Here is a section:

On May 22, 2010, Hanyecz asked a fellow enthusiast on a bitcoin forum to accept 10,000 bitcoin for two Papa John's Pizzas. At the time, Hanyecz believed that the coins he had "mined" on his computer were worth around 0.003 cents each.

Bitcoin mining involves solving a complex mathematical solution with the miner being rewarded in bitcoin. This is how Hanyecz got his initial coins.

The cryptocurrency has many doubters as it continues to be associated with criminal activity, but it has still seen a stunning rally. Here are two facts, on Bitcoin Pizza Day, however, that highlight this:

While being worth $30 at the time, Hanyecz pizzas would now cost $22.5 million at current bitcoin prices.

If you bought $100 of bitcoin at the 0.003 cent price on May 22, 2010, you'd now be sitting on around $75 million.

A number of factors have been driving the rally:

Recently passed legislation in Japan that allows retailers to start accepting bitcoin as a legal currency has boosted trading in yen, which now accounts for over 40 percent of all bitcoin trade

Political uncertainty globally has driven demand for bitcoin as a safe haven asset

A debate within the bitcoin community about the future of the underlying technology behind bitcoin known as the blockchain has been taking place. There was fear at one point this could lead to the creation of two separate cryptocurrencies but those worries have largely subsided with an alternative, more palatable option now being put forward. 

Eoin Treacy's view -

At the Tech Symposium I spoke at in London last week Charlie Morris made a number of important points about bitcoin which I found very educative. The most important of these was his point relating to the fact that bitcoin is a digital asset rather than a currency so it is a misnomer to describe it as a cryptocurrency. The best way to value bitcoin is in the strength of the network supporting it and therefore it is a barometer for the prevalence and acceptance of blockchain. 



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May 22 2017

Commentary by Eoin Treacy

Macro Morsels on China

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

Chinese authorities are attempting to delever their excessive levels of DEBT, which is causing a lack of credit at the short end of the curve, which in turn is driving up the cost of borrowing money at the short end.

Hence , short rates are higher than long rates.

However, unlike in the West, where an Inverted Yield curve signals trouble to the economy and to equities, having an Inverted Yield Curve is NORMAL in China.

This Inverted Yield Curve has been the situation for the majority of the last decade.

The red shaded area shows the times when 3 Month SHIBOR has been above 10 year government yields.

Currently the 3 Month SHIBOR is at 4.44%, higher than the 10 year at 3.61%

The AA 5 year rates have moved quite dramatically since last Oct, from a yield of 3.6% to 5.6% now.

This rise in their cost of debt should be negative for Equities.

Equities (SHCOMP) have indeed broken their uptrend and will remain an avoid until they can regain the 3200 level. 

Eoin Treacy's view -

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

China’s wide divergence between lending and deposit rates as well as the de facto state control of the banking system tend to skew financial conditions so that while an inverted yield curve is an omen of stress in the West, it is apparently less of a factor in China. 



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May 19 2017

Commentary by Eoin Treacy

May 19 2017

Commentary by Eoin Treacy

CAD Software Firm Autodesk Soars On Quarterly Earnings Beat

This article by Patrick Seitz for Investor’s Business Daily may be of interest to subscribers. Here is a section:

Analysts were modeling Autodesk to lose 15 cents a share on sales of $488 million.

Autodesk's annualized recurring revenue rose 18% year over year to $1.74 billion in the first quarter because of strong sales of subscription plans.

"Broad-based strength across all subscription types and geographies led to another record quarter for total subscription additions and a fantastic start of the new fiscal year," Amar Hanspal, Autodesk co-CEO and chief product officer, said in a statement. "Customers continue to embrace the subscription model, and we're expanding our market opportunity with continued momentum of our cloud-based offerings, such as BIM 360 and Fusion 360."

 

Eoin Treacy's view -

Subscription models have some pretty impressive advantages for companies not least because they get steady streams of income, do not have to worry about how well the next softward update is going to sell and have less pressure to discount. Consumers pay less upfront costs, have better ability to plan their expenditure and are always guaranteed to have the latest product so it is a win-win relationship.



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May 19 2017

Commentary by Eoin Treacy

China successfully mines flammable ice from the South Sea

This article by Cecilia Jamasmie for mining.com may be of interest to subscribers. Here is a section:

During the mining trial done at a depth of 4,153 feet, engineers extracted each day around 16,000 cubic metres of gas, with methane content of up to 99.5%, Minister of Land and Resources Jiang Daming said.

The new energy source, while revolutionary, is not exempt of risks. The release of methane into the atmosphere as permafrost melts is regarded for those who believe in climate change as one of the worst potential accelerator mechanisms for it. Methane hydrate is also hard to extract, which makes the cost of producing it high.

Test drillings have also taken place in the US, Canada and Japan, with the latter announcing earlier this month that it was successful at producing the natural gas on the pacific coast and will continue mining it for around three to four weeks.

Sources of methane hydrate are so large that the US Department of Energy has estimated the world's total amount could exceed the combined energy content of all other fossil fuels.

 

Eoin Treacy's view -

Methane hydrate is uneconomical using today’s methods of extraction and current prices However, its existence highlights the important fact that any argument referring to peak oil must be prefaced with details of costs of production and timeframes. There is no shortage of natural gas or fossil fuels for that matter. Their supply is limited only by a combination of technological innovation and price. Technology is improving all the time so it is inevitable that major important countries like China and japan will continue to work on how to bring down the cost of methane hydrate.



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May 19 2017

Commentary by Eoin Treacy

Bullard Sees Weak Data Contradicting FOMC's Rate-Hike Path

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

Since March, “longer-term yields have declined, inflation expectations have weakened, and market expectations of the policy rate path have declined,” Bullard said Friday in St. Louis. “This may suggest that the FOMC’s contemplated policy rate path is overly aggressive relative to actual incoming data on U.S. macroeconomic performance.’’

Fed officials left interest rates unchanged at their meeting earlier this month, indicating that a disappointing start to the year wouldn’t stop them from raising rates twice more in 2017 following a hike in March.

In their statement, policy makers described as “transitory” a slowdown in first-quarter growth, while emphasizing that inflation was running close to their 2 percent goal and the labor market continued to strengthen.

Bullard, who does not vote on the FOMC this year, is one of its most dovish officials. In March he projected just one hike in the target range for the federal funds rate until end-2019.
The median estimate among his colleagues is for two more hikes this year and for the benchmark rate, currently 0.75 percent to 1 percent, to be 3 percent by the end of 2019. His argument is that the U.S. economy has been saddled with persistently low growth, so there is little need to raise rates by much.

 

Eoin Treacy's view -

The Dollar experienced another sharp decline today to cap off the week as one of its worst in a number of years. It is falling for a number of reasons but two stand out. The bond market and at least some at the Fed believe the pace of interest rates will not be as aggressive as had been priced in earlier this year by the stock market. The second is that the uptick in political uncertainty is an additional factor because of the jeopardy talk of an impeachment puts the Republican’s legislative agenda in. 



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May 18 2017

Commentary by David Fuller

Macron's Youthful France to Storm Ahead of Ageing Germany

France is on the cusp of an economic 'golden age'. The country will overtake Germany in the 2020s, emerging as the driving force of a Gallic-led eurozone and the engine of a revived Franco-German axis.

That is the bold prediction of the German bank Berenberg. It is not as far-fetched as it sounds.

The theme running through the work of Nobel Economist Robert Shiller is that cultural narratives are a powerful catalyst for financial cycles. They stir the animal spirits of a nation. Societies talk themselves into malaise, and talk themselves out again.

As narratives go, the Napoleonic ascent of a 39-year-old counter-populist on the ruins of a shattered party system is as close to a 'positive shock' as you are ever likely to see in the realm of political economy.

This child of the digital age - yet steeped in Nietzsche - is surrounded by a cabinet of youth. His prime minister is barely older. Berlin looks stale, almost fossilized.

The eternal Wolfgang Schauble still growls at the finance ministry with his budget and trades surpluses, captive of the pre-Keynesian 'household fallacy' in economics. Chancellor Angela Merkel is more flexible. It is not her fault that she rose from the East German Communist youth league, yet her Weltanschauung seems other-worldly as she marches towards a fourth term.

Germany's Achilles Heel is a 'hive collapse' and the corrosive psychology of ageing. The demographic dividend is turning overnight into deficit as baby boomers retire. The European Commission's Ageing Report (2015) says the working-age cohort will contract by 200,000 a year for the rest of this decade, and by 400,000 annually in the early 2020s.

The old age dependency ratio will jump from 34pc today, to 39pc in 2020, 52pc in 2030, and 65pc in 2060. By then those deemed 'very elderly' (80 plus) will be 41.5pc of the German people. The population will shrink below 71m.

David Fuller's view -

I would not underestimate Macron, as I have said previously, but Robert Shiller’s report needs to be taken with a grain of salt, in my opinion.  I wish France well but let’s see how Macron’s regime is able to function over the remainder of this year. 

Meanwhile, there is a naiveté among liberal, establishment Americans regarding the EU’s prospects, possibly due to wishful thinking, which has not been supported by results with the exception of Germany.

Macron could hardly do worse than his establishment predecessors.  Nevertheless, a key test of his potential will be revealed by the number of entrepreneurial French families that he can attract back from London.  They favoured François Fillon in the recent election.

Meanwhile, Germany remains the EU’s biggest success but also its difficult problem without the federal system which most Europeans continue to resist. 

A PDF of AEP's column is posted in the Subscriber's Area.



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May 18 2017

Commentary by David Fuller

Would You Let Trump Run Your Company?

In Washington, people struggling to come to terms with all the details of James Comey’s sacking and the claim that Donald Trump asked him to drop the FBI’s investigation into Michael Flynn have reached back to Watergatefor comparison. But in many ways the more appropriate perspective is through a business lens: The immediate issue is whether a boss tried to halt embarrassing revelations about his company; the underlying one is whether he knows how to run it.

Of course, running a country is not the same as running a company. A president is both more constrained (by Congress, the press, and voters) and less so (chief executive officers, as a rule, can’t bomb their opponents). And Trump is not the first incoming president to have boasted of his corporate experience; remember George W. Bush, the first MBA president? But Bush had also run Texas. No president has tried to claim the mantle of CEO-in-chief as completely as Trump.

On the campaign trail, he cited his business experience all the time, contrasting his decisiveness, managerial skills, and shrewdness as a negotiator with the amateurish stumbles of Barack Obama and Hillary Clinton (not to mention several generations of U.S. trade representatives). Many of his first supporters knew him only as the archetypal “You’re fired” boss on The Apprentice. He rushed to bring in figures from the corporate world, luring Rex Tillerson from Exxon Mobil Corp. to run the State Department and a string of Wall Streeters. The stock market initially boomed. Trump’s message to business has been simple: Finally you have an executive in charge of the executive branch. “In theory I could run my business perfectly and then run the country perfectly,” he boasted to the New York Times shortly after his election. “There’s never been a case like this.”

So out of all the ways in which Trump might want to be measured, judging him as a chief executive would seem to be the fairest to him. Forget about ideology, his political agenda, or whether you voted for him; just judge him on whether he has been a competent executive. Would you want to leave him in charge? Or would you be calling an emergency board meeting?

The Comey fracas is the latest in a long list of apparent transgressions for which a normal CEO might lose his job. In the last week, Trump stood accused of having passed on intelligence secrets to the Russians. Any business chief who invited a competitor into the boardroom and then disclosed sensitive information would be in peril. (Klaus Kleinfeld lost his job at Arconic Inc. merely because he wrote an unauthorized stroppy letter to a truculent shareholder.) Appointing inexperienced relatives to important positions is not normally seen as good corporate governance. Jes Staley is currently in trouble at Barclays Plc just for allegedly protecting a friend. The White House was made aware that Flynn had lied to the vice president on Jan. 26, but he didn’t hand in his resignation to Trump until Feb. 13. Any board would want an explanation for that delay. Finally, any CEO who says something that is manifestly untrue in public or on his résumé is in hot water. Those who refuse to correct themselves quickly and satisfactorily often have to go—as happened to the bosses at Yahoo! Inc. and RadioShack.

David Fuller's view -

I regard this as a sensible, balanced article and commend it to you.



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May 18 2017

Commentary by David Fuller

Email of the day

On Trump’s crisis:

You might be right David, you often are. BUT if he threatened to drain the swamp you can be sure there will be many alligators trying to stop him. He's an unusual character for President but I think we need also to read the alternative press because mainstream is certainly gunning for him.

David Fuller's view -

Many thanks for your interesting thoughts on Trump.

The prospect of draining the swamp of Congressional fiefdoms has its appeal.  However, Trump is no inspiring reformer.  Instead, his combative personality, irritating Tweets and tendency to shoot from the hip have probably made more enemies than any other President at this early stage of their career. 

Democrats are out to get Trump and they probably have sufficient material to commence impeachment proceedings.  That is a difficult process but Democrats are not trying to remove Trump, at least not before the mid-term elections in November 2018.  Instead, they want to ensure that he is a lame duck, unable to govern.

Republicans are increasingly disillusioned with Trump.  Many now regard him as more of a risk than an asset.  They would have the most to gain if Trump could be removed from office well before the mid-term elections.



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May 18 2017

Commentary by David Fuller

The Markets Now

Here is the brochure for our session on Monday 12th June at London’s Caledonian Club.  

David Fuller's view -

This seminar is over half full so don’t delay if you are interested; another sell-out is likely.  

Meanwhile, can you think of a more interesting investment environment?  Volatility has increased this week and I am hoping it results in a sufficient setback for some high-flying tech shares to create another buying opportunity.



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May 18 2017

Commentary by Eoin Treacy

May 18 2017

Commentary by Eoin Treacy

Brazil crisis deepens with probe of president, top senator

This article by Peter Prengaman and Mauricio Savarese for the Associated Press may be of interest to subscribers. Here is a section:

Brazil's political crisis deepened sharply on Thursday with corruption allegations that threatened to topple the president, undermine reforms aimed at pulling the economy from recession and leave Latin America's largest nation rudderless.

Stocks plunged, both chambers of Congress cancelled sessions and President Michel Temer's office canceled his planned activities Thursday in the wake of a Globo newspaper report that he had been taped endorsing bribery of a former lawmaker.

Protests were planned in several cities and opposition politicians took to Twitter and local news channels to call for Temer to resign or be impeached, arguing his government no longer had legitimacy

"I can't see how Temer survives this," said David Fleischer, a political science professor at the University of Brasilia. "There are just too many people against him now."

 

Eoin Treacy's view -

Brazil has been plagued by corruption on both sides of the political divide and the fact that Lula Da Silva has said he intends to re-enter the public arena will only add to uncertainty and lack of faith in public institutions. The unfortunate fact is that it is hard to believe anyone can survive long in Brazilian politics without being corrupt in one way or another. That was ignored during the boom years but with a recession biting that kind of behaviour is less acceptable. 



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May 18 2017

Commentary by Eoin Treacy

Japan GDP Grows 2.2%, Longest Growth Streak in 11 Years; Asian Stocks Slide

This article by Robert Guy for Barron’s may be of interest to subscribers. Here is a section quoting Barclays:

The 0.5% q/q growth in Q1 reflected positive contributions from both net exports (0.1pp) and domestic demand (0.4pp). Notably, the heavily weighted private consumption component increased 0.4% q/q, resulting in the large contribution for domestic demand. This reflected an upturn in spending on semi-durables, together with the recovery in durables since last year. Private consumption was also up for services, but down for non-durables. That said, the strength of consumption in the Q1 GDP data may largely reflect an upswing in demand-side data and slightly overstate the underlying trend, setting the stage for a slowdown in Q2.

In other areas of domestic demand, private capex increased 0.2% q/q (Q4: 1.9%), a second consecutive gain. Also, housing investment rose 0.7% q/q, sustaining positive growth. Meanwhile, public fixed capital formation (public investment) fell 0.1% q/q in Q1 (Q4: -3.0%), a third consecutive decline. However, we expect such investment to turn positive in Q2 as the effects of the FY16 second supplementary budget materialize. At the same time, real exports increased 2.1% q/q and real imports rose 1.4% q/q. For real exports, this marked a third consecutive quarter of growth (Q3 16: 1.9%; Q4 16: 3.4%). This reflects the ongoing recovery in demand from overseas, especially Asia.

 

Eoin Treacy's view -

European and US politics as well as the meltdown in confidence in Brazil’s administration are making headlines. In fact they are obscuring the more important news that global growth is generally on an upward trajectory and this has been the case for at least 12 months already. The Japanese economy has been in and out of recession on a number of occasions over the last few years but the uptick in activity in Asia is having a positive influence in conjunction with efforts to stoke domestic demand. 



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May 18 2017

Commentary by Eoin Treacy

Miningball

Thanks to a subscriber for this well-argued report by Tyler Broda and colleagues at RBC making the case for a bull market in industrial commodities because they are still cheap and prices are likely to rise. Here is a section:

The data shows, unsurprisingly, that the sector is cyclical. What we find fascinating is that the downturn from 2012-2016 was so intense that most of the data sets are now showing extreme cyclical levels. As we have anecdotally pointed out at numerous times, the behaviours of the mining management has changed (for now). Starting with the success from cutting excess thermal coal and zinc production, Glencore was able to take leadership in focusing on meeting market demand rather than “maximising” sunk capital utilization. This has spread to the iron ore industry where Rio Tinto’s “Value over Volume” mantra is  noticeable shift in strategic culture following the change of CEO. We are seeing more rationality in production across the board and financing remains sparse for greenfield projects. Investors are demanding discipline and management teams are largely delivering.

Although the rhetoric suggests that this time is different, and an appropriate level of skepticism is advised, the data does back up the above anecdotal trends. In our view, the sector has rarely been positioned in as constructive a position as it is now and will take time to unwind with the inflexibility of certain data sets (for instance, total production is likely to fall over the medium term if expansion capex is nearing zero) as well as vastly improved cash situations (free cash flow yields have never been higher).

Total copper equivalent production has stayed relatively flat through the 2013-2016 period as the initial impacts of slowing capex levels began to reduce growth trends. Additionally, the removal of production has reduced the production base (either via some small divestments or by closure due to lower prices). This should increase the productivity of the remaining assets as it would be presumed these are better assets and there is more management focus that can be applied where it matters.

The rolling 3-year production growth is now down to sub-2% growth rates and we would not expect (beyond a copper and iron ore led production uptick in 2018) that this will be able to grow with such low levels of planned expansion capex and the lead times that it takes from project start to finish.

Eoin Treacy's view -

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

Mining has long been known as a highly cyclical sector. In fact, because investing in new supply is so capital-intensive it requires evidence that can be brought to creditors so they will make the money available to break ground. That takes time and everyone is waiting for the same data so when one company gets the wherewithal to expand so do many more. That means the capital intensive nature of the extraction business ensures its cyclicality because new supply often comes to market at the same time. 



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May 17 2017

Commentary by David Fuller

Trump Faces Deepest Crisis of Presidency With Comey Memo

Here is the opening of this fascinating article from Bloomberg:

Donald Trump is facing the deepest crisis of his presidency after contents of a memo written by James Comey when he was FBI director surfaced Tuesday, alleging that the president asked him to drop an investigation of former National Security Adviser Michael Flynn.

The White House was already on the defensive over the president’s firing of Comey a week ago and over a report Monday that Trump disclosed sensitive intelligence to Russian officials. Then another political bombshell exploded Tuesday night.

After a conversation Comey had with Trump in February, a day after Flynn was ousted for what the White House said were misleading accounts of his conversations with Russia’s U.S. ambassador, the FBI director wrote a memo documenting the Oval Office meeting. In it, Comey said the president asked him to abandon the Flynn investigation, according to a person who was given a copy of the memo and spoke on condition of anonymity.

“I hope you can let this go,” Trump told the FBI director, according to the memo as cited by the New York Times, which first reported its existence. The contents of the memo have subsequently been confirmed by other news organizations, including Bloomberg, although the memo itself has not yet surfaced publicly.

The revelation raised questions about whether the president sought to influence the FBI at the same time the agency is investigating Russian interference in the 2016 election and possible collusion with Moscow by Trump associates. The memo’s emergence, after Trump fired Comey, had congressional Democrats raising the specter that the president engaged in obstruction of justice, an impeachable offense.

David Fuller's view -

If Trump is proven to have committed an impeachable offence, and preliminary evidence suggests he may have, Republicans should join Democrats and remove him from office without further delay.

Trump is the problem because he creates his own crises in the manner of an impulsive, unreliable and unpredictable king, rather than the President of the United States.  This is obviously bad for America and also Democracy in the eyes of all those who look to the USA for positive leadership.

I don’t think this problem will blow over, even if James Comey’s testimony proves to be inconclusive.  Trump is unlikely to change and even his Cabinet will have lost confidence in him. 

This item continues in the Subscriber’s Area.



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May 17 2017

Commentary by David Fuller

Impeachment Talk May be Premature, but it isn't too soon to Discuss the Legal Standards for Removing a President

As soon as Donald Trump was elected, some of his critics argued that he should be impeached. Those arguments were reckless and irresponsible, and an insult to the many millions of Americans who voted for him. Impeachment is a singularly grave act -- a remedy of last resort. Those who think that they favor impeaching any president should ask themselves this question: If I strongly supported his policies, would I still think that there were sufficient grounds for impeachment?

If that is the right question, then talk of the possibility of impeachment is beginning to look less reckless, and less irresponsible, than it did a few months ago.

To be sure, legitimate grounds for impeachment have yet to be established. But the dismissal of FBI Director James Comey, possibly because of his investigation into alleged connections between Russia and the Trump campaign, alongside the apparent leaking of classified information to Russian officials, makes it appropriate to inquire into the legal standard -- and to probe some of our majestic Constitution’s unresolved mysteries.

The founding document says that the president can be impeached for “Treason, Bribery, or other high Crimes and Misdemeanors.” The first two words are not obscure. But what are “high Crimes”? And what are “Misdemeanors”?

The Constitutional Convention provides some answers. At a late stage in the Constitution’s drafting, treason and bribery were the exclusive grounds for impeachment. George Mason offered a strong objection, arguing that the president should be impeachable if he engaged in “many great and dangerous offenses” that did not count as treason or bribery. To include those offenses, he moved to add the words “or maladministration” after bribery.

After the motion was seconded, James Madison responded that that term was so vague that it would mean, in practice, that the president would serve at the pleasure of the Senate. Mason himself agreed. He withdrew his motion and substituted the words “high Crimes and Misdemeanors.” Apparently he believed that the new words would cover “many great and dangerous offenses” -- and thus have the requisite latitude.

For us, then, a central question is how to understand “high Crimes and Misdemeanors” in a disciplined way, so that they do not mean “maladministration.” It is tempting to say, as many people do, that the Constitution authorizes impeachment only when the president has committed a horrible crime -- a violation of the law of the same magnitude as treason or bribery.

But it can’t be right to say that impeachment is available only in cases of crimes. Suppose the president flies to Moscow and proclaims that he will spend 2018 there, studying the works of Lenin and Marx, and doing presidential business only when he can find the time. Or suppose he announces, in advance, that he will pardon anyone who kills a political opponent or a member of the press. Or suppose he reports that Martians have started to communicate with him, and that he has vowed to follow their guidance.

In all of these cases, impeachment would be legitimate. The president may have committed no crime -- but he has committed a “misdemeanor,” understood as an exceedingly bad act.

David Fuller's view -

This is an excellent opinion and I commend the rest of it to you.



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May 17 2017

Commentary by David Fuller

Trump Should Worry: Comey Memo Describes a High Crime

If President Donald Trump asked FBI Director James Comey to stop investigating National Security Adviser Mike Flynn and his ties to Russia, that’s obstruction of justice. But let’s be clear: It’s the impeachable offense of obstruction. It’s probably not the criminal version of that act. With the evidence now available, it’s extremely unlikely that an ordinary prosecutor could convict Trump.

This is an outstanding example of a crucial distinction that Americans badly need to keep in mind. High crimes and misdemeanors, to use the Constitution’s phrase, aren’t the same as ordinary crimes. What makes them “high” is their political character. High crimes and misdemeanors are corruptionabuse of power, and undermining the rule of law and democracy. They don’t have to satisfy all the technical aspects of an ordinary crime. And this act of Trump’s, as described in a memo written by Comey first reported Tuesday by the New York Times, probably doesn’t.

Start with the federal obstruction statute, 18 U.S.C. Section 1503. The first part of the law has to do with trying to influence jurors in the course of a trial; we can ignore it for our purposes.

The second part of the law punishes anyone who “corruptly or by threats or force, or by any threatening letter or communication, influences, obstructs, or impedes, or endeavors to influence, obstruct, or impede, the due administration of justice.”

On a close reading, this isn’t a great fit with the president asking the director of the Federal Bureau of Investigation if he can let a probe go because the target is “a good guy.” Remember, as a constitutional matter, the director of the FBI, like the attorney general and the rest of the machine of federal law enforcement, works for the president.

Although there has been a strong tradition of separating investigation and prosecution from the president -- a tradition grossly violated by Trump’s request -- it’s still just a tradition, not a legal requirement.

Thus, as a constitutional matter, Trump has the authority to propose ending an investigation. If he wanted to, Trump could just order the investigation to be brought to an end. He wouldn’t even have to exercise his pardon power, another way to put a preemptive stop to investigations. He could just direct his subordinates to cease.

To be sure, Comey probably would have resigned had this order been given. The point is that Trump could have given it, legally speaking.

Given Trump’s inherent constitutional authority to end the Flynn investigation himself, it’s pretty hard to say that he was “corruptly” obstructing or impeding “the due administration of justice.” It’s within prosecutorial discretion to decide not to go after someone because he’s a good guy. The target’s character and career of public service are legitimate factors to consider in the course of the investigation and decision of whether to bring charges.

It’s not that the president can never be guilty of the crime of obstruction. He can. It would be a federal obstruction crime for the president to lie to or to mislead investigators. It would be an obstruction crime for the president to hide evidence of a crime. But those examples are fairly different from the president exercising authority over investigations.

The one credible legal argument that could be made by a prosecutor seeking to charge Trump would be that he was indeed acting “corruptly” if his true intent was to protect himself and his administration, not just give Flynn a break.

Suppose a president owed a favor to an organized crime leader and asked the FBI director to drop the investigation. That would presumably count as a corrupt act, and would count as obstruction.

It’s not at all clear how you could prove Trump’s intent here, except maybe by taped conversations where he says he wants to protect Flynn to protect himself. Nor is it at all clear that acting “corruptly” under the statute would include saving himself from embarrassment. The upshot is that I don’t think Trump could be prosecuted for a crime on the basis of this report, and I am not at all sure that he actually committed a federal crime, legally speaking.

Impeachment is another matter. Using the presidential office to try to shut down the investigation of a senior executive official who was also a major player in the president’s campaign is an obvious and egregious abuse of power. It’s also a gross example of undermining the rule of law.

This act is exactly the kind that the Founding Fathers would have considered a “high crime.”

And it’s a high crime the president could perform only by virtue of holding his office.

Practically, it still seems unlikely that a Republican House would impeach the president, much less that two-thirds of the Senate would vote to convict and remove him from office.

But a Democratic House would have more than enough material now to start the impeachment process -- including the revelation of the request to Comey. And the House could choose to impeach even if it calculated that the Senate probably wouldn’t convict.

The act of impeachment would have tremendous symbolic ramifications. And it would include the detailed investigative oversight that so far has been lacking in Washington.

Trump’s firing of Comey now looks pretty different in the light of this news. Right around now, the president is probably asking himself whether firing the FBI director was the right decision. And if he isn’t, he should be.

David Fuller's view -

This seems like a logical analysis to me.  If it is correct, it may be difficult to impeach Trump.  The worst possible outcome for Wall Street would be either a stalled or at least severely handicapped US Administration for a lengthy period.  Against that background we could expect a bigger correction on Wall Street, not least since plenty of investors have been buying and holding on because they were waiting for Trump’s tax cuts to boost corporate profits.

This item continues in the Subscriber’s Area.



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May 17 2017

Commentary by David Fuller

The Markets Now

Here is the brochure for our session on Monday 12th June at London’s Caledonian Club.  

David Fuller's view -

This seminar is over half full so don’t delay if you are interested; another sell-out is likely.  

Meanwhile, can you think of a more interesting investment environment?  Trump’s self-inflicted wounds certainly roiled the markets today.  I am hoping this results in a sufficient setback for some high-flying tech shares to create another buying opportunity.



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May 17 2017

Commentary by Eoin Treacy

May 17 2017

Commentary by Eoin Treacy

Musings from the Oil Patch

Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report for PPHB. Here is a section on Saudi Arabia’s motivations in the oil market:

 

The analysts’ takeaways were that the Saudi Arabian economy was healthier than many thought, thus pressure for the country to lead the OPEC charge to substantially higher oil prices was soon dissipated. The headlines also helped explain King Salman’s willingness earlier to reverse the salary and benefit cuts for ministers and to grant salary bumps for the military and air force pilots. With the shrinking budget deficit and the ability of the kingdom to tap global debt markets twice in the last six months, the government felt comfortable it could increase spending without necessarily needing higher oil prices. Further comfort in its spending decision was provided by the point about non-oil revenue in the first quarter exceeding the government’s expectation. That latter point is important and helps explain why MBS says that Saudi Arabia’s debt will not exceed 30% of GDP. This is in contrast to many countries where total government debt equals or exceeds the country’s GDP. The shifting economic condition in Saudi Arabia is a long-term dynamic at work within the global oil market, and requires that analysts reassess their view of the kingdom’s strategy toward higher oil prices in the future. The last pillar supporting the significantly higher oil price forecast is the requirement for a favorable oil price backdrop in order to launch the initial public offering of Saudi Aramco, the state oil company. 

Crude oil prices are likely to remain highly volatile in the near-term as the shoulder months for oil demand and the restarting of refineries from the heating oil to gasoline turnarounds is creating inventory fluctuations. Many of these inventory fluctuations are not being accurately captured in the average analysts’ weekly inventory change forecasts, setting the oil market up for weekly surprises between the data and estimates. A key driver over the next few weeks will be people trying to guess the outcome from the May 25th OPEC meeting, but the outcome seems preordained. A negative surprise will be if the OPEC members fail to extend the production cut agreement as assumed by conventional wisdom. A positive surprise might be an increase in the production cut volumes, or an extension of the production cut agreement into 2018. Either or both of those actions will likely be viewed skeptically as greater volumes and longer time horizons create an environment that encourages increased cheating by OPEC members. If there has been a surprise from the current production cut it is the high compliance by the OPEC member countries. Is that a reflection of desperation or a true commitment to greater output discipline? 

Eoin Treacy's view -

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

The Saudi Aramco IPO will be a major event and the price of oil is an obvious consideration in the valuation that will be achieved. However the broader question for Saudi Arabia, in a market which is concerned both with equilibrium and increasing geopolitical tensions, is to ensure it affects an aura of stability and a lack of overt unilateral price manipulation strategies. That suggests they have no choice but to negotiate for concerted efforts to support prices, however successful those might be. 



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May 17 2017

Commentary by Eoin Treacy

There's a Big Technical Reason for Low Volatility in Stocks

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

Large dealer banks that buy or sell the S&P 500 to hedge exposure to U.S. equities are helping to suppress realized volatility and keep the VIX low, the Deutsche Bank analysts say.

By their estimates, dealers would have to buy $14 billion if the S&P 500 fell by 1 percent. It’s all about "gamma" -- the third Greek letter.

“When dealers are long gamma they sell equities when equities are rising, but buy them when they’re falling,” write Deutsche Bank analysts led by Rocky Fishman. “The primary reason" for the VIX index being so low is the multi-decade low in fluctuations in the market itself, according to the team. And the long gamma positions of dealers "is a contributing factor to the ongoing low-realized vol,” they wrote.

While the hedging needs of big banks have helped keep a lid on volatility by providing a backstop to moves in U.S. equities, the analysts note, the rebalancing requirements of the plethora of exchange-traded products now tied to the VIX could pose a risk to that stability. Such ETPs typically buy VIX futures as the underlying index rises, and sell futures as it declines, creating a so-called ‘short gamma’ position."

Eoin Treacy's view -

Options trading offers cost efficient leverage, hedging and variety and it has grown exponentially over the last decade to dominate the derivatives market. The fact that options are predominately used by traders to hedge long equity positions has resulted in the VIX trading at historic lows as mega-caps like Google/Alphabet and Amazon surged to new highs.  



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May 17 2017

Commentary by Eoin Treacy

Glencore: 'Electric vehicle revolution is happening faster than expected'

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

Vehicles with conventional internal combustion engines typically contain about 20 kilograms of copper. For electric vehicles the copper load is up to 80 kilograms (and increased quantities of cobalt, nickel, manganese).

Bloomberg reports Ivan Glasenberg, CEO of Glencore, the world's third largest producer of copper, told investors at an industry meeting in Barcelona “the electric vehicle revolution is happening and its impact is likely to be felt faster than expected.”

Almost all carmakers are increasing investment in electric vehicles as governments adopt tighter emissions targets, he added.

In a recent report consultants McKinsey forecast that barring large-scale substitution by aluminum and other materials or a significant increase in recycling, primary copper demand could potentially grow to 31 million tonnes by 2035 as per capita usage rates in emerging markets, particularly in China, approach levels in developed economies. The prediction represent more than 40% growth from today's annual demand levels of around 22 million tonnes.

Eoin Treacy's view -

Electric vehicles are on a major growth trajectory as the cost of batteries trends lower while the cost of regulatory compliance for car manufacturers increases. That represents a significant change for the automotive sector which Tesla has benefitted enormously from. The question for the company is whether it can prosper when subsidies eventually expire and when more battery factories open up in South Korea, Japan and China. 



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May 16 2017

Commentary by David Fuller

How Theresa May Is Recruiting an Army of Hard Brexit Backers

Here is the opening of this revealing article from Bloomberg

U.K. Prime Minister Theresa May is packing her Conservative Party with an army of Euroskeptic candidates for next month’s election as she seeks reinforcements for her battle to deliver a hard Brexit.

Bloomberg News surveyed the views of the Tory candidates standing in 60 of the most winnable seats for May’s party and found a clear majority voted a year ago to pull Britain out of the European Union. Of the 52 candidates in this group -- whose views could be verified by public statements or interviews -- 34 backed Brexit last June, 17 wanted to stay in the EU and one abstained.

The almost two-to-one margin in favor of leaving the EU shows how the June 8 election could herald a dramatic shift in May’s parliamentary party, with more Brexit-supporting lawmakers in her team than ever.

This outcome would give May greater power at home to pursue a divorce that is focused on reclaiming control of lawmaking and immigration, rather than fostering trade. The analysis also damps speculation that May might soften her approach if she secures the crushing majority polls are predicting.

“The overall balance of Parliament looks like it will lean toward the harder side of Brexit than had May not called the election,” said Mujtaba Rahman, managing director at the Eurasia Group.

More lawmakers who backed Brexit early on would make it easier for May -- who only had a majority of 17 in the previous Parliament -- to pass legislation related to the split and secure approval of the final deal she negotiates. After becoming premier last July some of her own side challenged her Brexit strategy.

Bloomberg studied candidates in the 12 seats where a sitting Tory lawmaker stepped down and the 48 seats the Conservatives lost most narrowly in the 2015 election. In the latter, 27 candidates voted for Brexit, 13 against it and one couldn’t decide. The rest wouldn’t comment or couldn’t be reached.

Fresh Blood

The results suggest an influx of new Tory lawmakers who are more biased toward Brexit than either the country as whole, or the previous House of Commons.

Britain split 52 percent to 48 percent in last June’s referendum and an analysis by the ConservativeHome website at the time found 185 Tory lawmakers were Remainers while 128 were Leavers: a 56 percent versus 39 percent divide.

A YouGov poll released this week suggested 68 percent of the electorate now believes the government has a duty to deliver Brexit.

David Fuller's view -

Theresa May has always indicated that she favoured a mutually beneficial Brexit.  However, unless it is a monumental bluff, EU leaders still want to ‘punish’ Britain.  If so, that would lead to a quick, hard Brexit by Theresa May.  This would cause some short-term confusion and uncertainty but benefit Britain over the medium to longer term.



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May 16 2017

Commentary by David Fuller

Email of the day 1

More on the length of time before we see “the end of petrol and diesel cars”:

Dear David, Following your post "The End of Petrol and Diesel Cars? All Vehicles Will be Electric by 2025, Says Expert", you may find interesting an opinion of Mark Schwartz, global head of analytics from S&P Global Platts, whom I interviewed recently. In particular, he says that it will take decades for EVs to make their way first into new car sales, and then to become a significant part of the entire car fleet. And that's why oil is here to stay for a while, in his view. We also talk about 'peak oil demand' theory being discussed now and I recollect 'peak supply' claims back in 2007. Video can be seen here -  or at our Facebook page -  It's in English (with Russian subtitles). Best regards, Mikhail

David Fuller's view -

My thanks to Mikhail Overchanko for his long-term interest in the FTM service and also his interview with Mark Schwartz, which is in English.

Obviously no one knows how quickly EVs will replace those which are petrol driven, or even if that will ever occur.  I think it will happen because of the understandable concern over air pollution.  Even more importantly, mass market EVs will be much cheaper to build and less costly to run because they have far fewer moving parts. 

I said on Monday, in response to AEP’s article, that in citing 2025, I thought Professor Seba was forecasting a rate of change which may be technologically feasible but impossible in terms of practicalities.  After all, most petrol stations are owned and operated by oil companies.  I think it will take at least another five to ten years, beyond 2025, before EVs count for a majority of the market.

Mark Schwartz says it will take decades for EVs to become a significant part of the market.  I disagree and note that he was speaking in a country which is a major oil producer.    



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May 16 2017

Commentary by David Fuller

Email of the day 2

On a clear majority of UK citizens now favouring Brexit:

You were right David when you said that the majority favouring Brexit has grown. According to this YouGov poll,  "A total of 68 per cent of respondents would like to see Britain withdraw from the EU, the latest YouGov figures "A total of 23 per cent described as Re-Leavers“ said that they voted Remain last year, but now believe the government has a duty to carry out the will of the British people."

David Fuller's view -

Thanks and I think most of us were aware that support for Brexit had increased considerably since the UK’s referendum, not least because of the EU’s hostility and attempted intimidation.  



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May 16 2017

Commentary by David Fuller

Despite Emmanuel Macron's Election, the Eurozone Isn't Out of the Woods

As things stand, Merkel’s hands are tied unless and until she wins re-election in September. But even after that she is unlikely to give much ground to Macron. The thing about the German establishment, which is so easy to under-estimate, is that they really believe the guff they espouse about the need for fiscal restraint and the virtue of current account surpluses. Macron may be set for a honeymoon period over the summer. But things will not look so good come the autumn if his domestic reform agenda has hit difficulties and Merkel is refusing to make concessions.

Meanwhile, thanks to higher inflation, the European economic environment will become more testing later this year, and perhaps more so next year and beyond, if and when the current global upswing starts to stall. Plenty of observers think that the next US downturn may not be far away.

Admittedly, some European commentators think that the eurozone economy will receive a boost from Brexit as foreign investors shift money from the UK to the continent, and various businesses, including financial ones, leave London for Frankfurt or Paris. But I think this view is misguided. The exodus of businesses, people and capital from London will probably be minor.

Indeed, Brexit may pose a threat to the eurozone if and when it becomes clear that the UK has managed Brexit well and is continuing to outperform its continental neighbours. Of course, this is not an immediate prospect. First the UK has to leave and then it will be some time before it becomes clear how well the country is faring.

All along, though, I have thought that the weakest link in the euro chain was Italy, where elections are due by May next year at the latest. It is striking that all of Italy’s opposition parties are now eurosceptic. The Five Star Movement, led by Beppe Grillo, leads in the opinion polls. Grillo’s party, although quirky, is not like Marine Le Pen’s National Front. It does not have the same protectionist agenda and does not have to fend off accusations that it is tinged with racism and anti-semitism. Moreover, despite the current slight upturn in its economy, Italy remains deeply depressed. Grillo could easily deliver the shock that Marine Le Pen did not.

So do not be fooled by the appearance of calm. There is an almighty task facing the governments of Germany and France to forge the necessary institutions to make the euro system sustainable. What recent political and economic developments have done is to provide a reprieve, but no more than that. Failure by Macron to introduce radical reform, a major row with Germany over the course of its policy and reform to the eurozone, or the election of a eurosceptic government in Rome could all deal the euro a fatal blow.

One way or another, the euro does not make sense. It is only a matter of time.

David Fuller's view -

I would not underestimate Macron, as I have said before, and we should not overlook Super Mario Draghi’s considerable contribution to euroland’s survival and modest recovery to date. 

Nevertheless, remember that Europe last prospered when it was a free trade region of independent nations, before the euro was introduced in 1999. Without fiscal union, which Germany and most other EU countries resist, the euro remains fatally flawed. 

A PDF of Roger Bootle’s column is posted in the Subscriber’s Area.



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May 16 2017

Commentary by David Fuller

May 16 2017

Commentary by Eoin Treacy

May 16 2017

Commentary by Eoin Treacy

Third Well to Help Meet Demand for Geothermal Heating in Boise, Idaho

This article by Parker O’Halloran for thinkgeoenergy.com may be of interest to subscribers. Here is a section

According to Colin Hickman, a spokesman for Boise Public Works, “We’re getting to a place where the amount of space downtown that we’re heating we felt it was the right time to bring on the third well to ensure that we have redundancy, in case something happens during the winter months, during our peak season so we have some back up for the customers on geothermal heating,”

Interestingly, a third well was dug in 1982, however, it has been not in use. Hickman says this third well is needed. These particular wells in Boise have geothermal water that is approximately 177 F (80 C) degrees when it comes out of the ground and is then pumped in insulated pipes to the downtown locations where the water heats the buildings.

“The buildings will basically take the heat out of that water, use it for their heating purposes in their building, and then that water goes back to Julia Davis Park, and there’s an injection well there that puts that water back into the earth,” Hickman said.

Hickman adds that Boise should be proud of its geothermal system as it eliminates the use of fossil fuels, it’s renewable and it’s an economic driver that will bring businesses in that are interested in this type of renewable energies to the Boise area.

Geothermal energy use in Boise dates back to the 1890s.

Eoin Treacy's view -

Geothermal energy has been around for a long time but has been totally reliant on the confluence of shallow heat vents and abundant water. However, it occurs to me that with the advances in hydraulic fracturing and horizontal drilling there is potential for cross pollination between the oil services and renewable energy sectors. 



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May 16 2017

Commentary by Eoin Treacy

Inflation, El Nino, and Fishmeal

Thanks to a subscriber for this report from Jeffrey D.Saut for Raymond James. Here is a section:

Some inflation numbers were reported last week. They read: April PPI jumped 0.5% month/month, +2.5% year/year; +2.2% year/year was expected. Meanwhile, core PPI increased by 0.4% month/month, +1.9% year/year; +0.2% month/month and +1.6% year/year were expected. The inflation report reminded us of something Pippa Malmgren (a policy consultant to numerous presidents) said to us at a recent national conference. She opined that when inflation goes from 1% to 2.5%, or maybe even 3.0%, it’s a really big deal; and we agree. Shortly after parsing those inflation figures I read something about the El Niño that is expected to “hit” in the back half of 2017. As paraphrased from the eagle-eyed David Lutz’s blog “What Traders Are Watching,” (Jones Trading):

The headline read, “Full-Fledged El Niño Increasingly Likely in Second Half 2017.” The U.S. government’s Climate Prediction Center (CPC) last month forecast El Niño conditions would prevail by the end of the northern hemisphere summer, but put the probability at only 50 percent. Most El Niño indicators have strengthened since then so the probability is likely to be revised higher when the CPC issues its next forecast later in May. Aussie’s wheat crop could see further drought damage. Sugar cane will also be impacted. Dryness in Southeast Asia could depress harvest levels of crops including rice and sugar in Thailand, Robusta coffee in Vietnam, and will add stress to rubber and palm oil trees in Indonesia and Malaysia. El Niño has also been linked to a weaker Indian monsoon and lower than average rainfall could affect crops including rice, wheat, cotton, and sugar. Indian farmers are large buyers of gold, and analysts at UBS last year raised concerns that a potential weak monsoon could hit purchases of the precious metal. El Niño has tended to impact cocoa production in West Africa. Meanwhile, Peru’s anchovy catch is almost always affected by the weather event, and is the main ingredient for fishmeal. Interestingly, this “fishmeal” inference made me recall that a severe El Niño was responsible for the term "core inflation," which excludes food and energy prices in its inflation figures for those of you who don't eat or drive.

Eoin Treacy's view -

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

Inflation has been largely absent from official figures for what feels like a long time and the bond market is still of the opinion that it is not about to make a comeback anytime soon. However there are increasing signs that wage demands are rising and that can’t but contribute to the official inflation figures eventually. 



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May 16 2017

Commentary by Eoin Treacy

Email of the day on the yield curve spread and Plato:

I tried to find in the chart library the last chart you should on Friday's Video. That is the difference between the US 10 & 2 year. This Friday's long term outlook was different but I liked it; even got myself a copy of Plato to read

Eoin Treacy's view -

Thank you for a question which may be of interest to subscribers. The yield curve spread is the difference between the 10-year and 2-year Treasury yield. I created this video to discuss both how to create the chart and save it as a preset template for when you want to find it later. 



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May 15 2017

Commentary by David Fuller

Oil Price Indicators Flash Buy as OPEC Expectations Grow Bigger

Price curve? Check. Technical markers? Check. The oil market just got bullish and that’s left OPEC with little room for maneuver when it meets in Vienna next week.

After the energy ministers of Saudi Arabia and Russia talked up the potential for the Organization of Petroleum Exporting Countries and other nations to extend output cuts into early 2018, the crude market took off. OPEC’s preferred market structure returned, with nearer contracts at a premium further along the curve, with Brent and West Texas Intermediate crude rising above their key 200-day moving averages in intraday trading.

“Now they have to deliver,” said Ole Hansen, head of commodities strategy at Saxo Bank A/S in Copenhagen. “You could argue that an awful lot of positive news has been priced in and they need to deliver for that to be sustainable.”

coalition of OPEC nations and allies including Russia last year agreed to cut output by about 1.8 million barrels a day, starting in January. After the move initially boosted prices, concerns that it wouldn’t be sufficient to counter-act surging U.S. production pushed WTI below $44 a barrel. Producer nations, acknowledging they won’t achieve their target of returning global inventories to their five-year average by the time the original deal expires at the end of June, look likely to agree an extension at a meeting in Vienna on May 25.

As traders in Europe hit their desks on Monday morning, Brent crude jumped above its 200-day moving average. Early in May, a break below that marker sparked a sell-off with prices at their lowest since the last OPEC meeting at the end of November. The global benchmark also broke on Monday above another key technical marker, the 50-day moving average, for the first time since April 19.

“If you were short you cover, if you were flat you start acquiring length and if you were long you add to or keep those positions,” said Tamas Varga, an analyst at brokerage PVM Oil Associates Ltd. in London. “If there’s going to be a rollover longer than the second half of this year, I think the market will strengthen even after the meeting.”

David Fuller's view -

Interestingly, the press has been full of stories about how large long-term holders of the big multinational oil companies have been selling these top income producers since the beginning of 2017.  They were eventually joined by short sellers, forcing Brent Crude prices sharply lower in the second half of April. 

This item continues in the Subscriber’s Area where two other articles are also posted. 



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May 15 2017

Commentary by David Fuller

The End of Petrol and Diesel Cars? All Vehicles Will be Electric by 2025, Says Expert

No more petrol or diesel cars, buses, or trucks will be sold anywhere in the world within eight years. The entire market for land transport will switch to electrification, leading to a collapse of oil prices and the demise of the petroleum industry as we have known it for a century.

This is the futuristic forecast by Stanford University economist Tony Seba. His report, with the deceptively bland title Rethinking Transportation 2020-2030, has gone viral in green circles and is causing spasms of anxiety in the established industries.

Prof Seba’s premise is that people will stop driving altogether. They will switch en masse to self-drive electric vehicles (EVs) that are ten times cheaper to run than fossil-based cars, with a near-zero marginal cost of fuel and an expected lifespan of 1m miles.

Only nostalgics will cling to the old habit of car ownership. The rest will adapt to vehicles on demand. It will become harder to find a petrol station, spares, or anybody to fix the 2,000 moving parts that bedevil the internal combustion engine. Dealers will disappear by 2024.

Cities will ban human drivers once the data confirms how dangerous they can be behind a wheel. This will spread to suburbs, and then beyond. There will be a “mass stranding of existing vehicles”. The value of second-hard cars will plunge. You will have to pay to dispose of your old vehicle.

It is a twin “death spiral” for big oil and big autos, with ugly implications for some big companies on the London Stock Exchange unless they adapt in time.

The long-term price of crude will fall to $25 a barrel. Most forms of shale and deep-water drilling will no longer be viable. Assets will be stranded. Scotland will forfeit any North Sea bonanza. Russia, Saudi Arabia, Nigeria, and Venezuela will be in trouble.

It is an existential threat to Ford, General Motors, and the German car industry. They will face a choice between manufacturing EVs in a brutal low-profit market, or reinventing themselves a self-drive service companies, variants of Uber and Lyft.

They are in the wrong business. The next generation of cars will be “computers on wheels”. Google, Apple, and Foxconn have the disruptive edge, and are going in for the kill. Silicon Valley is where the auto action is, not Detroit, Wolfsburg, or Toyota City.

The shift, according to Prof Seba, is driven by technology, not climate policies. Market forces are bringing it about with a speed and ferocity that governments could never hope to achieve.

David Fuller's view -

In the accelerating rate of technological innovation which this service has long forecast, many of the most important changes occur much more quickly than expected.  Nevertheless, I think Professor Seba is forecasting a rate of change which may be technologically feasible but impossible in terms of practicalities.  My guess is that it will take at least five to ten years longer before his views are confirmed. 

A PDF of AEP’s article is posted in the Subscriber’s Area.



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May 15 2017

Commentary by David Fuller

How North Korea Managed to Defy Years of Sanctions

DANDONG, China — As the end of the fashion season approached, and the suits and dresses arrived in her company’s warehouses here in the Chinese border town of Dandong, the accountant crammed about $100,000 into a backpack, then boarded a rickety train with several co-workers.

She asked to be identified only by her surname, Lang, given the sensitivity of their destination: North Korea.

After a six-hour journey, she recalled, they arrived at a factory where hundreds of women using high-end European machines sewed clothes with “Made in China” labels. Her boss handed the money to the North Korean manager, all of it in American bills as required.

Despite seven rounds of United Nations sanctions over the past 11 years, including a ban on “bulk cash” transfers, large avenues of trade remain open to North Korea, allowing it to earn foreign currency to sustain its economy and finance its program to build a nuclear weapon that can strike the United States.

Fraudulent labeling helps support its garment industry, which generated more than $500 million for the isolated nation last year, according to Chinese trade data.

North Korea earned an additional $1.1 billion selling coal to China last year using a loophole in the ban on such exports, and researchers say tens of thousands of North Koreans who work overseas as laborers are forced to send back as much as $250 million annually. Diplomats estimate the country makes $70 million more selling rights to harvest seafood from its waters.

China accounts for more than 80 percent of trade with North Korea, and the Trump administration is counting on Beijing to use that leverage to pressure it into giving up its nuclear arsenal. The Chinese government took a big step in February by announcing that it was suspending imports of coal from the country through the end of the year.

But China has a long record of shielding North Korea from more painful sanctions, because it is afraid of a regime collapse that could send refugees streaming across the border and leave it with a more hostile neighbor.

In addition, Beijing now has a sympathetic ear in South Korea, whose newly elected president, Moon Jae-in, echoes its view that sanctions alone will not be enough to persuade Pyongyang to abandon its nuclear program.

While North Korea remains impoverished and dependent on food aid, its economy appears to be growing, partly because of a limited embrace of market forces since its leader, Kim Jong-un, took power more than five years ago.

David Fuller's view -

If (when?) North Korea is eventually reunited with South Korea, the reunification of Germany is probably an apt model.  In other words, we could expect ten to fifteen years of difficult transformation, before a united Korea emerged as an important superpower.   

Reunification would be best for Korea over the longer term.  A problem is that China still prefers the status quo, despite the increasing recklessness of Kim Jong Un. 

(See also: Political transitions in South Korea and Washington give Kim Jong Un opening, from USA Today)



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May 15 2017

Commentary by David Fuller

May 15 2017

Commentary by Eoin Treacy

May 15 2017

Commentary by Eoin Treacy

Cyberattack Is Blunted as Governments, Companies Gain Upper Hand

This article by Jordan Robertson and by Rebecca Penty

Governments and companies around the world began to gain the upper hand against the first wave of an unrivaled global cyberattack, even as the assault was poised to continue claiming victims this week. 

More than 200,000 computers in at least 150 countries have so far been infected, according to Europol, the European Union’s law enforcement agency. The U.K.’s National Cyber Security Centre said new cases of so-called ransomware are possible “at a significant scale.”

"For now, it does not look like the number of infected computers is increasing," said a Europol spokesman. "We will get a decryption tool eventually, but for the moment, it’s still a live threat and we’re still in disaster recovery mode."

At Germany’s national Deutsche Bahn railroad, workers were laboring under "high pressure" Monday to repair remaining glitches with train stations’ electronic departure boards, a spokesman said.

Eoin Treacy's view -

I don’t know how you feel about Wikileaks and Edward Snowdon. Personally I’m conflicted because the USA’s NSA has known about weaknesses in the global tech infrastructure for a long time and has used them for its own purposes while at the same time accepting that cybercriminals were also using them to achieve profits. I’m angry because if they were aware of the risk why wasn’t more done to protect it? Nevertheless, I’m sympathetic with the need for surveillance in an increasingly connected world where there are groups that challenge my personal security. However, that is largely beside the point now since these events have already happened and the potential for more cyberattacks and more intense attacks, not to mention during war, are inevitable. 



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May 15 2017

Commentary by Eoin Treacy

Brace for Chaos If U.S Expands Airline Laptop Ban

This article by Justin Bachman and Michael Sasso for Bloomberg may be of interest to subscrib ers. Here is a section:

While companies won’t abandon trans-Atlantic trips, an electronics ban may dampen corporate travel when combined with other recent regulations that have made traveling more onerous, said Michael McCormick, executive director of the Global Business Travel Association. When faced with having to part with their computers—potentially putting sensitive corporate information at risk—some companies may tell employees to leave their computers at home.

“I think business travelers would be far more willing to accept a far more rigorous screening at the airport, rather than having to part with their tools when they travel,” McCormick said.

The threat of laptop loss—be it theft, damage, or misplacement as checked luggage—is likely to make some companies consider whether some meetings can be conducted via Skype or other virtual methods, said Andrew Coggins, a management professor at Pace University’s Lubin School of Business. “People don’t want to let their laptops go,” he said.

That may be bad news for airlines who count heavily on business travel for profitability.

Eoin Treacy's view -

Since business travel costs around three times more than an economy seat for what is probably an area twice as large, the potential hit to revenues is considerable. I know for me, I wouldn’t be writing today unless I could have taken my laptop on the plane on Saturday and the question of course will be how do we define a laptop in an era when smartphones are probably more accurately described as phablets. My Microsoft Surface for example has a detachable keyboard and looks for all the world like a large iPhone..



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May 12 2017

Commentary by Eoin Treacy

May 12 2017

Commentary by Eoin Treacy

Amazon Makes Major Push Into Furniture

This article by Brian Baskin and  Laura Stevens for the Wall Street Journal may be of interest to subscribers. Here is a section: 

The online retail giant is making a major push into furniture and appliances, including building at least four massive warehouses focused on fulfilling and delivering bulky items, according to people familiar with Amazon’s plans.

With that move, the Seattle-based retailer is taking on the two companies that dominate online furniture sales— Wayfair Inc. W -5.95% and Pottery Barn owner Williams-Sonoma Inc. Furniture is one of the fastest-growing segments of U.S. online retail, growing 18% in 2015, second only to groceries, according to Barclays. About 15% of the $70 billion U.S. furniture market has moved online, researcher IBISWorld says.

But even the biggest players in online furniture are struggling to get the market right. Unlike established categories such as books and music or even apparel, retailers are still hammering out basic concepts like how much variety to offer on their sites and the most efficient ways to deliver couches and dining sets to customers’ homes.

While Amazon has been selling furniture for years, it has lately decided to tackle the sector more forcefully.

“Furniture is one of the fastest-growing retail categories here at Amazon,” said Veenu Taneja, furniture general manager at Amazon, in a statement. He said the company is expanding its selection of products, with offerings including Ashley Furniture sofas and Jonathan Adler home décor, and it is adding custom-furniture design services. Amazon is also speeding up delivery to one or two days in some cities, he adde

Eoin Treacy's view -

Free returns and secure transactions make online shopping risk free and painless from the perspective of consumers. Amazon is employing that strategy in an increasing number of sectors but most particularly in furniture and fashion. The number of brands Amazon now carries as well as sporting its own designs represent not only a direct threat to Williams Sonoma but to departments stores generally. 



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May 12 2017

Commentary by Eoin Treacy

Container shipping: rising tide

Thanks to a subscriber for this article by Richard Milne for the Financial Times may be of interest to subscribers. Here is a section:

Soren Skou, chief executive of Danish conglomerate AP Moller Maersk said global demand for containers — a proxy for trade growth — was at its highest level in years in the first quarter.

“It’s a very strong quarter for global trade. Five per cent is significantly above global [gross domestic product] growth. It’s driven by strong growth in Europe, and continued strong growth in the US,” he told the Financial Times.

Global trade growth has been sluggish ever since the 2008/09 financial crisis. That has hurt container shipping lines — of which the Danish group’s Maersk Line is the largest — with annual growth falling from more than 10 per cent before the crisis to 1 to 3 per cent in recent years. Maersk recorded only its second ever loss since the second world war in 2016.

Maersk Line still made a loss of $66m in the first quarter of 2017 as a rise in freight rates from record lows last year was offset by an 80 per cent jump in fuel costs. But the group stuck to its full year forecast of a profit of more than $616m at Maersk Line as a sign of its confidence in improving shipping markets.

Eoin Treacy's view -

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

It’s an understatement to say that the Baltic Dry Index is prone to wild swings. It rallied from a low of 290 in early 2016 to a March peak of 1338 and yet there is still significant stress evident across the shipping sector. The Index is currently testing the region of the trend mean which reflects a potential area of support. 



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May 12 2017

Commentary by Eoin Treacy

Stretching Thin

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

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

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

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

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

 

Eoin Treacy's view -

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

With significant reserves Saudi Arabia has time to deal with a relatively low oil price environment and the effect that is having on its fiscal condition. Rolling back spending commitments would leave the country in a much healthier position to compete considering its abundant resources and low cost of production. The new administration has embraced the need for change both in terms of domestic reform and investing in sectors outside of energy. The soon to launch $100 billion Softbank Technology Fund is a case in point. 



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May 11 2017

Commentary by Eoin Treacy

May 11 2017

Commentary by Eoin Treacy

1st Quarter Commentary

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

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

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

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

Eoin Treacy's view -

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

I think it is safe to say low fees are an unabashed positive development from the perspective of investors. Gaining access to major indices, deemed to represent the benchmark for market performance, at a low price is good enough for the vast majority of investors. The reason so many pundits are now talking about the trend into passive funds is twofold. 



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May 11 2017

Commentary by Eoin Treacy

Email of the day on the Hong Kong Dollar peg

HK$ has gone up for 4 months and possibly turned exponential at the inflection point near 7.775. Could this be like buying USD inasmuch as HKD is linked to USD?

Eoin Treacy's view -

Thank you for this email and there has been speculation of late about the sustainability of the Hong Kong Dollar’s peg against the US Dollar which has resulted in some downward pressure on the former.  



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May 11 2017

Commentary by Eoin Treacy

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

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

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

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

 

Eoin Treacy's view -

Nvidia is on a mission to own the graphics card market. It already has a dominant position but the growth markets for its chips rest not in its traditional gaming sector but in artificial intelligence and autonomous vehicles. The creation of a portal to help companies manage the development of related software using its chips helps to lock them into its ecosystem and cement the firm’s dominant position. 



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May 11 2017

Commentary by Eoin Treacy

Flooding hits northeast Arkansas rice hard

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

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

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

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

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

 

Eoin Treacy's view -

The soft commodity sector has been acting as a drag on the wider commodity complex for much of the year but there are initial signs of some respite emerging. The low price of grains and beans was pricing in close to a perfect crop this year but adverse weather has at least partially ameliorated that situation. 



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May 11 2017

Commentary by Eoin Treacy

May 10 2017

Commentary by David Fuller

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

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

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

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

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

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

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

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

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

David Fuller's view -

I think every investor and pundit interested in the US Presidential Election cycle has wondered, often out loud as I have, if President Trump would face impeachment proceedings at some point.  

The possibilities of this happening are the stuff of dreams for media types.  Conspiracy theories, illegal actions, presidential lies and especially sex scandals will always have an element of prurient appeal for the public, especially among those who don’t have a good book to read.

This item continues in the Subscriber’s Area, where a PDF of AEP’s column is also posted.



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May 10 2017

Commentary by David Fuller

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

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

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

David Fuller's view -

This is a far cry from alarmist forecasts which we see and hear from a number of other US commentators, not to mention self-destructing hedge fund managers.  We know the risks so no complacency here but the super-bears remain contrary indicators.

This item continues in the Subscriber’s Area, where The Weekly View is also posted.



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May 10 2017

Commentary by David Fuller

May 10 2017

Commentary by Eoin Treacy

May 10 2017

Commentary by Eoin Treacy

Day One for President Moon Sees Korea Stocks in Retreat With Won

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

The Kospi index dropped the most since March as North Korea reiterating its pledge to push forward with another nuclear test showed Moon Jae-in, the victor in Tuesday’s presidential vote, is unlikely to get a honeymoon. While Citigroup Inc. to Morgan Stanley are betting on further upside for South Korea’s record- setting stocks, analysts and investors are seeking more from Moon, who ran on a platform of corporate reform and rapprochement with North Korea.

“Markets will take this on the chin,” said James Soutter, who helps manage the equivalent of about $500 million at K2 Asset Management in Melbourne, referring to the election.
“Rumblings out of North Korea on further nuclear tests should have a bigger influence on markets than the election.”

While Korean technology shares rallied on bets Moon will bolster the sector as a way of delivering more jobs, the Kospi spiked lower, declining 1 percent Wednesday -- the most since March 3 -- as utilities and banks paced losses. Markets in Seoul were closed for the election Tuesday, so the drop came after a 2.3 percent surge in the Kospi on Monday, its best day since September 2015

Eoin Treacy's view -

The South Korean Kospi Index has been ranging for six years but broke out ahead of the election to new all-time highs. Increased tensions with North Korea coinciding with a short-term overbought condition suggest there is scope for some consolidation of the recent run-up. However a sustained move below the trend mean would be required to question medium-term scope for additional upside. 



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May 10 2017

Commentary by Eoin Treacy

China Stocks Still Adored Abroad as Losses Mount for Locals

This article by Sofia Horta e Costa for Bloomberg may be of interest to subscribers. Here is a section:

Mainland markets have struggled under the government’s campaign to trim risk in the financial sector, making stocks the least linked to the offshore index since 2006. With history showing sentiment can flip quarter to quarter, international traders are riding on a bet that solid corporate and economic data will continue to support the divergence.

“These investors don’t believe that any of this will lead to a crisis,” said Caroline Yu Maurer, the Hong Kong-based head of Greater China equities at BNP Paribas Investment Partners.
“For stocks, people are buying earnings growth rather than macro stories. The market is quite resilient as long as that holds.”

For a gauge that is rarely this expensive relative to the rest of the world, improving earnings are emerging as a key line of defense against worsening sentiment. While profit estimates are being upgraded at the fastest pace since 2010, they’re failing to keep pace with the index’s rally, which has pushed valuations toward the highest levels since 2015. The gauge gained another 0.4 percent on Wednesday, while the Shanghai Composite slumped 0.9 percent to its lowest level since October.

 

Eoin Treacy's view -

The mainland Shanghai Composite is heavily weighted by state owned enterprises like banks and infrastructure companies which are the primary focus of the clamp down on the shadow banking sector and financial leverage in “private lending clubs”. Privately owned companies, many of which are listed in Hong Kong or the USA continue to perform not least because they are not overly impacted by the financial sector tightening currently underway.



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May 10 2017

Commentary by Eoin Treacy

Biotechnology Sector update

Thanks to a subscriber for this report from Oppenheimer dated in April which may be of interest. Here is a section:  

Industry’s sales/earnings growth and margin structure are enviable, M&A on-tap
1. With increases in sales and earnings power and improving product approval rates, large-cap biotech has stuck to its knitting, i.e., developing products for smaller, more focused disease areas with high unmet needs.
2. 2015 was a banner year for worldwide biopharma M&A. After downturns, such as seen in 2016, M&A typically picks up as valuations become realistic.
3. Drug pricing, recent slowdown in large-cap sales/earnings momentum, many companies between product cycles and some clinical disappointments, are all still overhangs.

And 

1. Sales/earnings growth deceleration following peak sales/earnings in 2014 for the large-cap companies.
2. Has led to generalist and momentum money reducing exposure/abandoning the sector.
3. This deceleration in sales/earnings growth to trough in 2017, then rapidly start accelerating again.
4. Currently GILD is the laggard in its peer group for expected sales/earnings growth over the next three years.

 

Eoin Treacy's view -

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

R&D is expensive, riddled with uncertainty and big bureaucracies tend to stifle the creativity necessary for the kind of out of the box thinking which leads to breakthroughs. The result is that large pharmaceuticals companies often buy promising biotechnology companies, usually at a premium, rather than invest in the uncertainty of in-house development. 



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May 09 2017

Commentary by David Fuller

What Are the Economics of Britain Walking Away From the EU Without a Trade Deal?

The Prime Minister has said that no deal with the EU is better than a bad deal. The importance of this judgement has recently increased as the possibility of securing any deal, let alone a good one, seems to have receded.

We have been left with the impression that we are going to have to pay an enormous divorce settlement, agree to the continuing jurisdiction of the European Court of Justice and accept free movement, at least for a time, before the EU will even discuss a future trading arrangement with the UK, never mind the “bold and ambitious” free trade agreement (FTA) that Theresa May is seeking.

Perhaps unsurprisingly, the structure of the negotiations seems to be stacked against us. The two-year time deadline is a major disadvantage. As and when talks stall, the pressure will begin to build as time ticks away. Moreover, as the former Greek finance minister Yanis Varoufakis warned recently, the EU is a past master at intimidating others by deft use of agendas and timetables.

What we need is a well worked-out Plan B. If Plan A fails then there is something to fall back upon, but also, paradoxically, a viable Plan B would mean that we are more likely to succeed with Plan A.

Unless EU leaders see that we have an alternative and are prepared to walk away, not in fear and trepidation, but with a reasonable degree of confidence about our future, then they may well believe that it is in their interest not to give any ground to us. Above all, the Government must avoid the trap that David Cameron fell into. He asked for very little but got even less. His mistake was to make it clear that however little he got he would still support staying in the EU.

But is there a plausible Plan B? Not according to erstwhile Remainers and their sympathisers, who often use lurid language to describe our plight if we leave without a deal.

You might well think that economics is a dry subject, not open to hyperbole. In fact, when it comes to areas of uncertainty, and especially when there are sharp differences of opinion, language is important.

In the debates running up to the referendum, politicians and businesspeople talked about the overriding importance of having “access to the single market”. This conjured up the image of some precious restricted space, with entry possible only through a locked door, perhaps closely guarded by a bibulous Jean-Claude Juncker, carefully checking membership cards.

I think this particular penny has now dropped. As I and others pointed out all along, every country in the world has “access” to the single market. It is just a matter of having to pay the EU’s tariffs and abiding by its various rules and regulations governing product quality, for example, just as we have to when we sell into any market in the world. That’s why countries all around the world that are not members of the single market have managed to export into it so successfully. “Access to the single market”, so powerful as an image, is in fact a chimera.

So it is with regard to the subject of the UK’s exit. Some politicians and businesspeople talk of the UK “crashing out” of the EU. Another metaphor is of British business facing “a cliff-edge”. They say that without a deal, the UK would “fall into the clutches of the WTO”.

It is as if the World Trade Organisation (WTO) were some sort of monster that devours its members – especially juicy new ones like us. In fact, the UK helped to set up the WTO in the first place and has remained a member all along, albeit with our seat vacant because our trade policy has been run by the EU. On leaving the EU, we would simply take up our seat once again.

Mind you, Remainers often portray trading “under WTO rules” as a disaster. At the very least, it supposedly represents a step into the unknown. Yet this simply means trading with countries without having an FTA and using WTO rules to govern trading practices. As part of the EU, the UK already trades under WTO rules with over 100 countries around the world, including the United States (our largest single export market), as well as China, India, Brazil and Singapore.

This arrangement is often described as the “WTO-only option”. But because this sounds so Spartan and threatening I have suggested that we should instead refer to it as “the American option”.

After all, without an FTA between the EU and the US, “WTO-only” is the basis on which trade between them takes place. Suddenly, it does not sound so threatening.

In saying this, I am not suggesting that there are no sorts of agreement that can and should be signed. In particular, there are various technical arrangements called Mutual Recognition Agreements (MRAs) without which goods trade is next to impossible.

The EU has such agreements with virtually all countries around the world, including those that are neither members of the single market nor have an FTA in place.

Getting such agreements should be a simple matter and should not cause our negotiators any problems, not least because such MRAs are already in place.

All the UK has to do is simply to carry them over into the new world. If the EU refused to agree MRAs with us, this would count as discrimination under WTO rules and would lead to huge fines.

If our leaders, senior officials and negotiators, as well as the majority of British businesspeople and the commentariat, can convince themselves that not having an FTA with the EU is a perfectly acceptable outcome, then the Government will be in a strong position to say no to a bad deal. Especially for a country like the UK, the open sea should hold no terrors.

David Fuller's view -

All of this makes sense to me.  I have long felt that Roger Bootle is far more accurate on this subject than militant Remainers and British EU advocates who either misunderstand the issue or aspire to cushy jobs and fat pensions (effectively bribes) for unelected bureaucrats in Brussels. 

Prime Minister Theresa May is committed to at least opening Brexit negotiations with the EU, following the General Election on 8th June.  Thereafter, I maintain that on encountering the first irrational obstacle she should just declare an end to negotiations and announce that the UK was leaving the EU. 

In addition to Roger Bootle’s views above, Patrick Minford has been clear on this point all along.  

A PDF of Roger Bootle’s column is posted in the Subscriber’s Area.



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May 09 2017

Commentary by David Fuller

Dear Mr Juncker, Brexit Isn't a Divorce so the EU can Forget Alimony

I do not understand why some in the EU Commission seem to think the UK owes the bloc any money on leaving. The UK is not seeking a divorce from Europe. It is a silly misrepresentation. We are surrendering our membership of the European Union, but expect to have strong and positive ties with the rest of Europe after we have left. There will be much trade, many joint ventures, common research, shared campaigns in international politics, cultural, academic and business links.

I have great news for our EU partners. Because it is no divorce, there is nothing in the EU treaties which gives the UK a claim on the assets Brussels has built up during our period of membership. It is true we have made a big financial contribution, which has in part been invested in buildings and other stores of value. We lose that. Because it is no divorce and we have no children, the EU does not have to pay us maintenance in the future either.

It also means there is also nothing in the treaties which give the EU the right to send us a leaving bill. They cannot expect us to carry on meeting financial obligations after we have left, or pay the interest on loans taken out to buy assets we no longer share.

The EU has had a strange attitude towards UK membership. They first blocked our joining in the 1960s. They were then critical of our reluctance about the social union, defence union, monetary union and borders union.

They offered us some opt-outs, but pressed us to do many things the UK would rather not do.

Some of them understandably were unhappy about their cross-Channel partner who never wanted to join the full project but just wanted a trade arrangement or common market.

You would have thought when we decided to leave they would be pleased. It enables them to get on with completing their extensive union without UK reluctance, always seeking to slow or water it down. As democratic countries you would expect them to respect the verdict of British electors. Instead, some of them seem to want to keep us in, or claim to want to punish us for leaving.

They both claim the EU is a precious prize for any country to be a member, and that you need to lock countries into it under threat of worse if they dare to leave.

I suspect these attitudes are more the Commission’s than the member states’. The individual countries should prove to be more realistic. They have businesses that want to trade tariff-free with the UK after exit as they did before.

They have citizens living in Britain that they need to support, by accepting the continued right of our citizens to live in their countries. They will understand that the balance of votes and power within the EU has shifted, and each remaining member state will be a bit more powerful when the UK votes and voices go.

The Commission thought they could control the negotiations over Brexit. They wrongly expected the UK to seek to remain within the so-called single market. In return the EU would demand continued freedom of movement and continued budget contributions. As ending our payments and controlling our own borders were two central features of the reasons to go, that was never likely.

Instead the UK has a friendly and simple offer. We will willingly accept tariff-free imports from the EU with no new barriers to their trade with us, if they reciprocate. Why would they want to impose tariffs, when under World Trade Organisation (WTO) rules the main losers would be the big agricultural export industries of the continent who sell us so much more than we sell them, and the continental car industry facing a more modest 10 per cent tariff?

If the EU wants to charge us for buying their imports and selling them rather fewer exports, the cheapest and easiest way to do so is through tariffs, under WTO rules. We know what that is like, as that is how we have to trade with the rest of the world all the time we are in the EU. One of the prices of membership is dearer food from the rest of the world. Once out we could decide to remove the tariffs we no longer wish our consumers to pay.

Now, about that bill. I assume the EU won’t be sending one, as ministers in the UK can only spend money against a clear legal requirement. There is no such legal base.

David Fuller's view -

This is easily one of the best articles that I have seen on Brexit and I think John Redwood is absolutely correct.

Any logical person in the UK or EU would like to see a friendly, mutually beneficial agreement in terms of the UK’s exit from the EU.  However, this may not be timely or even possible in dealing with 27 separate EU nations.  For this reason I have always felt that the serious negotiations were likely to take place after we have already left the EU.

 



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May 09 2017

Commentary by David Fuller

Volcanic Macron Forces Germany to Come Clean on Its real EU Agenda

Emmanuel Macron’s lightning conquest of France has put Germany in an awkward spot.

Berlin may have to start fleshing out its European rhetoric and contemplate a Franco-German grand bargain on the future of the EU, or risk serious consequences down the road. Excuses are running thin.

French voters have picked an apostle of Europe and an arch-defender of the Franco-German axis. While this is welcomed with jubilation by some in Berlin, it raises thorny questions that others would prefer left unanswered.

Charles Grant from the Centre for European Reform says Mr Macron’s strategic gamble is to restore French credibility, and then to lever this to extract a “new concordat on the euro” from Germany.

He plans Nordic labour reforms, easier collective bargaining rules, and the sort of tax shake-up that German leaders have long demanded. It is the French riposte to the Hartz IV reforms that - supposedly - lifted Germany from its sickbed a decade ago.  

The quid pro quo is that Berlin must agree to eurozone fiscal union, and cut its corrosive current account surplus - now 8.6pc of GDP and in breach of EU rules.

“If France is not reformed, we will not be able to regain the confidence of the Germans,”  Mr Macron told Ouest-France.  “After that Germany must ask whether its own situation is tenable. It is accumulating surpluses which are neither good for its own economy nor for the eurozone.”

He wants a eurozone finance minister and budget, with joint debt, and a banking union with shared deposit insurance, all legitimized by a new parliament for the currency bloc. It implies a unitary eurozone superstate.

This calls Berlin’s bluff. The German elites often argue that they cannot accept such radical proposals as long as other eurozone states scoff at budget rules and fail to put their house in order. Whether Germany’s real motive is to protect its mercantilist interests as a creditor power and run monetary union to suit itself is conveniently never put to the test.

As French economy minister, Mr Macron was an acerbic critic of the austerity regime imposed on the eurozone by Germany. He decried the current half-way house of an orphan currency with no EMU government to back it up, and argued that was is folly to try to close the North-South gap in competitiveness by imposing all the burden of adjustment on the weakest high-debt states. Such a policy misdiagnoses the cause of the EMU crisis -  capital flows, rather than fiscal or moral failure - and leads to a deflationary vortex for the whole system.

David Fuller's view -

Emmanuel Macron is the most interesting new arrival in European politics for a long time and he is challenging conventional views in the dysfunctional EU.

Basically, if they want to make it work, bring in fiscal union, as anyone with a modicum of financial savvy and historic awareness knows.  However, the idea of fiscal union - effectively creating a United States of Europe - was never popular with the European electorate.  Moreover, it was even less popular with many European governments.  That is why it was gradually being ushered in via the back door by EU bureaucrats. 

Today’s question: is the EU now too dysfunctional and too populist to openly discuss fiscal union? I would have thought so but along comes fresh-faced, intelligent Emmanuel Macron, apparently challenging Germany on this subject. I can sense the alarm in Europe’s largest economy.

It makes no difference for the UK.  We will shortly resume our historic role as a sovereign nation.

A PDF of AEP's column is posted in the Subscriber's Area.



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May 09 2017

Commentary by David Fuller

Email of the day

On the French push for UK financial services:

Have you ever tried to make an international transfer through a French bank? Neanderthals Age.  It will be very difficult to beat London´s financial services. Macron will have to deal with unions and after that with a strong regulatory culture inserted in France.

David Fuller's view -

You make a very important point.  I have enjoyed many trips to France with family and friends, and was fortunately able to cover all transactions with a credit card or occasionally cash.  However, financial services are another matter and I think you are correct.  



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May 09 2017

Commentary by Eoin Treacy

May 09 2017

Commentary by Eoin Treacy

Buying Spree Brings Attention to Opaque Chinese Company

This article by David Barbozamay for The New York Times may be of interest to subscribers. Here is a section:

Last week, HNA was the subject of wild online speculation after a fugitive Chinese billionaire said in a television interview that relatives of a senior Chinese leader, Wang Qishan, had a stake in the company. No proof was provided.

The allegations leveled by the billionaire, Guo Wengui, who has ties to China’s former spy chief, is part of his broader war on the Chinese government. From his New York apartment, Mr. Guo, using his Twitter account and Google’s YouTube, has been making claims of widespread government corruption. China has requested his arrest, on separate corruption charges.

As speculation swirled that HNA could be drawn into a political firestorm, shares of one of the company’s Hong Kong affiliates tumbled late last month. Soon after, critical news articles on the group began disappearing from Chinese websites, prompting concerns that government censors had handed down orders to delete unfavorable news about HNA.

 

Eoin Treacy's view -

Mrs. Treacy has been following this story closely. Guo’s interview on Voice of America’s Chinese channel in late April, which had been headlined as an exposé, was cut short when Chinese officials called the show directly to insist it be cut off. Here is a section from an article discussing the event: 



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May 09 2017

Commentary by Eoin Treacy

Australia Presses for Nation Building But Forecast Doubts Linger

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

 

Morrison is changing the terms of the economic debate, from dire warnings on debt and deficit to a more politically astute one of prosperity and opportunity. His infrastructure plan aims to create a virtuous circle: such investment may trigger private-sector spending and increased household consumption that would boost the economy.

“We continue to forecast a slower deficit consolidation than projected in the budget,” Marie Diron, associate managing director at Moody’s Investors Service, said in a statement after the release. “We assume that GDP growth will be somewhat slower than projected by the government, at 2.5-2.7 percent in the next few years. Productivity growth has slowed in Australia, like in other high-income economies. We estimate that this slowdown is partly related to long-lasting factors that will continue to weigh on growth.”

Infrastructure projects include a new airport in Western Sydney; acquiring greater or outright ownership of the Snowy Mountains hydroelectric scheme and then expanding it; upgrading highways across the nation; and funding for a Melbourne-to-Brisbane inland railway.

Eoin Treacy's view -

The Australian economy has gone 25 years without a recession which is an incredibly impressive achievement. In that time the currency has been highly volatile; acting as a pressure release valve. The decision to spend A$75 billion in infrastructure projects will help to absorb some of the available labour that the drop off in commodity supply growth investment has left but the outright effort to stoke inflation through wage growth is likely to take a toll on both the currency and bond yields. 



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May 09 2017

Commentary by Eoin Treacy

Traders Stake $12 Billion on Dollar Extending Gains Versus Yen

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

Data from the Depository Trust & Clearing Corporation shows dollar-topside bets outweigh bearish views this week. That includes $700 million on the 115.00 level, another $600 million going through on 116.00 calls, and $140 million on the pair reaching 133.00 within the next year.

Yen haven demand has also lost traction, as the French election result provided a market-friendly outcome, as shown by risk reversals, a gauge of market positioning and sentiment.

While demand for dollar-yen puts over the next month still outweighs that for calls, it does so at the lowest in almost two months. Dollar puts trade on a 38-basis-point premium over calls on the one-month tenor, which compares to an average in the past year of 105 basis points.

 

Eoin Treacy's view -

The result of the 1st round of the French election acted a risk-on catalyst for global markets with the VIX dropping abruptly and the Nasdaq-100 running to new highs. Safe haven assets like the Yen, Dollar, bonds and gold on the other hand have experienced selling pressure. 



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May 08 2017

Commentary by David Fuller

Paris Will Be Hoping the 'Macron Effect' Can Strengthen its Planned City Scalp on Back of Brexit

The sweeping victory of Emmanuel Macron in France opens the way for a radical shake-up of the country's antiquated labour code and punitive tax regime, greatly boosting the hopes of Paris as it tries to capture valuable business from the City of London.

The French financial industry is seizing on the 'Macron effect' to step up its charm offensive in the Square Mile and Canary Wharf, convinced that the election of an ex-Rothschild banker in France has combined with a hard Brexit to create a perfect opportunity. 

Officials have been criss-crosing London over recent days meeting sovereign wealth funds and bankers from the US, Japan, China, and other countries, selling the promise of a reformist revolution in Paris. What is faintly ominous for London is that they are pulling forward the timetable for what they believe to be the expected exodus. 

"We think that the process will now accelerate because it looks like a hard Brexit, and we think it will happen within months," said Arnaud de Bresson, head of finance federation Paris Europlace.

"Investment banks and asset managers now understand that they will have to move part of their euro activities, which was not the case in our earlier meetings when it was still business as usual," he told the Daily Telegraph.

"We expect them to move some of capital market as well as fund management business to Paris in phases. We think we can gain 20,000 jobs, 10,000 directly. This is quite reasonable," he said, though he was coy about names. City advocates say such claims are wishful thinking.

David Fuller's view -

I think Emmanuel Macron is an extremely impressive and capable figure.  I am glad he won the Presidency because he is far more entrepreneurial than any of his rivals.  This can only be good for France.

How might this affect the City in the light of the hard Brexit which we are likely to see?

This item continues in the Subscriber’s Area where a PDF of AEP’s article is also posted.



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May 08 2017

Commentary by David Fuller

French Annoyingly Retain Right to Claim Intellectual Superiority Over Americans

Here is some satire from the Borowitz Report in The New Yorker, posted without further comment:

PARIS (The Borowitz Report)—On Sunday, the people of France annoyingly retained their traditional right to claim intellectual superiority over Americans, as millions of French citizens paused to enjoy just how much smarter they were than their allies across the Atlantic.

In bars and cafés across France, voters breathed a sigh of relief in the knowledge that arrogantly comparing themselves to the U.S. population, a longtime favorite pastime of the French people, would remain viable for the foreseeable future.

Pierre Grimange, a Parisian café-goer, sipped on a glass of Bordeaux and toasted his nation “for not being so dumb as the United States after all.”

“A lot was at stake today: the future of our liberal traditions and our democracy itself,” he said. “But by far the greatest loss of all would have been our right to look down on Americans.”

“Grâce à Dieu, that has been secured!” Grimange exclaimed.

But, sitting a few tables away, Helene Commonceau, another Parisian, admitted that she did not understand what all of the celebrating was about. “We are smarter than the Americans, true, but they have set the bar very low, no?” she said. 

Andy Borowitz is the New York Times best-selling author of “The 50 Funniest American Writers,” and a comedian who has written for The New Yorker since 1998. He writes the Borowitz Report, a satirical column on the news, for newyorker.com.

David Fuller's view -

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May 08 2017

Commentary by David Fuller

The World Is Not Ready for the Next Pandemic

My thanks to a subscriber for this sobering article by Bryan Walsh for Time.  Here is the opening:

Across China, the virus that could spark the next pandemic is already circulating. It's a bird flu called H7N9, and true to its name, it mostly infects poultry. Lately, however, it's started jumping from chickens to humans more readily--bad news, because the virus is a killer. During a recent spike, 88% of people infected got pneumonia, three-quarters ended up in intensive care with severe respiratory problems, and 41% died.

What H7N9 can't do--yet--is spread easily from person to person, but experts know that could change. The longer the virus spends in humans, the better the chance that it might mutate to become more contagious--and once that happens, it's only a matter of time before it hops a plane out of China and onto foreign soil, where it could spread through the air like wildfire.

From Ebola in West Africa to Zika in South America to MERS in the Middle East, dangerous outbreaks are on the rise around the world. The number of new diseases per decade has increased nearly fourfold over the past 60 years, and since 1980, the number of outbreaks per year has more than tripled.

Some recent outbreaks registered in the U.S. as no more than a blip in the news, while others, like Ebola, triggered an intense but temporary panic. And while a mutant bug that moves from chickens in China to humans in cities around the world may seem like something out of a Hollywood script, the danger the world faces from H7N9--and countless other pathogens with the potential to cause enormous harm--isn't science fiction. Rather, it's the highly plausible nightmare scenario that should be keeping the President up at night.

The U.S. Centers for Disease Control and Prevention (CDC) ranks H7N9 as the flu strain with the greatest potential to cause a pandemic--an infectious-disease outbreak that goes global. If a more contagious H7N9 were to be anywhere near as deadly as it is now, the death toll could be in the tens of millions.

"We are sitting on something big with H7N9," says Michael Osterholm, the director of the Center for Infectious Disease Research and Policy at the University of Minnesota and a co-author of the new book Deadliest Enemy: Our War Against Killer Germs. "Any one of these cases could trigger something big. By then it'd be way too late."

Too late because even as the scientific and international communities have begun to take the threat of pandemics more seriously, global health experts--including Bill Gates, World Health Organization director Dr. Margaret Chan and former CDC director Dr. Tom Frieden, to name just a few--warn that nowhere near enough is being done to prepare, leaving the U.S. scarily exposed. That's because the system for responding to infectious disease is broken. So broken that it recently prompted Gates and his wife Melinda to put their weight behind a major public-private initiative called the Coalition for Epidemic Preparedness Innovations (CEPI). The Gates Foundation alone will devote $100 million over the next five years to CEPI, which will help speed the development of vaccines against known diseases, like MERS, while also investing in next-generation technologies that can counter future threats.

David Fuller's view -

Pandemics will always be a periodic threat, mainly due to overly intensive farming.  Thank heavens for Bill and Melinda Gates, and their Coalition for Epidemic Preparedness Innovations (CEPI).



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May 08 2017

Commentary by David Fuller

Email of the day

On Sapiens and Barry Ritholtz’ interview of Yuval Noah Harari:

David

I remember one of your comment about the book and how much it impressed you.

I take every morning the time to listen to something new or recurrent that makes me (hopefully) think (hopefully) differently…

One podcast that I usually follow loosely is Barry Ritholtz: Masters in Business.

Today I listened to the interview of Yuval Noah… I recommend it.

Just one comment: around minute 43 he noted that the new religion will be happening in Silicon Valley. I cannot figure out if he was positive or not about it, but if so (The new religion), what consequence does it has on our self determination and freedom, the cherished prize of democracy if you go to ‘’church'' everyday of your life when you open any connected device.

This will define our (new) times as much as war defined our time not too long ago (my father as Navy officer spent 12 years of his life doing so and it must have influenced the following next 25 years of the rest of his life) 

Enjoy, and all the best,

David Fuller's view -

Many thanks for this interesting email and the Barry Ritholtz interview.  I like Barry – a thoughtful, intelligent man and am pleased to be reminded of his Masters in Business radio interviews, not least regarding Yuval Noah Harari who I think is easily one of the most interesting people on the planet.

Re minute 43 and the new religion in Silicon Valley: little is explained but I think he is referring to the god-like machines that tech geniuses are creating.  With tongue in cheek and meaning no offence, I have often said that for me, Google was the closest representation of God which I ever expect to encounter.



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May 08 2017

Commentary by Eoin Treacy

May 08 2017

Commentary by Eoin Treacy

Email of the day on the recording glitches

You seem to have had a couple of problems with your Friday Big Picture report. A skype call rang for an interminable length of time in the background which was a distraction to me and I think, to yourself. Perhaps you should switch off Skype as a precaution before you start recording? Then, the report ended abruptly in your mid-sentence. You were talking about Bitcoin and I was finding it very interesting. What happened?

Eoin Treacy's view -

Thank you for this email as well as a number of others from subscribers. I’ve been having some grave difficulties with my recording software over the last two sessions with the microphone ceasing to work mid recording. I’ve been trying to trace the fault all weekend and believe I have solved the problem. I was not aware the microphone was sensitive enough to pick up the Skype ringing and will log out in future when recording. Please accept my apologies for these technical difficulties. 



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May 08 2017

Commentary by Eoin Treacy

Email of the day on Chinese liquidity measures

In recent years, changes in liquidity in China have caused considerable upset.   How significant is the following reported change? 

In recent years, changes in liquidity in China have caused considerable upset.   How significant is the following reported change? 

Eoin Treacy's view -

Thank you for this useful graphic as well as the link to the associated article. Here is a section:

Mark Orsley and I have been working on a “Chinese Liquidity Monitor” which tracks the PBoC’s various measures (repos, reverse repos, OMOs, SLFs, MLFs, Pledged Supplementary programs)—see below. The key point here: it’s not just the sharp decline in the ‘rate of change’ of PBoC ‘lending’ / ‘financing’ / ‘credit creation’….it’s that liquidity is being outright REMOVED.



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May 08 2017

Commentary by Eoin Treacy

Big Short in Loonie on Concern Over Oil, Trump, Housing

This note by Maciej Onoszko for Bloomberg may be of interest. Here it is in full:

Hedge funds and other speculators increased their short positions in the Canadian dollar to the highest level on record, according to data from the Commodity Futures Trading Commission. The loonie, which is the worst-performing major currency this year, has been under pressure in recent weeks amid concerns over a potential trade war with the U.S., a plunge in crude oil and financial woes of alternative mortgage lender Home Capital Group Inc.

Eoin Treacy's view -

The Canadian Dollar skirted the worst effects of the credit crisis by virtue of having a strongly regulated banking sector when just about everywhere else in the G7 had given into the worst excesses to deregulation. The rebound in oil allowed the Loonie to retest its 2008 peak in 2011 but the subsequent decline in commodity prices has taken its toll.



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May 08 2017

Commentary by Eoin Treacy

London Home Rents Fall for First Time Since December 2009

This article by Julie Edde for Bloomberg may be of interest to subscribers. Here it is in full:

Londoners are paying lower home rents for the first time in more than seven years amid rising supply and weakening demand from senior executives for properties.

The average rent paid in April for new lettings in Greater London was 1,519 pounds ($1,968) a month, a 1.2 percent decline from a year earlier, HomeLet, the U.K’s largest reference- checking and rentals insurance company, said in a statement on Monday. Annual rental inflation across the U.K. was 0.4 percent in the same period, the lowest in seven years.

"Rents have been rising at a more modest pace across the whole of the U.K. in recent months," HomeLet Chief Executive Officer Martin Totty said. "We continue to see landlords and letting
agents weighing tenant affordability considerations very seriously.”

London’s housing market is weakening amid affordability issues, new taxes and preparations for Brexit. Landlords rushed to buy homes before the introduction of a new stamp duty sales tax in April of last year, boosting supply and leading to greater competition for tenants.

The number of tenancies agreed at 1,000 pounds to 5,000 pounds a week fell 3.7 percent in the first quarter from a year earlier, Knight Frank said on Friday. Demand in that segment of the market usually comes from senior executives in industries including financial services, the broker said.

Home values in the U.K. capital grew at their slowest annual rate in almost five years in February as values in the most expensive boroughs including Camden and Kensington and Chelsea fell, according to Acadata and LSL Property Services Plc.

 

Eoin Treacy's view -

Uncertainty surrounding the ramifications of Brexit and the potential for several thousand workers and their families to decamp to continental Europe is likely having a knock-on effect for rental demand. 



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May 05 2017

Commentary by David Fuller

Tech and Talent Must Top the Next Government's Wishlist

In the race for international tech talent and inward investment, the UK ranks third in Europe behind Finland and Sweden for digital inclusion and skills (EC Digital Economy and Society Index – DESI). But the new government should not forget that around half of our most valuable tech workers hail from overseas with some 30pc coming from the EU and 20pc from further afield. To avoid a post-Brexit brain drain, the UK must remain a destination for international talent, with an immigration policy to match.

And to ensure that in the future more of our tech capability is grown at home with jobs filled by British citizens, the next government must 
do even more to encourage the 
take up of science, technology, engineering and maths (STEM) subjects in schools.

Of the 320,000 students in England studying for A-levels last year, the number taking STEM subjects was largely stable, according to Department for Education data. Where it is increasing, it is in tiny increments.

Last year, the number of students entered for A-level computing increased by just 0.3 pc to 1.7 pc. And the 23.8 pc of A-level students entered for mathematics represented an increase of just 0.5 pc. STEM subjects need to move further up the education agenda accompanied by more support for targeted vocational training and apprenticeships.

Continued investment in infrastructure to support an increasingly digitised marketplace is also vital. Applications and productivity gains requiring world-class connectivity can only gather momentum if the physical backbone is there to provide the necessary support.

The last government’s “Universal Service Obligation” aimed to give every business and individual in the country the right to request an affordable high-speed broadband connection. The intention was laudable, but in practice today the UK ranks no higher than sixth for overall European connectivity and just 10th for Next Generation Access. Further investment in digital infrastructure should remain a key priority for the next government.

The UK is the fifth largest global economy and renowned for innovation and our entrepreneurial spirit. We are home to many world class businesses spanning technology, hi-tech engineering and pharma research, financial services, the professions, education and the creative arts. Government initiatives to cultivate the smartest talent and encourage the right investment will help capitalise on these strengths and accelerate our position at the vanguard of the 4IR.

David Fuller's view -

Thankfully, the long, sad history of the UK surrendering its sovereignty within the EU is now ending.  Britain will soon have the freedom to welcome additional talent from all over the globe, not just the EU.  A newly competitive economic environment will be ideal for expanding our tech industries. 

A PDF of Jeremy Hand’s article is posted in the Subscriber’s Area.



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May 05 2017

Commentary by David Fuller

Email of the day

On Allister Heath’s column posted Thursday:

Amen. Some might see this column - and your comments- as political. Not so, they are Realpolitik - a German concept that many in Brussels ignore while continuing to push a centralisation policy that is not very well appreciated by the electorates who are their ultimate masters, albeit currently disenfranchised by the delegated authority system of the EU.

David Fuller's view -

Thanks, Norman, I appreciate your comments.

Furthermore, I think we always knew that leaving the EU was going to be both challenging and divisive, although I believe a clear majority now favours Brexit.  I am glad that Theresa May is leading the country at this crucial time and I maintain the UK’s long-term prospects are excellent.   



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May 05 2017

Commentary by David Fuller

On Target: Martin Spring's Private Newsletter on Global Strategy

My thanks to the ever-interesting Martin Spring for his insightful look at the global scene.  Here is a brief sample:

Good and Bad Aspects of Passive Funds

Investing via exchange traded funds (ETFs) and other forms of index-tracking management can make sense, as it minimizes costs and avoids manager selection risk.

The trouble with its alternative, active management, is finding those who are consistently good at it, without most or even all of the gains being gobbled up by fees and other costs. Usually such managers are too frightened of the risk to their careers in making idiosyncratic decisions to stray far from being almost-trackers. They are poor value for investors.

The trouble with passive management is, it means putting your money into the most popular shares, which are the most expensive because of their popularity, and may be the poorest choices for the longer term.

As Ian Lance of RWC Partners reminds us: “Passive investors in 2000 were allocating large chunks of their money to bubble stocks like Cisco, Sun and Yahoo, and also to accounting frauds like Enron and Worldcom, which were on their way to zero.”

The bias towards buying the biggest stocks, which are not likely to be the best, seems to be particularly true in the emerging markets sector.

Well-known fund manager Terry Smith says increasing amounts are being allocated to its largest companies, but “they are not good companies.”

Last year the return on capital employed of the top ten constituent stocks of the MSCI Emerging Markets index averaged just 12 per cent. Over the past ten years their returns have shown a more or less continuous decline. That has been particularly true of Chinese companies, “which seem to be investing on the basis that debt capital… for them is close to free.” Such an assumption is always dangerous, “as the Dotcom era and Japan in the late 1980s illustrated.”

These giant companies are expensive, currently trading on price/earnings ratios averaging 28 times, compared to 23 for all firms in the MSCI index. It doesn‟t seem likely that this reflects expectations of significant improvement in earnings.

Trouble is, “if money pours into markets via ETFs, it will cause the shares of the largest companies… to perform well irrespective of their quality or value, or lack of it, even though active managers seeking quality and/or value will not want to own them.

“The weight of money flows will make it a self-fulfilling prophesy that the index will outperform the active managers who behave in this rational manner.”

Longer-term, it makes sense to buy more shares in good companies. They will eventually produce superior returns. But you need patience to wait for that to happen. In the meantime, the weight of index-tracking buying makes it difficult to manage actively, focusing on good companies that are not popular. That‟s why most investors would do better to opt for index funds such as ETFs.

A courageous admission by an expert who himself manages an emerging markets fund.

 

David Fuller's view -

I have long favoured Investment Trusts also known as Closed-End Funds in some other countries, including the USA. 

Incidentally, Iain Little includes a review of Investment Trusts during each of his Markets Now presentations, the next of which will be on Monday 12 June at London’s Caledonian Club.   

On Target is posted in the Subscriber's Area.



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May 05 2017

Commentary by Eoin Treacy

May 05 2017

Commentary by Eoin Treacy

Kuroda Confident Can Raise Wages, Prices "Significantly"

This note by Chua Baizhen Bloomberg may be of interest to subscribers. Here it is in full:

“The mindset is still quite cautious about inflation expectations, but I’m quite sure that with continuous accommodative monetary policy, supported by fiscal policy, we’d be able to eventually raise wages and prices significantly,”

CNBC cites BOJ Governor Haruhiko Kuroda in interview.

* Projected growth rate of 1.5% “not great” but it’s well above medium-term potential growth rate

* Means output gap to shrink and become positive while labor market continues to tighten

* Wages, prices would eventually rise to achieve 2% inflation target around fiscal 2018

* Yield curve control “has been functioning quite well”

* 10-yr JGB target should, for the time being, be maintained around 0%

* Acknowledges that “headline inflation has been quite slow to adjust upward” in part because of weakness in oil prices

 

Eoin Treacy's view -

Since its bubble burst in the late 1980s Japan has been attempting to combat deflation and despite its best efforts failed. The big question is whether this was because they were not aggressive enough early on in forcing the banking sector to write down large bad loan books, or was it because their bust occurred in one of the greatest disinflationary periods in modern history and no matter what they did they could not have fomented inflation? I suspect the answer lies somewhere in between. 



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