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June 19 2019

Commentary by Eoin Treacy

Video commentary for June 19th 2019

June 19 2019

Commentary by Eoin Treacy

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

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

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

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

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

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

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

Eoin Treacy's view -

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



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June 19 2019

Commentary by Eoin Treacy

Musings from the Oil Patch June 18th 2019

Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report for PPHB. Here Is a section on the commodity/S&P500 ratio:

When we contemplate the market’s assessment of commodities versus stocks, we find the former, which includes oil and gas, to be at the lowest valuation point in at least 50 years.  Does this mean that the commodity market it being disrupted?  Peak valuation points occurred in 1973-74, 1990 and 2008.  Each peak was associated with spikes in oil prices caused by geopolitical events such as the Arab Oil Embargo, the First Gulf War and the Global Financial Crisis, which happened as oil prices traded in excess of $100 per barrel.  Likewise, each low has been associated with low oil prices – either absolute lows, or lows below more recent oil price ranges.  

With respect to the low points in the valuation of commodities versus stocks, the prior two lows were marked by excess stock market speculation about super-growth stock future earnings.  The 1998-99  Dot.com Bubble, which saw companies brought public with barely any revenues and no earnings, but lots of “eyeballs” on web sites or clicks on shopping sites, happened to also be associated with oil prices falling to $11 per barrel as the Asian currency crisis unfolded and a brief global recession occurred.  The 1970-73 low was marked by the market bubble created by the Nifty-Fifty growth stocks, as price-to-earnings ratios for these 50 super-growth companies soared to ratios in excess of 50 times next year estimates for earnings per share.  Of course, two energy service companies – Schlumberger Ltd. (SLB-NYSE) and Halliburton Companies, Inc. (HAL-NYSE) – were part of this Nifty-Fifty stock group.  Crude oil prices at that point were in the $3 per barrel range, and there was a battle brewing between the seven largest global oil companies that ruled the international oil business and the Organization of Petroleum Exporting Countries over the value of a barrel of oil for tax and royalty calculations.  That tax battle lit the fuse that exploded after the Yom Kippur War involving Israel and Egypt in 1973, leading to the Arab Oil Embargo and the explosion in global oil prices.  

Eoin Treacy's view -

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

This ratio has been doing the rounds of pundit commentary for the last couple of years because commodities are trading at a such a record low level relative to stocks. Jeff Gundlach in particular has been predicting a resurgence in commodity prices because of their relative discount to stocks and one of the reasons private equity has been so interested in the energy space is because of the relative discount to equities on offer, coupled with the prolific production profiles (and early payback) of unconventional wells.



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June 19 2019

Commentary by Eoin Treacy

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

I am enjoying the commentary as usual. 

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

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

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

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

Eoin Treacy's view -

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



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June 19 2019

Commentary by Eoin Treacy

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

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

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

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

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

Eoin Treacy's view -

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



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June 19 2019

Commentary by Eoin Treacy

June 19 2019

Commentary by Eoin Treacy

2019: The 50th year of The Chart Seminar

Eoin Treacy's view -

There will be a memorial concert for David at the Royal Festival Hall on October 5th. It looks like we will have a room at the Royal Festival Hall for an hour before the concert for a memorial. Wine and canapes will be served. Afterward we will retire to the Benefactor's Lounge where Tim Walker, Chairman of the LPO will dedicate the concert in David's memory. The concert will be from 7:30 to 10pm. If anyone would like to attend the concert in addition to the memorial there will be a box to tick on the booking form which I will provide as soon as I have it.   

Since this is the 50th year of The Chart Seminar we will be conducting the event on October 3rd and 4th to coincide with the memorial on the Saturday.

In the meantime, if you have any questions, would like to attend, or have a suggestion for another venue please feel to reach out to Sarah at sarah@fullertreacymoney.com.  

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). Annual 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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June 18 2019

Commentary by Eoin Treacy

June 18 2019

Commentary by Eoin Treacy

ECB Rate Cut Is Weapon of Choice as Draghi Threatens Action

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

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

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

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

Eoin Treacy's view -

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



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June 18 2019

Commentary by Eoin Treacy

Are Valuations Irrelevant?

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

Eoin Treacy's view -

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

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



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June 18 2019

Commentary by Eoin Treacy

Visa, Mastercard, PayPal Join Facebook to Form Crypto Effort

This article by Julie Verhage, Jenny Surane and Kurt Wagner for Bloomberg may be of interest to subscribers. Here is a section:

The currency, called Libra, will launch as soon as next year. It’s what’s known as a stablecoin, one that can avoid massive fluctuations in value so it can be used for everyday transactions. Industry experts and insiders say the payments companies want a seat at the table to help shape the new currency.

“It’s not unusual for the incumbents -- Visa, Mastercard, PayPal -- to partner with a disruptor,” Harshita Rawat, an analyst at Sanford C. Bernstein, said in an interview. “They would at least want to participate in how this product is being developed.”

New payment methods such as Apple Pay and other mobile wallets are often slow to take off, so any competition is likely to be years away. Still, the earlier payments companies come to the project, the more time they have to ensure their businesses don’t suffer.

Eoin Treacy's view -

A stablecoin is specifically designed to hold parity with a base fiat currency and therefore is not suited to speculative investment. They do, however, have attractions as being easy to convert into other crypto assets and have the same portability features. The one challenge stablecoins have had is there have a couple of instances of them being used as Ponzi schemes, because the provider did not have the assets on deposit to support the currency’s value. Facebook will likely solve for that problem at least, considering its substantial cash pile, but the much bigger issue will be in how it can monetise the financial transactions of its billions of users. That is where the clear investment opportunity resides.



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June 18 2019

Commentary by Eoin Treacy

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

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

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

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

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

Eoin Treacy's view -

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



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June 17 2019

Commentary by Eoin Treacy

June 17 2019

Commentary by Eoin Treacy

Internet Trends 2019

This report from Mary Meeker at Bond includes a large number of graphics which may be of interest to subscribers. Here is a section from the introduction:

The rapid rise of gathered / analyzed digital data is often core to the holistic success of the fastest growing & most successful companies of our time around the world. Context-rich data can help businesses provide consumers with increasingly personalized products & services that can often be obtained at lower prices & delivered more efficiently. This, in turn, can drive higher customer satisfaction. Better data-driven tools can improve the ability for consumers to communicate directly & indirectly with businesses & regulators.

Core constituents (consumers / businesses / regulators) are increasingly drinking from a data firehose & management challenges continue to rise for all parties. Broad awareness of challenges (& related vigorous / heated debates) can be the first step in driving change.

Consumers are aware of concerns about Internet usage overload & are taking steps to reduce usage – leading USA-based Internet platforms have rolled out tools to help monitor usage & social media usage growth appears to be decelerating following a period of strong growth. Privacy & problematic content concerns are also top-of-mind & are following similar patterns.

Owing to social media amplification, reveals / actions / reactions about events can occur quickly – resulting in both good & bad outcomes. In markets where online real-time rating systems exist, accountability can be improved vs. offline options as consumers & businesses interact directly while regulators can also benefit.

Rapidly expanding connectivity has helped amplify voices of good & bad actors. This has brought new focus to an age-old challenge for regulators around the world – finding the most effective ways to amplify good & minimize bad, often resulting in different regional interpretations & strategies.

Eoin Treacy's view -

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

The march of technology and pace of innovation as massive data sets are parsed, managed and exploited has helped to drive the bull market in data centres and the resulting cloud-based product offerings. That remains a powerful trend because new business models are springing up to lever the potential for costumer engagement from automating the product offering to cater to user demand. That represents a reversal of the traditional product to customer model and is a primary trend behind the creation of new companies.



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June 17 2019

Commentary by Eoin Treacy

The Power of Self-Learning Systems

This presentation by Demis Hassabis from DeepMind may be of interest to subscribers. I found it fascinating.

June 17 2019

Commentary by Eoin Treacy

Illinois farmers give up on planting after floods, throw party instead

This article by Tom Polansek for Reuters may be of interest to subscribers. Here is a section:

Nationwide, farmers are expected to harvest the smallest corn crop in four years, according to the U.S. Department of Agriculture. The agency last week reduced its planting estimate by 3.2% from May and its yield estimate by 5.7%.

Farmers think more cuts are likely as the late-planted crop could face damage from hot summer weather and an autumn frost.

“An early frost will turn this world upside down,” Rock Katschnig, a farmer from Prophetstown, Illinois, said at the party.

Eoin Treacy's view -

It is one thing to have worries about being able to sell into overseas markets like China, it is quite another challenge not to have inventory at all. The failure to plant spring crops represents a significant risk for farmers if they plant late because of getting the wrong weather at the wrong time and potentially delaying winter crops.



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June 17 2019

Commentary by Eoin Treacy

Facebook's Answer to Bitcoin Is a Double Threat

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

Weekend media leaks suggest that Facebook’s “Libra” project will be a continuation of its past efforts to expand its payments business and keep customers within the walled garden of its social media apps by creating their very own money.

While Zuckerberg is poised to unveil a team of partners – reportedly including eBay Inc., Farfetch Ltd., Spotify Technology SA, Uber Technologies Inc. and Vodafone Group Plc – so far this feels very much like Facebook’s baby. Tellingly, it’s not one that the big banks or the other Silicon Valley and Seattle giants seem ready to adopt quite yet, unless Zuckerberg surprises us with some bigger names at the launch.

The target customer base for these new digital tokens looks certain to be the 2.6 billion-strong user base of Facebook, WhatsApp and Instagram.

While Facebook will no doubt assure us that this project is all about making the lives of its customers ever easier, giving them the ability to actually buy stuff in a way that Bitcoin has rarely offered, it’s hard to square it away with the political effort to curb Big Tech’s monopolistic tendencies (regardless of that roster of launch partners and their $10 million participation fees). 
 

Eoin Treacy's view -

If we were to summarise Facebook’s foray into cryptocurrencies it would be to say that Zuckerberg wants what Jack Ma and Pony Ma have. Alibaba has Ali-Pay and Tencent has WeChat-Pay. Respectively these represent the crown jewels of their respective business empires, because the payments platforms tie users to the parent app but also enable a significant multiplier effect by linking buyers with sellers.  

 



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June 14 2019

Commentary by Eoin Treacy

June 14 2019

Commentary by Eoin Treacy

YouTube University

Thanks to a subscriber for these notes from Jeff Gundlach’s conference call on Thursday. Here is a section:

Eoin Treacy's view -

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

This idea that President Trump has a plan to make sure the economy is humming in the run-up to the Presidential Election is gaining ground on Wall Street and elsewhere. David Rosenberg put out a tweet last week expressing the same sentiment. 

Maybe Trump is a genius, after all. What if he finally gets the steep Fed rate cuts he has been demanding? After that, he ends the trade wars, tariffs go to zero, and the stock market surges to new highs -- just in time for the 2020 election!

I agree it is certainly possible he is self-absorbed enough to try and attempt to shape the economy’s prospects to his own interests but there is an alternative interpretation which does not get a lot of airplay.



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June 14 2019

Commentary by Eoin Treacy

Disruptive Innovation: WHY NOW?

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

Eoin Treacy's view -

Secular bull markets are most often driven by massive technological innovation which creates productivity and growth and efficiencies where none where possible previously. That was true of mechanisation, electricity, semiconductors and the internet. It is also likely to be true of biotechnology, blockchain, artificial intelligence, robotics and batteries.



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June 14 2019

Commentary by Eoin Treacy

This Time It's Different

Thanks to a subscriber for this note from Howard Marks, for Oaktree which may be of interest. Here is a section:

Eoin Treacy's view -

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

The biggest manias tend to have the biggest internal contradictions which everyone is conditioned to accept while the bubble is inflating but can identify as ridiculous after it pops. That is one of the most important tenets of crowd psychology to remember during the Third Psychological Perception Stage of a bull market; where bubble risk is most acute.



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June 13 2019

Commentary by Eoin Treacy

Video commentary for June 13th 2019

June 13 2019

Commentary by Eoin Treacy

Email of the day - on the USA's oil advantage:

Quick thought, following your comment on America's oil glut, and Morgan Stanley's report you highlighted.

I have been watching the difference in price between the WTI and Brent Crude for a long time now. The difference seems to vary between 10 and almost 20% depending on the day, with WTI obviously being the cheaper. Is it too SIMPLISTIC to say?

1) that US factories, offices, homes etc enjoy an enormous advantage over their global competitors with energy costs being so much cheaper, not forgetting it already enjoys a significant tax advantage over many as well.

2) when the US does become a significant oil exporter, it can make a lot of profit, even by offering only minor discounts to the Brent price to attract business. Possibly more profit than from its LNG exports.

Eoin Treacy's view -

Thank you for highlighting these points. I’ve always been a fan of Ockham’s Razor. There is no need to get over complicated. The USA has a massive advantage in terms of its oil and gas production capacity. That is reshaping global geopolitics, it will have a meaningful effect on the balance of payments and it has already had a meaningful effect on the chemical industry because of reduced input costs.  one.



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June 13 2019

Commentary by Eoin Treacy

Beyond Meat Gains as Tim Hortons Adds Sandwiches at 4,000 Shops

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

 

Beyond Meat Inc. got a reprieve from two downgrades in as many days after Tim Hortons said it’s now offering faux-meat breakfast sandwiches at almost 4,000 locations across Canada.

The plant-based meat products maker gained as much as 7.1% in early trading after the coffee-and-doughnuts chain said it added three breakfast sandwiches to the menu made with Beyond Meat sausages after testing them at select stores last month.

The stock reversed earlier losses driven by Sanford C. Bernstein & Co.’s decision Wednesday to cut its rating on Beyond Meat to market perform from outperform, saying shares of the company have gotten too expensive after a more than 400% rally since its May 1 initial public offering. On Tuesday, JPMorgan Chase & Co.’s similar move spurred a 25% decline, Beyond Meat’s worst day since the debut.

Last week, the company reported quarterly earnings for the first time since the IPO, fuelling optimism among investors when it said sales would exceed $210 million this year, topping analysts’ estimates. It also said earnings before interest, taxes, depreciation and amortization would break even, compared with projections it would have a loss. The results reinforce that consumer demand for alternative meat products is on the rise.

Eoin Treacy's view -

After seeing such an impressive move on the upside since the IPO, when I saw a Beyond Meat Burger on the menu of my club’s restaurant this afternoon, I thought I had better taste one. It was good and certainly competes favourably with the de rigeur beef patties at most fast food outlets. I would hasten to add however that it pales in comparison with the gourmet burgers on offer in London and much of Europe. The cost on the other hand was on par with any average burger and that is an important part of its appeal.



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June 13 2019

Commentary by Eoin Treacy

Uranium Sector

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

Enviro Minister Schulze recently said that Germany will stick to its timetable to close the last nuclear reactor by YE22.  Some critics like Volkswagen CEO Herbert Diess believe that it should wind down coal before nuclear. A recent Forbes article “What Does It Actually Cost to Charge Up an Electric Car focused on cost of charging an EV.  We took it one step further and also determined the environmental impact of Germany’s decision.  Given that France’s electricity generation is 73% nuclear and Germany is only 12%, we compared estimated costs and emissions associated with charging a Tesla Model S with a 100-kWh battery. First off, electricity prices appear 45% lower in France.  Secondly, CO2 emissions from electricity generation to charge an EV in France is just 13% of what it is in Germany. Yes, Germans would see a 140% CO2 reduction by using EV’s versus that from an average ICE vehicle, but the French would see a 1,720% CO2 reduction.

Eoin Treacy's view -

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

For the green movement there is no greater cause celebre than to combat nuclear proliferation. That consideration more than any other fired the resolve of Angele Merkel to wind down Germany’s nuclear industry following the Fukushima disaster even though Germany is not a seismically active area.



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June 13 2019

Commentary by Eoin Treacy

What Your Face May Tell Lenders About Whether You're Creditworthy

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

In its lending business, meanwhile, Ping An says it uses its technology to analyze the faces of loan applicants in real time, searching for “micro-expressions” that reveal their emotional and psychological state. Such expressions typically occur within fractions of seconds and are hard for people to control, and loan officers make more accurate judgments on the applicants’ credibility based on this information, according to an article posted by Ping An on its official WeChat social-media account in China last year.

For large loans, applicants often have to answer questions in an online video meeting that typically lasts 10 to 15 minutes. Ping An records and analyzes how the applicant answers questions, and looks for signs of eye-shifting or other suspicious behavior, which would be flagged by its system.

Ping An in January said it has made more than 500 billion yuan worth of loans with the help of its micro-expression technology. It also said the technology has helped shorten its average loan-approval times to two hours from five days.

Eoin Treacy's view -

Tracking movement of large numbers of people and compiling databases on patterns of behaviour, social media activity and even utilities bills is about as a Big Brother as is currently imaginable. The rolling out of the social credit scheme to the insurance sector is just another part of that long-term project to compile a unique score for each individual which will be more exact than a credit score and will have broad spectrum uses beyond credit, not least in quelling political activism.



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June 12 2019

Commentary by Eoin Treacy

June 12 2019

Commentary by Eoin Treacy

US Policy Mix Flips and Will Take the Dollar with It

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

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

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

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

Eoin Treacy's view -

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



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June 12 2019

Commentary by Eoin Treacy

Transcript of Felix Zulauf's interview by Grant Williams -

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

Eoin Treacy's view -

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

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



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June 12 2019

Commentary by Eoin Treacy

What if the US and China Reach a Trade Deal?

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

June 12 2019

Commentary by Eoin Treacy

How to Keep Thieves From Stealing Your PIN at the ATM

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

What’s more, no-name ATMs are often free-standing and not built into the wall, like those at banks. That means they’re easier to get inside of and thus more susceptible to skimming and other crimes, says Brian Krebs, who covers computer security and cyber crime at krebsonsecurity.com. (In fact, if you can see the top of an ATM, that’s a big warning sign, he says.)

That said, third-party ATMs are hardly the only machines to look out for. Says Mr. Rosenberg: “I’m pretty sure every type of ATM has had skimmers on them.”

Eoin Treacy's view -

There is no justifiable reason to use a debit card. They offer unparalleled access to one’s bank account with no protection and therefore the risk is simply too great relative to the benefit. Credit cards are insured, often have no fees tor holding the card and can be paid off automatically at the end of the month, plus they help to build credit. At least if your credit card is stolen you have recourse to the card issuer for recompense. That is a lot more difficult to with debit cards.



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June 11 2019

Commentary by Eoin Treacy

Video commentary for June 11th 2019

Eoin Treacy's view -

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

Some of the topics covered include: China moves to ease lending standards, supports the stock market and the currency, Wall Street pauses. gold, copper, lumber and corn steady, oil weak. Europe, India and ASEAN steady. Dollar steady but susceptible to additional weakness. 

Some of the topics covered include: China moves to ease lending standards, supports the stock market and the currency, Wall Street pauses. gold, copper, lumber and corn steady, oil weak. Europe, India and ASEAN steady. Dollar steady but susceptible to additional weakness. 

 



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June 11 2019

Commentary by Eoin Treacy

On Target June 11th 2019

Thanks to Martin Spring for this edition of his ever-interesting report. Here is a section on China’s tech ambitions:

The FT reports that the US ban on infotech trade with China could be a problem for Google as its Android system is “central to the smartphone market in China, which is bigger than Europe and the US combined, due to its use by Huawei and other [Chinese] phonemakers include Oppo and Xiaomi.”

Chinese president Xi Jinping has spoken openly about his plans for China to gain global dominance in future high technologies in just SIX years’ time. Their foundation will be China’s capacity to design and manufacture cutting-edge semiconductor chips. $150 billion is being poured into achieving that. However, so far subsidies and tax breaks have only lifted China’s self-reliance in low-value chips.

The Americans are clearly using the current “trade war” to hinder Xi’s ambitious plans by demanding that the Chinese cease their theft of intellectual property, and of using their negotiating power to force technology transfers as part of the price of allowing joint ventures to operate in their huge domestic market. 20 per cent of European companies doing business in China, for example, say they are compelled to hand over technology to Chinese partners.

It’s unlikely the Americans will succeed in getting the Chinese to play fair. Agreeing to trade-balancing deals would be one thing. Agreeing to stop their massive co-ordinated attack on the heights of leading-edge industries would be something else. It’s certain they’ll renege on any promises about that they have to give.

Ironically, cutting Chinese access to American components and technology, or merely threatening to do so, is the strongest incentive of all to stimulate Chinese development of high-tech sectors.

Investors have generally taken the view that the ugly contest between Trump and Xi will be resolved in a “deal” that the American president can claim to be a victory, but Xi can present as a fair agreement. That still seems to be the likely outcome.

As for the arms race… that still has much further to run. It will be a key part of the long-term strategic contest between the hegemon and its fast-growing global challenger.

Eoin Treacy's view -

The challenge in competing with the West is less in developing hardware, which can be copied at will, but in developing the software to function across platforms, communicate between devices and provide both back and front-end support. It is no mistake that the majority of the companies which have attained mega-cap status are software driven and outsource manufacturing of their hardware. There is no doubt China is capable of creating its own software systems, but it is not an easy process and will take time even with an army of programmers.



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June 11 2019

Commentary by Eoin Treacy

China Sets Yuan Fixing Stronger Than Expected in Sign of Defense

This article by Tian Chen and Ran Li for Bloomberg may be of interest to subscribers. Here is a section:

"Forget about the psychological 7 level," said Khoon Goh, head of research at Australia & New Zealand Banking Group Ltd., adding that the fixing will stay stronger than 6.9 before the Group of 20 summit. "Today’s fixing sends a clear message that the authorities are still intent on keeping the yuan stable, and
have no desire to see it weaken further."

Trump Says He’ll Raise China Tariffs If Xi Won’t Meet at G-20 U.S. President Donald Trump and his Chinese counterpart Xi Jinping may meet at the G-20 summit in Osaka this month. Traders will be closely watching the gathering to gauge the outlook for trade negotiations and the yuan.

"We expect the Chinese authorities to continue defend 7 in the foreseeable future," said Becky Liu, head of China macro strategy at Standard Chartered Plc, adding that a negative outcome at the G-20 summit wouldn’t warrant a change in this stance. "The PBOC may step up the size and frequency of bill issuance should the yuan come under greater depreciation pressures."

Eoin Treacy's view -

With upwards of a million people protesting on the streets of Hong Kong and the world paying attention to the trade war between the USA and China, the Chinese administration has a clear incentive to project an aura of stability and calm.



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June 11 2019

Commentary by Eoin Treacy

BOE Hike Warnings Go Unheeded as Rate Cuts Seen as More Likely

This article by David Goodman for Bloomberg may be of interest to subscribers. Here is a section

Bank of England policy makers and investors are taking contrasting views of the U.K. economy as official warnings of potential interest rate hikes clash with market predictions for a cut.

The market moves are partly based on a belief that the U.S. Federal Reserve is on course to reverse its recent hiking path, forcing central banks around the world to follow suit, but also reflect the drastically different Brexit outcome built into investors’ outlook.

While the BOE’s forecasts -- including its hawkish view of longer-term inflation -- are based on the assumption of a smooth Brexit process, investors have the luxury of being more nimble, and so have increasingly priced in the risk of a no-deal departure in October. That’s not without reason, since no deal is a policy advanced by a number of potential candidates to replace Theresa May as prime minister this summer. There are also nascent signs that BOE officials are ending their year of unanimity, with some edging closer to the market’s view.

Eoin Treacy's view -

The UK is just about the only developed market where inflation measures are above the comfort level of the central bank and yet the Bank of England is not in a position to raise rates. CPI has been above 2% since early 2017 and while the rate moderated from 3% to 2% last year it has stabilised this year. Brexit represents a key uncertainty because a hard exit would deliver a short sharp shock which would justify the low interest rate environment, whereas if the UK ultimately decides to remain in the EU, the Pound is undervalued and the Bank of England be more inclined to raise rates.



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June 10 2019

Commentary by Eoin Treacy

Video commentary for June 10th 2019

Eoin Treacy's view -

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

Some of the topics covered include: Wall Street extends rally but fails to hold intraday high, Treasuries susceptible to some consolidation, Gold and precious metals pause, oil weak, Dollar eases, Rand and Peso steady, Renminbi breaks downwards from its short-term range, 



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June 10 2019

Commentary by Eoin Treacy

Email of the day on South African governance:

In your recent big picture video, you outlined the possible trajectory of some of the emerging market currencies in a declining dollar environment. Some time ago I emailed in to state my reasons why I thought the ZAR might be one of the worst in the immediate future. Events since the recent election have only served to confirm that view. At the moment there is a struggle going on in the ANC regarding the mandate of the Central Bank The powerful ANC secretary general wants the mandate changed from the focus on inflation to include growth and jobs considerations. In a public statement this week, Mr Ace Magashule wants the bank to embark on a policy of "Quantity Easing" whatever that might mean!! This would inevitably send South Africa in the direction of Zimbabwe. This country could end up worse than Zim for the following reason.

Recently, there have been a series of xenophobic attacks involving firebombing of trucks on some of the main motorways. Local companies have been employing drivers from Zimbabwe who are intelligent and highly motivated at the expense of local South Africans. The history of primary and secondary education could not be more different in these adjacent countries. Even under Mugabe the colonial legacy of education was left in charge of the churches who maintained a strong culture of teaching and learning rooted in Christian values. Zimbabwe still uses the Cambridge University exams for both "O" and "A" levels set in 1954. In South Africa, the Apartheid government passed the Bantu education act into law which took away the control of the churches and gave it to the state. This has proved to be an unmitigated disaster by any measure. The last thing South Africa needs right now is a huge population of poorly educated young people currently around 30% many of whom embrace a culture of entitlement

Eoin Treacy's view -

Thank you for this on-the-ground perspective of the environment in South Africa. The dumbing down of curricula is a global phenomenon linked to the cutting of educational funding, the expanding power of teacher’s unions, the lack of commitment from parents to take responsibility for the education of their own children and the desire of politicians to show results against a background of deteriorating fundamentals. It’s a secular trend and shows little sign of changing because it would require everyone to work harder for a distant benefit which seems to be beyond the ability of society to collectively deal with right now.



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June 10 2019

Commentary by Eoin Treacy

Sunset of China's REE Dominance

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

Eoin Treacy's view -

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

China has overplayed its hand in the rare earth metals sector. Two years ago, it produced 80% of the worlds supply, now it produces 70%. The global economy is now alert to the fact that these metals represent vital components in all manner of new technology products.



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June 10 2019

Commentary by Eoin Treacy

Email of the day - on silver miners:

With the silver/gold ratio at multi-year lows, coupled with the adage that silver is high beta gold, I’ve been evaluating from a contrarian perspective whether to increase my exposure to silver whilst the market is in the depths of despair and await a possible turnaround. 

The problem is where to venture as the fundamentals of virtually every silver producer are pretty scary, including CDE, which has been mentioned from time to time in your Comment of the Day.

I came across this informative article which analyses in some detail the current state of the market and its various producers, the declining percentage of their production which is silver related, and their prospects of outperformance should the silver price recover. 

I would appreciate your insight into this analysis and which companies, or ETF’s, you feel might be worth considering for investment.

Eoin Treacy's view -

Thank you for this informative article which may be of interest to other subscribers. Here is a section:

Silver mining is as capital-intensive as gold mining, requiring similar large expenses to plan, permit, and construct new mines, mills, and expansions. It needs similar fleets of heavy excavators and haul trucks to dig and move the silver-bearing ore. Similar levels of employees are necessary to run silver mines. But silver generates much-lower cash flows than gold due its lower price. Silver miners have been forced to adapt.

This is readily evident in the top SIL miners’ production in Q1’19. SIL’s largest component in mid-May as this latest earnings season ended was the Russian-founded but UK-listed Polymetal. Its silver production fell 15.0% YoY in Q1, but its gold output surged 41.1%! Just 17.5% of its Q1 revenues came from silver, making it overwhelmingly a primary gold miner. Its newest mine ramping up is another sizable gold one.

SIL’s second-largest component is Wheaton Precious Metals. It used to be a pure silver-streaming play known as Silver Wheaton. Silver streamers make big upfront payments to miners to pre-purchase some of their future silver production at far-below-market unit prices. This is beneficial to miners because they use the large initial capital infusions to help finance mine builds, which banks often charge usurious rates for.



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June 10 2019

Commentary by Eoin Treacy

China Faces Showdown in Hong Kong as Mass Protests Roar Back

This article by Shawna Kwan, Carol Zhong and Blake Schmidt for Bloomberg may be of interest to subscribers. Here is a section:

China has spent much of the past five years tightening its gripover Hong Kong with little challenge. Now, hundreds of thousands in the city are fighting back.

Hong Kong is bracing for a potentially historic showdown over extradition legislation that could for the first time subject residents to face justice in Chinese courts, further eroding the city’s autonomy. Opponents on Sunday staged one of the largest protests since the former British colony’s return to China: Organizers said more than 1 million participants showed up, while police put the figure at 240,000.

Tensions are only heating up, with demonstrators vowing to surround the city’s Legislative Council on Wednesday, when lawmakers debate scores of proposed amendments. Hong Kong’s Beijing-backed leader, Carrie Lam, defended the bill in a 45-minute news briefing Monday, saying it was necessary to prevent the city from becoming a “haven” for fugitives and vowing to press ahead with its passage. China endorsed her government’s efforts later in the day.

Eoin Treacy's view -

Deng promised the “one country, two systems” model would last for a century. Hong Kong will be lucky if it makes it to quarter of that time. Extra judicial disappearances have been a feature of Hong Kong life for the last decade and this extradition law would institutionalise the process. Tightening mainland oversight, particularly of critics of the administration is inevitable regardless of how many people protest. In the meantime, there is a clear intent to express power and control over Chinese territories so this situation has the potential to escalate.



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June 07 2019

Commentary by Eoin Treacy

June 07 2019

Commentary by Eoin Treacy

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

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

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

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

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

Eoin Treacy's view -

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



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June 07 2019

Commentary by Eoin Treacy

June 07 2019

Commentary by Eoin Treacy

Shell's Floating Prelude LNG Poised to Load First Cargo

This article by Stephen Stapczynski for Bloomberg may be of interest to subscribers. Here it is full:

Shell’s Prelude floating LNG plant offshore Australia is expected to load its first cargo on the vessel Valencia Knutsen, which is currently idled in the area, according to commodity shipment tracker Kpler.

* The vessel arrived near Prelude on June 4 and was likely attempting to load from the facility, but it left berth range a few hours after arrival, Kpler analysts said

** The vessel will probably be moored alongside the Prelude facility before the end of the week: Kpler

* NOTE: Shipment of the first LNG cargo is “imminent,” Platts reported on June 4, citing Shell’s head of integrated gas, Maarten Wetselaar

Eoin Treacy's view -

When Royal Dutch Shell announced it was ready to spend billions on developing a major offshore LNG processing facility in Northern Australia a few years ago it was considered a risky venture. However, the company’s long-term bet on natural gas representing a much better demand growth trajectory than crude oil has been proved correct. 



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June 07 2019

Commentary by Eoin Treacy

Beyond Meat's Forecast Wows Wall Street as IPO Darling Delivers

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

“As long as Street forecasts fail to properly reflect BYND’s remarkable potential, we remain overweight.” Notes that “eventually this stock’s hefty valuation will more than offset the fast-growing fundamentals.”

Notes the importance of CEO Ethan Brown calling the forecast “very conservative” and telling investors that the company doesn’t include foodservice customers in guidance until they are past the testing stage.

JPMorgan has a $233 million 2019 sales target -- vs the company forecast of $210 million -- and the analyst says his estimate may be conservative. “It is conceivable that Tim Hortons alone (a current customer with nearly 5,000 locations that is not yet in guidance) could account for most of that
gap.” Rates overweight, price target to $120 from $97

Eoin Treacy's view -

Meat alternative providers like Beyond Meat and Impossible Burger have a clear benefit in that they are providing a new product which is fashionable. The trendiness of vegan food products that are considered both healthy and taste good represents a significant market phenomenon which has been growing in importance at local eateries around Los Angeles for the last couple of years. The primary benefit of these products for fast food chains like McDonalds, Burger King or Jack in the Box is they attract a new demographic that normally avoid such establishments.



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June 06 2019

Commentary by Eoin Treacy

June 06 2019

Commentary by Eoin Treacy

Email of the day on ETF holdings of gold

I have been particularly taking note of the chart for The Total Known ETF holdings of gold over the past two weeks and observe it has bounced emphatically off the trend mean. Does this reinforce your view that gold is due for a bullish outlook?

Eoin Treacy's view -

ETF Holdings of Gold represent a significant source of demand for gold as an investible asset class. At 71.4 million ounces ETFs represent larger stockpiles than most countries and therefore reflect a signal as to the interest of the international community in the gold market.



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June 06 2019

Commentary by Eoin Treacy

Is silver due to catch up?

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

Eoin Treacy's view -

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

The Gold/Silver ratio is at rather extreme but not the most extreme levels seen historically. David long described silver as high-beta gold and poor man’s gold. The less liquid nature of silver trading and the various use cases for the metal contribute to it being more volatile than gold.



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June 06 2019

Commentary by Eoin Treacy

The rise and rise of private markets

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

Dry powder: How much is too much? With competition rising and deals hard to find, GPs’ stocks of uncommitted capital, or dry powder, reached a record high of $1.8 trillion in 2017 (Exhibit 14). That was up 9 percent year on year; indeed, dry powder has grown by 10 percent on average every year since 2012. Does the industry have too much capital? Probably not, or at least not yet. If we compare dry powder to other measures, such as funds raised and AUM, “stocks” of capital available for investment have changed little over the past few years vis-à-vis the size of the industry. Dry powder as a percentage of in-year fundraising has been between 220 and 280 percent for the past six years. As a percentage of AUM, dry powder has been similarly consistent, at 30 to 34 percent. Nor are there any significant variations among asset classes, suggesting that GPs are finding adequate opportunities in every field. Furthermore, by the metric we introduced in the 2017 edition of this report, years of PE inventory on hand, dry powder still seems adequate to deal flow. If we divide dry powder by deal volume on a seven-year trailing basis, the industry seems to have cycled through its capital in a stable way for the past several years (Exhibit 15).

Eoin Treacy's view -

This report while focusing on 2018, references a lot of data from 2017. The quantity of capital now held by private equity groups in anticipation of a buying opportunity stands at $3 trillion. That’s almost a multiple from a couple of years ago and speaks both to the quantity of money still sloshing around and the dearth of attractively valued assets to buy with it.



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June 06 2019

Commentary by Eoin Treacy

Investors Signal Draghi Is Running Out of Time and Ammunition

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

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

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

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

Eoin Treacy's view -

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

 



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June 06 2019

Commentary by Eoin Treacy

"Record 3,000" Hong Kong lawyers in silent march against controversial extradition bill

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

If passed, the new legislation would allow the transfer of fugitives from Hong Kong to jurisdictions with which it has no extradition deal, including mainland China.

Organisers estimated the turnout to be between 2,500 and 3,000, but police said attendance peaked at 880.

Four Nordic chambers of commerce also jointly expressed concern that the bill had been “fast tracked without the thorough consultation and full legislative scrutiny that is customary for a piece of legislation of this nature”.

The city’s last colonial governor Chris Patten meanwhile urged the government to shelve the bill, arguing it would “strike a terrible blow” to Hong Kong’s rule of law.

Eoin Treacy's view -

Any hope that Hong Kong will be allowed to host critics of the mainland’s administration are being quashed. The time when Hong Kong is completely subsumed within China is drawing progressively closer as the “one country, two systems” approach is abandoned.  



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June 05 2019

Commentary by Eoin Treacy

Video commentary for June 5th 2019

Eoin Treacy's view -

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

Some of the topics covered include: ADP new jobs report pulls back sharply, Dollar pulls back from its intraday peak, stock and bond market steady,, oil extends pullback, gold tests its high for the year before easing. 

Some of the topics covered include: ADP new jobs report pulls back sharply, Dollar pulls back from its intraday peak, stock and bond market steady,, oil extends pullback, gold tests its high for the year before easing. 

 



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June 05 2019

Commentary by Eoin Treacy

Market Spotlight: A Major Base For Gold

This note from Credit Suisse may be of interest to subscribers. Here it is in full:

June 05 2019

Commentary by Eoin Treacy

Iran Crisis Guide Things That Matter

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

Eoin Treacy's view -

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

The biggest issue for oil prices right now is the risk of slowing Chinese demand growth and what that means for global demand growth. Auto sales in China are declining. Regardless of whether that is because of regulatory restrictions on purchases or because of slowing growth the reality is we are seeing fewer cars being sold. With thousands of jobs being lost at auto makers that is both a factor for oil demand growth but doubly so because of the impact on GDP growth.



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June 05 2019

Commentary by Eoin Treacy

China digging in on trade - We are Reducing International Stocks

This note from Rodd Smith for Riverfront may be of interest to subscribers. Here is a section:

Eoin Treacy's view -

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

The best time to use moving averages as stops is when we have evidence of a year consistent trend where the price has bounced successively from the trend mean. Nevertheless, a moving average is a trend smoothing device that lags by definition and markets often overshoot so it is reckless to think of the moving average as a sacrosanct level



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June 04 2019

Commentary by Eoin Treacy

Video commentary for June 4th 2019

Eoin Treacy's view -

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

Some of the topics covered include: Fed signals it is listening to the messages being sent by the bond market, Wall Street rebounds, Dollar eases, Europe bouncing led by banks, gold steady, oil quiet, China eases and India pauses, Treasuries pause.



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June 04 2019

Commentary by Eoin Treacy

Powell Signals Openness to Cut If Needed Over Trade Tensions

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

Federal Reserve Chairman Jerome Powell signaled an openness to cut interest rates if necessary, pledging to keep a close watch on fallout from a deepening set of disputes between the U.S. and its largest trading partners.

Referring to “trade negotiations and other matters,” Powell said Tuesday in Chicago that “we do not know how or when these issues will be resolved.”

“We are closely monitoring the implications of these developments for the U.S. economic outlook and, as always, we will act as appropriate to sustain the expansion, with a strong labor market and inflation near our symmetric 2% objective,” Powell said in opening remarks at a conference at the Chicago Fed.

Eoin Treacy's view -

The big question last year was how much tolerance the Federal Reserve has for drawdowns in the stock market. 10% was not enough in January, not least because Jay Powell had just taken the job. However, the persistent pace of raising rates and reducing the size of the balance set nerves on edge that the Fed was not paying attention to signals sent by the market. A 20% drawdown was enough to change that and the Fed rode to the rescue in December.



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June 04 2019

Commentary by Eoin Treacy

Woodford Confronts Career Crisis After Freezing Fund Withdrawals

This article by Suzy Waite and Nishant Kumar for Bloomberg may be of interest to subscribers. Here is a section:

The decision to freeze withdrawals gives Woodford time to position illiquid holdings, the company said in a statement late Monday. While investments in unlisted securities are unusual for a mutual fund, Woodford hasn’t shied away from them.

Two of the top 10 holdings in Woodford’s main fund, accounting for about 7% of assets, were in private companies. A significant drop in size could undermine Woodford’s ability to run the fund effectively, Hargreaves Lansdown said in a statement explaining its decision to remove that fund and the Income Focus Fund from its list.

Freezing withdrawals "is a difficult to decision to make," said Emma Wall, Hargreaves’s head of investment. "It’s disturbing for investors. Any negative news like this is worrying. But it gives him the breathing space to get on being an investor rather than constantly worrying about redemptions. He can use these 28 days to offload illiquid assets, which he’s doing anyway.”

Eoin Treacy's view -

I’m at a Marcus Evans fund managers speed dating event in Palm Springs at the moment. What I find particularly interesting is the exposure it gives me to the strategies being purveyed and where investment managers believe there is money to be made.

I sat in on a panel discussion yesterday where there was a lively discussion about the merits of Liquid Alternatives. The asset class was created in response to the desire for liquidity that arose from the fear of a repeat of the halted withdrawals that occurred during the credit crisis. Many people, however, have complained that the long/short strategies that characterise the product offering are closet trackers and fail to deliver the uncorrelated returns required by Modern Portfolio Theory. Instead they, to a man, recommending ditching liquid alternatives and buying bonds. That’s a clear testament to the fact the bond rally is forcing investment managers to participate because the momentum is beating everything else.



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June 04 2019

Commentary by Eoin Treacy

One Month, 500,000 Face Scans: How China Is Using A.I. to Profile a Minority

This article by Paul Mazur from New York Times, dated April 14th may be of interest to subscribers. Here is a section:

Chinese authorities already maintain a vast surveillance net, including tracking people’s DNA, in the western region of Xinjiang, which many Uighurs call home. But the scope of the new systems, previously unreported, extends that monitoring into many other corners of the country.

The police are now using facial recognition technology to target Uighurs in wealthy eastern cities like Hangzhou and Wenzhou and across the coastal province of Fujian, said two of the people. Law enforcement in the central Chinese city of Sanmenxia, along the Yellow River, ran a system that over the course of a month this year screened whether residents were Uighurs 500,000 times.

Police documents show demand for such capabilities is spreading. Almost two dozen police departments in 16 different provinces and regions across China sought such technology beginning in 2018, according to procurement documents. Law enforcement from the central province of Shaanxi, for example, aimed to acquire a smart camera system last year that “should support facial recognition to identify Uighur/non-Uighur attributes.”

Eoin Treacy's view -

Last April, Mrs. Treacy was at a 7-Eleven in Guangzhou and the cashier offered her a 10 Yuan discount for taking her photo and before she could answer had already taken her data. A day later she found herself accidentally paying for items at a different store with her face.

We are having a significant discussion in the West about privacy and how much of our data should be available to corporations. That discussion does not exist in China and regardless of what venue gathers your data, it all ends up in the hands of the government and that is everything from passwords to fingerprints, to facial features, to browsing history, to utility usage, to travel history to social media contacts to purchasing patterns and genetics.



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June 03 2019

Commentary by Eoin Treacy

Video commentary for June 3rd 2019

Eoin Treacy's view -

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

Some of the topics discussed include: China's regional banks represent an understated but large risk to the economy, gold follows through on the upside, FAANG shares lead on the downside, Treasuries at the first area of potenital resistance if the trend is to remain consistent. Dollar eases and European stock markets at potential support with Germany steadying. 
 

 

Some of the topics discussed include: China's regional banks represent an understated but large risk to the economy, gold follows through on the upside, FAANG shares lead on the downside, Treasuries at the first area of potenital resistance if the trend is to remain consistent. Dollar eases and European stock markets at potential support with Germany steadying. 

 



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June 03 2019

Commentary by Eoin Treacy

As China's Debt Balloons, Emerging Markets Fail to Take Off

This article by John Authers and Lauren Leatherby for Bloomberg may be of interest to subscribers. Here is a section:

Within China, all forms of debt have risen, reflecting a shift in the dynamics of its economy. Before the crisis, China had largely managed to finance its growth without recourse to much debt. The inflows from exports had done the job. The population, fast reaching middle-class living standards, still tended to fund itself conservatively. But household debt has almost tripled from 18.8% of China’s GDP before the crisis to 51.2%. All this debt has successively less impact in stimulating economic growth.

There are reasons why China’s debt is not creating greater fears. If countries want to avoid crisis, issuing a greater share of debt in their own currency is key. This avoids the risk that a devaluation can force them into default, and it leaves them with the option—not necessarily a good one—of printing money to escape difficulties.

China does more than 90% of its borrowing in local currency, which limits the risks somewhat. Meanwhile, almost all large emerging markets now do more than half of their borrowing in their own currency. But not all emerging markets have made uniform progress in converting to local market debt. The two biggest exceptions are Argentina and Turkey—and it is no coincidence that these two countries both slipped into crisis during 2018 as a strong dollar put pressure on their currencies.

Eoin Treacy's view -

Where the burden of debt resides in an economy gives us a clue as to where the greatest effect will be felt from a problem. When the credit crisis struck it was mortgage debt in the USA which led the market downwards and it was consumers who felt the brunt of the decline with the foreclosure crisis and erasing of savings. Today, debt resides on company balance sheets and in China’s regional banking sector in particular.

Successive attempts to wring leverage out of the regional banking sector have finally had the desired effect of ending shadow banking. However, without resource to government capital, Dollar loans or private lending clubs, the regional banks are in serious peril. This is a difficult sector to monitor because only a handful are listed on the stock market.



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June 03 2019

Commentary by Eoin Treacy

Google, Facebook Tumble Amid Heightened Antitrust Scrutiny

This article by Gerrit De Vynck and David McLaughlin for Bloomberg may be of interest to subscribers. Here is a section:

American antitrust officials are under increasing pressure from both Democratic and Republican lawmakers to step up scrutiny of technology giants, and several presidential candidates have already weighed in. Massachusetts Senator Elizabeth Warren laid out a detailed plan for breaking up the
tech giants in March.

European officials have already been aggressively pursuing antitrust cases against American tech firms, including Google, while so far the U.S. has been mostly hands-off.  That may be changing amid continuing criticism that lax enforcement in the U.S. has allowed tech platforms to dominate their markets. The FTC earlier this year set up a task force to examine the conduct of tech companies and their past mergers.

President Donald Trump and many Republicans have complained that Facebook, Google and Twitter Inc. suppress conservative views.

Google, with a sprawling empire of businesses that could feasibly be targets, is in the dark about the focus of the investigation and hopes to learn more this week, according to another person familiar with the situation.

Eoin Treacy's view -

Capitalism trends towards concentration but ultimately runs up against the barrier of antitrust. The size and influence of companies like Amazon, Google and Facebook is the primary obstacle they face rather that the monopolies they control, although this latter point will be used to justify and attempted action.



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June 03 2019

Commentary by Eoin Treacy

What Trade War? Africa Sidesteps Tariffs, Starts Free-Trade Pact

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

Africa, largely ignored in a U.S.-China trade war that could roil economies worldwide, is quietly piecing together the world’s largest free-trade zone.

The African Continental Free Trade Area comes into force on paper on Thursday after the required 22 countries ratified the deal a month ago. Once it’s passed by all 55 nations recognized as part of the African Union, it would cover a market of 1.2 billion people, with a combined gross domestic product of $2.5 trillion. The potential benefits are obvious, if the usual hurdles of nationalism and protectionism don’t yet stand in the way.

The deal would help the continent move away from mainly exporting commodities to build manufacturing capacity and industrialize, said Jakkie Cilliers, head of African Futures and Innovation at the Pretoria-based Institute for Security Studies. Boosting intra-regional trade would spur the construction of roads and railways, reducing the infrastructure gap in Africa, he said.

Eoin Treacy's view -

Africa is the global centre for population growth and represents an important demographic growth engine for the global economy over coming decades. The creation of a free trade area to promote transnational trade right across the continent is a positive development that will help spur growth for many economies.Building up trade that is not exclusively reliant on resource extraction is a major objective for just about every commodity producer but it is especially important in high population growth markets because people need jobs if their productive capacity is to be realised. That’s a long-term objective.



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May 31 2019

Commentary by Eoin Treacy

May 31 2019

Commentary by Eoin Treacy

China Threatens Sweeping Blacklist of Firms After Huawei Ban

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

The vague wording of the Chinese state media report opens the door for Beijing to target a broad swathe of the global tech industry -- from U.S. giants like Alphabet Inc.’s Google, Qualcomm Inc. and Intel Corp. to even non-American suppliers that have cut off China’s largest technology company. Those run the gamut from Japan’s Toshiba to Britain’s Arm.

Shares in Apple Inc. slipped less than 1% while Qualcomm Inc. gained less than 1% and Intel Corp. was little changed in U.S. trading Friday. U.S. stocks slumped as the Trump administration’s trade spats intensified.

“Surely companies that have announced cutting supplies to Huawei, such as Panasonic and Toshiba, would be under threat,” said Michelle Lam, Greater China economist at Societe Generale SA in Hong Kong. “It could be very damaging to multinational companies.’’

Eoin Treacy's view -

The lopsided nature of the trade relationship between the USA and China means the impact of tariffs is equally lopsided. China’s decision to stop buying agricultural products and to advise the population to boycott US goods is the extent of what can be achieved. The geopolitical theatre is where China has more cards to play, not least in its support for North Korea, Iran and Pakistan. The purge/execution of North Korea’s lead negotiator with the USA over the last week is a sign that card is also being readied for play.



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May 31 2019

Commentary by Eoin Treacy

Border at 'Breaking Point' as More Than 76,000 Unauthorized Migrants Cross in a Month

This article from the New York Times posted earlier this month puts some numbers on the scale of the challenge faced in handling migrant issue on the USA’s southern border. Here is a section:

Understanding what is happening on the border is difficult because, while the numbers are currently higher than they have been in several years, they are nowhere near the historic levels of migration seen across the southwest border. Arrests for illegally crossing the border reached up to 1.64 million in 2000, under President Clinton. In the 2018 fiscal year, they reached 396,579. For the first five months of the current fiscal year, 268,044 have been apprehended.

The difference is that the nature of immigration has changed, and the demographics of those arriving now are proving more taxing for border officials to accommodate. Most of those entering the country in earlier years were single men, most of them from Mexico, coming to look for work. If they were arrested, they could quickly be deported.

Now, the majority of border crossers are not single men but families — fathers from Honduras with adolescent boys they are pulling away from gang violence, mothers with toddlers from Guatemala whose farms have been lost to drought. While they may not have a good case to remain in the United States permanently, it is not so easy to speedily deport them if they arrive with children and claim protection under the asylum laws.

Families with children can be held in detention for no longer than 20 days, under a much-debated court ruling, and since there are a limited number of detention centers certified to hold families, the practical effect is that most families are released into the country to await their hearings in immigration court. The courts are so backlogged that it could take months or years for cases to be decided. Some people never show up for court at all.

Eoin Treacy's view -

Families with young children immediately require services and are a long way from self-sufficiency. That represents a challenge for border facilities never designed to handle the numbers of people seeking admission. It effectively means that anyone turning up at the border is given leave to remain in the USA.



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May 31 2019

Commentary by Eoin Treacy

Energy Prices Crash in Europe as Old and New Fuels Vie for Share

This article by Mathew Carr, Jeremy Hodges and Eddie van der Walt for Bloomberg may be of interest to subscribers. Here is a section:

“LNG is now so cheap it’s competing with coal almost,” said Caroline Bain, chief commodities economist at Capital Economics Ltd., who sees slowing demand for coal. “It’s not actually falling off a cliff. We think it’s going to be a long slow death rather than tomorrow.”

The price slump is one sign of Europe’s determination to phase out coal as it seeks to slash climate warming emissions without holding back the economy. Renewables are also in the fight for market share, with onshore wind and solar power “fast becoming cheaper than average power prices in Europe’s largest markets,” according to a research by BloombergNEF.

Front-month Dutch gas prices, a benchmark for Europe, plunged 50% this year as record volumes of LNG landed in northwest Europe. Coal for next year has dropped 30% after a mild winter left inventories at European ports unusually high.

“There’s too much coal,” said Hans Gunnar Navik, a senior analyst at StormGeo AS. As “natural gas out-competes coal,” renewable generation is replacing both of them, he said.

Eoin Treacy's view -

In the pricing of commodities supply is much more volatile than demand. Generally, bull markets don’t end because the market runs out of buyers but because new sources of supply appear to satiate demand. That is why we define secular bull markets in commodities in terms of a step up in the marginal cost of production.



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May 30 2019

Commentary by Eoin Treacy

Video commentary for May 30th 2019

Eoin Treacy's view -

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

Some of the topics covered include: Crude oil pulls back to break its uptrend, grains and beans steady, iron ore at a new high, Wall Street steady, Treasuries firm, review of recession lead indicators and long-term moving averages. 

 
Crude oil pulls back to break its uptrend, grains and beans steady, iron ore at a new high, Wall Street steady, Treasuries firm, review of recession lead indicators and long-term moving averages.
Crude oil pulls back to break its uptrend, grains and beans steady, iron ore at a new high, Wall Street steady, Treasuries firm, review of recession lead indicators and long-term moving averages.
Crude oil pulls back to break its uptrend, grains and beans steady, iron ore at a new high, Wall Street steady, Treasuries firm, review of recession lead indicators and long-term moving averages.


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May 30 2019

Commentary by Eoin Treacy

Could Stock Picking Matter More Than Sector Positioning This Year?

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

Eoin Treacy's view -

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

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



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May 30 2019

Commentary by Eoin Treacy

Bond Bears Dust Off Debt Insurance on Wave of Corporate Pain

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

“There are many people now focusing on single-name distressed situations rather than doing plain-vanilla index trades,” said Jochen Felsenheimer, the Munich-based managing director of XAIA Investment GmbH. “There are lots of idiosyncratic situations rather than systematic triggers.”

Distressed situations are increasing as companies struggle to manage the debt piles they built up during years of largesse. The cost of insuring such companies is surging, with swaps on some of Europe’s riskiest names costing thousands of basis points compared to about 300 basis points for the region’s high-yield benchmark.

Investors are paying up for protection amid speculation they’ll cash out when companies collapse. Moody’s Investors Service forecasts the speculative-grade default rate in Europe will nearly double to about 2% next year from 0.9% in April.

“Defaults are still quite low, but swaps are definitely more relevant today than they were a few years ago,” said Justin Jewell, senior portfolio manager at BlueBay Asset Management in London. “For funds that have the flexibility, these tools are becoming effective again.”

Eoin Treacy's view -

The manner in which intangibles have been squeezed out of the valuation of major companies like Kraft Heinz, General Electric and Tesla represent significant changes in the way the prospects for companies is being assessed by the debt markets. That change is a factor of tightening liquidity conditions particularly last year but the strength of the Dollar remains an inhibiting factor to global liquidity this year.



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May 30 2019

Commentary by Eoin Treacy

The Real Winners From Trump's Tariffs Are China's Neighbors

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

There is some evidence of that happening, even with the previous, smaller tariffs. Since the third round of U.S. tariffs on China went into effect in late September, U.S. imports from China have faltered. An 8% growth rate in October turned to an 18% decline on the year in March. Yet import growth from Taiwan has risen from 12% to 21% over the same period. Imports from Vietnam grew 34% in March, up from a 15% rate in October. And imports from South Korea also surged in the first quarter: They were up 18% on the year, against just 9% in the fourth quarter of 2018.

Some of those shifts might represent manufacturers in China rerouting goods through neighboring countries. Chinese export growth to Southeast Asia and Taiwan accelerated in the first quarter of 2019, even as its overall export growth slowed. Regardless, the result is probably more expensive goods in the U.S. and lower employment in China, as Chinese companies shift elements of supply chains across borders or lose market share to pricier but tariff-free Asian competitors.

Many U.S. policy makers would argue that some pain for U.S. households is worthwhile if it achieves broader strategic goals. In the meantime, however, the big winners from the Sino-U.S. trade conflict are still across the Pacific.

Eoin Treacy's view -

In the cryptocurrency world, “trust” is the buzzword. It occurs to me it is also the primary asset which has been lost in the pursuit of the trade war. The USA and other countries were willing to tolerate China’s misdeeds for years until the populist revolution highlighted just how much damage had already been sustained by the middle classes. Now the unfair trade practices and theft China has engaged in are no longer being tolerated and normal trade practices are being demanded. China is not in a position to accept those terms and that is setting up the conditions for a protracted disagreement which is likely to ebb and flow for years.



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May 29 2019

Commentary by Eoin Treacy

Video commentary for May 29th 2019

Eoin Treacy's view -

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

Some of the topics discussed include: global sovereign yield compression, need for the Fed to cut rate soon, Wall Street in the region of its trend mean, oil and gold stable. grains ease from intraday highs, rare earth metals surging, Dollar firm, 



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May 29 2019

Commentary by Eoin Treacy

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

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

Eoin Treacy's view -

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

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



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May 29 2019

Commentary by Eoin Treacy

Email of the day on cloud computing stocks

I have a simple question.  A large number of cloud computing companies seem to show strong growth on the price charts for the last few years.  Do you think that this is a fundamentally based trend which will continue, or is it just another dot com bubble?

I am as always addicted to your excellent research and presentation.  Watching your video is the first thing I do every morning, and I even have to divide the Friday video into three parts, otherwise I feel deprived on Mondays.

Eoin Treacy's view -

Thank you for your kind words and I am delighted you enjoy the videos. The cloud computing sector has been one of the best performers in this bull market as the app-based economy has flourished on the back of data centre buildouts.



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May 29 2019

Commentary by Eoin Treacy

Rare Earth Stocks Give Abundant Returns as Investors Pile In

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

The People’s Daily, a flagship newspaper of the ruling Communist Party, said in a commentary that the U.S. shouldn’t underestimate China’s ability to fight the trade war. The country is “seriously” considering restricting rare earth exports to the U.S., the editor-in-chief of the Global Times, a newspaper affiliated with the Communist Party, said in a tweet. An official at the National Development & Reform Commission told CCTV that people in the country won’t be happy to see products made with exported rare earths being used to suppress China’s development.

 

The U.S. relies on China for about 80% of its imports of rare earths, the group of materials that are used in everything from electric cars to high-tech military equipment. Rare earths, which include elements such as cerium and dysprosium, are relatively abundant in the Earth’s crust but mine-able concentrations are less common than other ores.

China produces about 70% of the world’s mined rare earths and its industry is dominated by a handful of producers including China Northern Rare Earth, China Minmetals Rare Earth Co., Xiamen Tungsten and Chinalco Rare Earth & Metals Co. Some of the country’s listed rare earths stocks are small caps, making them easy targets of speculation.

The country has taken a proactive approach to managing the global market, Bank of America Merrill Lynch said in a report, citing steady exports in the 1990s that depressed prices and a 40% reduction in its export quota in 2010 that led to a spike.

Eoin Treacy's view -

The last time rare earths were a political football in 2010, it was because China cut off exports to Japan in an effort to force high-end manufacturing to migrate. That set off a massive run-up in rare earth metal prices, investment in new mining facilities and a drive towards substitution. Faced with the threat of losing it dominant position China relented and began exporting again. Prices collapsed, most of the new miners went bust and some semblance of normality returned. How is this occasion different?



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May 28 2019

Commentary by Eoin Treacy

Video commentary for June 28th 2019

Eoin Treacy's view -

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

Some of the topics discussed include: Treasuries extend breakout, Wall Street ease back to test their MAs, golds eases, oil steady, grains breaking out, Italian yields subject to selling pressure, Euro weak, South African Rand weak, China and India steady



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May 28 2019

Commentary by Eoin Treacy

Gold in the Age of Eroding Trust

Thanks to a subscriber for this edition of Ronald Peter Stoeferle and Mark Valek’s always interesting report. Here is a section:

Trust is the basic value of interpersonal cooperation and the cement of our social order. The erosion of our “trust capital” can be observed in many areas of society.

The breakdown of trust in the international monetary order is manifesting itself in the highest gold purchases by central banks since 1971 and the ongoing trend to repatriate gold reserves.  

Gold reaffirmed its portfolio position as a good diversifier as trust in the “Everything Bubble” was tested in Q4/2018. While equity markets suffered doubledigit percentage losses, gold gained 8.1% and gold mining stocks 13.7%.

The normalization of monetary policy was abruptly halted by the stock market slump in Q4/2018. The “monetary U-turn” that we already forecasted last year has begun. 

Recession risks are significantly higher than discounted by the market. In the event of a downturn, negative interest rates, a new round of QE, and the implementation of even more extreme monetary policy ideas (e.g. MMT) are to be expected. 

When it comes to trust in investments, our vote is clear. Trust looks to the future, forms itself in the present, and feeds itself from the past. Gold can look back on a successful five-thousand-year history as sound money.

Eoin Treacy's view -

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

Gold is a monetary metal and therefore is best valued like a currency rather than as a metal, stock or bond. Of course, currencies are generally income producing but if the last decade has taught us anything that is not always the case. One of the clearest arguments for owning gold in the aftermath of the credit crisis were the negative interest rates that prevailed which made gold alluring by comparison. With similar conditions arising now, the big question many people are asking is why gold hasn’t done better?



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May 28 2019

Commentary by Eoin Treacy

Europe's Populists Don't Look So Healthy Now

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

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

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

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

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

Eoin Treacy's view -

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



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May 28 2019

Commentary by Eoin Treacy

Incessant Rain Puts U.S. Farmers on Insurance-Deadline Watch

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

Claims known as prevented plant pay out when farmers are unable to sow crops at all. With unceasing rain keeping farmers out of fields, growers are increasingly weighing how best to get paid and ease the impact from the bad weather and an escalating U.S.-China trade war.

“You hate to farm for insurance, but in a year like this, you keep that in the back of your mind,” Nelson, whose farm is near the east-central town of Paola, said by phone. Storms across the Midwest and Great Plains have resulted in the wettest 12-month stretch on record in the U.S., with the deluge closing refineries and snarling Mississippi River traffic. Crucially for agriculture markets, it’s also hampered crop planting. Worries over tighter supplies due to the soggy weather drove Chicago corn futures to surge as much as 3.9% on Friday, topping $4 a bushel and rising to the highest level in almost a year.


The wet weather’s showing no signs of easing. Severe weather that broke out late Sunday across the Central U.S. and into the Midwest is expected to continue to cause havoc. The insurance deadline for sowing has already passed for some farmers in southwestern Missouri, southeastern Kansas and western Tennessee. They now have to decide whether to plant with less coverage, or make prevented-plant claims.

Eoin Treacy's view -

The cyclicality of grain prices, where old crop prices rise heading into the harvest of winter planting and fall thereafter is predicated on the assumption that there is a winter crop to harvest. There is likely to be significant volatility because hard red wheat crops are expected to be OK, but a significant rally appears to be getting underway in old crop contracts. The true test of the health of the new crop will come when it the front month July contract rolls.  



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May 24 2019

Commentary by Eoin Treacy

May 24 2019

Commentary by Eoin Treacy

May 24 2019

Commentary by Eoin Treacy

The hardest Post to Write

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

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

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

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

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

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

Eoin Treacy's view -

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



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May 24 2019

Commentary by Eoin Treacy

Email of the day on Yes Bank

The cloud over Yes Bank is the result of the Reserve Bank of India (RBI) announcing last Fall that the bank’s co-founder and former CEO, Rana Kapoor, had not provided adequate reserves for bad loans in 2017. The RBI asked Kapoor to step down and find a replacement, which is a fairly radical move.

When Gill took over this spring, he immediately took large write offs to clear the decks, but has since changed his tone and become much more optimistic (I am referring to his interview on 5/17/19 on CNBC India). He is adamant that there are no more skeletons in the closet.

I am inclined to take him at his word, since the RBI has been closely scrutinizing Yes Bank for the past 6 months and knows the full extent of any problems. Also, the RBI found no issues in its most recent review of Yes Bank’s reserves, released just after Gill took the helm (but before his first earnings announcement in which he wrote off everything). The RBI also just appointed a representative to the board, so Gill is being held accountable in real time.

Local investors remain nervous that there is more bad news coming in the next quarters, but I hold the view that the bank has adequate collateral for its important exposures (ADAG and Essel group), will get through this phase, and that perceptions will change – I think the shares will return to their historic valuation range in the next two to three years, providing excellent returns from the current price.

The capital raise in the next 6 weeks could also be a catalyst in this process. That could be when the bank announces a capital raise, possibly with the participation of a Private Equity firm or other marquee investor. Tier 1 capital is now 8.3%, and the bank needs the capital to continue to grow.

Long term shareholder returns from private sector banks in India have been excellent (HDFC Bank, Axis Bank, or Kotak Bank compare very well to the S&P 500 over 5, 10, or 15+ yrs. In USD). Yes Bank is trading at a severely distressed level compared to its historic valuation range, and I believe there is a strong possibility of making a 2x return in 3 years, and more over a 5-7 year time horizon.

I am set up to invest in India (which is no small feat, 4-6 months of paperwork)

The market capitalization in USD is $4.7bn, book value is $3.88bn, price/book is 1.21x. This is the lowest p/b ratio since the financial crisis (See chart below). In Aug 2013 the p/b ratio got down to 1.5x and recovered to 4.37x book by Jan of 2015. The mean p/b during the bank’s history appears to be around 2.7x, which is normal for private sector banks in India due to their continuing high growth and high ROE.

Here is a chart of Yes Bank’s p/b range since 2009. It is important to note that when the shares reached 1.5x book in 2013 they were INR 49/share, compared to today’s price of 137/share, owing to the bank’s very fast rate of growth in book value.

Eoin Treacy's view -

Veteran subscribers will be familiar with the fact that India is our favourite market for the long-term. The challenge for many investors has always been in how best to express that view since it is difficult to transact in Indian shares and the number of Global Depository Receipts is limited. That leaves funds which may or may not perform.

Allen Benello is fund manager, a long-time subscriber and dear friend who has gone through the 4-6-month process of being set up as a Foreign Portfolio Investor (FPI) by the Securities and Exchange Board of India (SEBI). He has offered to answer any questions subscribers might have about opening a brokerage account in India and can be reached at ABenello@WRPartners.com.



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May 24 2019

Commentary by Eoin Treacy

As May Steps Aside, Rival Boris Johnson Makes His Brexit Pitch

This article by Tim Ross and Fergal O'Brien for Bloomberg may be of interest to subscribers. Here is a section:

Johnson said he would prepare for no-deal, go back to Brussels to renegotiate the toxic Irish backstop, and make clear that he’s prepared to leave without a deal if the EU says no. He said he believes the U.K. will leave the EU on Oct. 31 -- the latest deadline -- with or without a deal.

He has long indicated that he’d be willing to pull the U.K. out of the bloc without a deal and has criticized May for surrendering to the EU. That has spooked markets, and the pound has weakened on concerns that a hardliner would pursue a no-deal exit.

Johnson’s other tactic is to get Parliament to rule out the possibility of canceling Brexit --- an option the U.K. legally has. That would make the threat of no-deal more credible, and could concentrate minds in the EU, where some officials continue to hope that the U.K. might change its mind.

The EU has repeatedly said it won’t reopen the divorce deal and won’t change the Irish backstop. It’s the most contentious part of the agreement as it potentially keeps the U.K. bound to the EU rules indefinitely and treats Northern Ireland differently to the rest of the country. Johnson noted that a majority in the Parliament has voted to renegotiate the backstop.

As for a second referendum, Johnson thinks it’s a very bad idea. “Put Brexit to bed, pacify this bawling that’s been going on for so long,” he said.

Eoin Treacy's view -

With all the best will in the world, the Brexit question is still going to be an enormous dispute to settle successfully. The first rule of negotiating is you need to be willing to walk away. That is why the threat of a hard Brexit needs to remain on the table and needs to be credible. The UK needs to do everything possible to plan for a hard Brexit because preparing for the worst and hoping for the best is the only strategy one can follow when faced with tough odds. From that perspective Boris Johnson is the best man for the job.



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May 23 2019

Commentary by Eoin Treacy

Video commentary for May 23rd 2019

Eoin Treacy's view -

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

Here of the topics discussed include: whiff of risk off in the market with China related instruments taking the brunt of selling. Treasuries, yen and gold steady, Wall Street testing the region of the trend mean, Oil pulls back sharply to break its uptrend, 



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May 23 2019

Commentary by Eoin Treacy

Modi and B.J.P. Make History in India. Gandhi Concedes.

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

“If someone is victorious, it is India,” he said. “If someone is victorious, it is democracy. If someone is victorious, it is the electorate.”

Striking a populist tone and evoking mythical Hindu figures engaged in war, Mr. Modi framed the elections as a victory by and for ordinary Indians, over those who write off the poor and downtrodden. At the end of the battle, he said, was “the guarantee of a bright future for India.”

“Some are saying, ‘Modi, Modi, Modi.’” he said. “This is not Modi’s victory. This is the victory of the expectations of the honest citizen of this country.”

“This is the victory of the mother who was longing for a toilet,” he continued. “This victory is of the farmers who sweat to fill the stomachs of others. This is the victory of the 400 million unorganized laborers.”

Exceeding all predictions, Modi’s party is winning a majority of seats.

Mr. Modi, one of the most powerful and divisive leaders India has produced in decades, appeared easily headed for another five-year term, according to election returns.

With most votes counted, the Election Commission reported that Mr. Modi’s Bharatiya Janata Party, or B.J.P., was ahead in about 299 parliamentary districts, far beyond the 272 seats it would need for a majority in the 543-seat Parliament. At this pace, the party would actually expand on its current majority — a development no one was predicting in recent months. And its actual majority will be larger, as its established coalition partners have won at least a few dozen more seats.

Eoin Treacy's view -

Narendra Modi declated victory today which is going to maintain his party’s dominant position in the recent elections. That ensures the business-friendly environment which has prevailed for the last five years will persist and further strengthens his hand in pushing through reforms, assuming of course that is what he intends. There is also the matter of building a temple to Ram on the site of a mosque, which is likely to inflame religious tensions over coming months. How that is handled will give us a clear clue as to just how populist the administration has become.

 



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May 23 2019

Commentary by Eoin Treacy

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

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

Eoin Treacy's view -

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



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May 23 2019

Commentary by Eoin Treacy

Bad News for Markets Offers Little Help to Gold as Metal Dithers

This article by Joe Richter and Marvin G. Perez for Bloomberg may be of interest to subscribers. Here is a section:

With an equities rally wavering, trade relations between world’s two largest economies deteriorating and U.S. borrowing costs slipping, the commodity often seen as a haven in times of turbulence is encountering troubles of its own. Gold prices are headed for a fourth straight monthly drop, and have seesawed between weekly gains and losses since late April.

Bullion, which hasn’t posted more than three straight daily gains since March, has been stuck in a fits-and-starts pattern as signs of resilient growth and a rising dollar counter concern that the world economy is set to slow. Even increased wagers that the Federal Reserve will ease monetary policy this year haven’t been enough to sustain rallies in bullion, which can benefit from low rates because it doesn’t pay interest.

“Prices are kind of range bound, nobody is making any money, so on the margin, people are just disinterested,’’ said John Laforge, the head of real asset strategy at Wells Fargo Investment Institute, which oversees 1.9 trillion. “You really need something fearful out there, which is the scary part. You really need something that rattles markets for gold to take off.’’

Eoin Treacy's view -

I like to see these kinds of articles because they give us some perspective on what sentiment towards an asset class is like. As you can see from the above passage the broad feeling is this “market has no legs” and “can’t sustain a rally”. That tells us the majority of people are not in the market.



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May 23 2019

Commentary by Eoin Treacy

Mrs May is the epitome of all that is wrong with British politics

Thanks to a subscriber for this article by Allister Heath for The Telegraph which may be of interest. Here is a section: 

The root cause of the problem is that too few Tories realise that we are in the midst of the political equivalent of a bank run: the depositors are queuing to take their money out, and the whole system is about to implode. The choice is either urgent, decisive and painful action, or a Canadian-style collapse for the Tories when the inevitable general election comes. Every passing day is an embarrassment, further toxifying the Tory brand, and each one of Mrs May’s pronouncements costs the party yet more support that it will struggle ever to recover. The European elections will be a catastrophe.

Tory MPs and the remaining members of the Cabinet need to understand the depth of their predicament, and do anything they can to accelerate Mrs May’s ejection from office. They should snap out of their debilitated stasis, pull out their fountain pens and get writing to Sir Graham. The other Cabinet members must realise just how badly their own reputations are being damaged: they are propping up Mrs May, and they are still far too obsessed with their own leadership prospects to want to rock the boat. Do they really want to lead a rump opposition party, or even lose their own seats, which is where their cowardice and excessive caution could eventually lead?

There may be a chance of a Tory-Brexit Party pact at some point but zero chance that supporters of Mrs May’s deal or her allies will be spared the full force of Nigel Farage’s party. Any Cabinet minister with a sense of self-preservation must therefore follow Mrs Leadsom in repudiating both. It is their only chance.

Eoin Treacy's view -

Theresa May took the job of Prime Minister in large part because no one else wanted it, and everyone knew from the outset it was a poison chalice. She has failed, as expected, to bridge the chasm between the Leave and Remain sides of her party. However, because of the betrayal of the vote for a clean break she is now is facing the clear potential for schism with in the Conservative Party. Under Theresa May’s watch a third force has emerged in UK politics, with far more groundswell appeal than the Liberal Democrats ever had. That is something she deserves all the blame for. The lurch towards the fringes and away from the status quo is now well underway. It has been my opinion for months that both the Conservatives and Labour would be eviscerated at the next election. Now we know what the alternatives look like.  



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May 22 2019

Commentary by Eoin Treacy

Video commentary for May 22nd 2019

Eoin Treacy's view -

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

Some of the topics covered include: buybacks continue to support markets but are dependent on earnings growth, Australia, New Zealand continue to trend higher supported by weak currencies, China pauses, Oil weak, gold steady, bonds trending higher. 



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May 22 2019

Commentary by Eoin Treacy

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

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

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

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

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

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

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

Eoin Treacy's view -

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



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May 22 2019

Commentary by Eoin Treacy

Franklin Says Aussie Bonds to Rally as RBA May Ease Four Times

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

Overnight swap markets are currently pricing in two RBA cuts by November. Westpac Banking Corp. economist Bill Evans on Tuesday brought forward his forecast for the first reduction in the cash rate to June, with a second to follow in August. Commonwealth Bank of Australia and Royal Bank of Canada expect the same.

JPMorgan Chase & Co. though says two cuts may not be enough. “From where we are today, this is still not sufficient to fully neutralize risks to the RBA staff’s current forecasts, suggesting risks to a sub-1% cash rate,” economist Ben Jarman wrote in a note.

Franklin Templeton’s Canobi expects the RBA to lower borrowing costs three to four times over the next nine to 12 months as tepid inflation weighs. “We never felt that inflation has really had a grip since the RBA started easing in 2016, and it still looks pretty weak,” he said.

Eoin Treacy's view -

Australian mortgages are full recourse and floating rate. The Australian consumer is carrying some of the highest leverage ratios in the world, second only to Canadians in the G7. That’s fine as long as the property market is rising but when it starts to contract pressure starts to build on leverage at even a slight down turn in the ability of consumers to service their debts.



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May 22 2019

Commentary by Eoin Treacy

Jai hind: This is the new India

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

On our latest grassroots research trip to India, we visited three lower-tier cities — Ahmedabad, Pune, and Lucknow — to meet with middle-class consumers between the ages of 20 and 30. We also conducted an online survey of 1,200 millennials across the country. This paper outlines our observations and offers potential investment implications driven by a rapidly changing “Young India.”

High-level observations
• India is home to more millennials than any country in the world, with nearly 473 million people born between 1985 and 2000.1
• Digital democratization is driving lifestyle convergence between metro and lower-tier cities.
• Expanding internet access and a wave of national pride have begun to shift consumption trends.
• The desires to bridge tradition with modernity and gain independence without losing family ties have boosted markets for inventive products and aspirational experiences.

Trend: Digital democratization is reshaping consumption patterns Internet and mobile penetration in smaller cities like Pune and Lucknow are beginning to match that of large, metro cities like Delhi and Mumbai. Data prices in India have plummeted 95% to approximately 18 rupees (US$0.26) per Gigabyte (GB) since 2016 (Figure 1), contributing to an eightfold increase in usage with the average user consuming nine GB of data per month as of the end of 2018 (Figure 2).

Eoin Treacy's view -

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

The evolving populist, followed by nationalist trends first root in India. There is increasing evidence that this two-fold pattern is evolving elsewhere. The success of populist candidates in a large number of countries and the increasingly nationalistic rebasing of political dialogue that has occurred subsequently suggests there is a clear trend underway in the global market which is supportive of regionalisation rather than globalisation.



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May 22 2019

Commentary by Eoin Treacy

Email of the day on Brexit

You have probably have had your fill of Brexit but I thought you would find this piece quite insightful in explaining the rise of the Brexit Party. 

The weekend results are going to be far more interesting than we have ever believed an EU election could be.

https://unherd.com/2019/05/how-farage-outflanked-everyone/

Eoin Treacy's view -

Thank you for this article which I agree is a useful primer on the rise of a populist party. The process has been long and drawn out in the UK because people believed that by voting for Brexit, what they were going to receive was change. The failure of incumbents to deliver necessarily requires the rise of a new power which at least promises to deliver.



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May 21 2019

Commentary by Eoin Treacy

May 21 2019

Commentary by Eoin Treacy

May 21 2019

Commentary by Eoin Treacy

Farage's Brexit Party to Trounce May, Sporting Index Says

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

Nigel Farage’s Brexit Party is poised to dominate the upcoming European elections in the U.K., according to spread betting firm Sporting Index.

The anti-EU party will win 28 seats, the firm said. Prime Minister Theresa May’s Conservatives will win seven, while Labour will take 13 and the Liberal Democrats 12, Sporting Index predicted in an email in London on Tuesday.

Sporting Index has had a consistently strong record in predicting some of the key twists and turns of the Brexit saga. Last month, about two hours before the latest vote on May’s Brexit deal, the spread betting firm forecast she’d lose by 60 votes. She was defeated by 58.

“The Tories look set to face the consequences over their handling of Brexit, with the Brexit Party and Liberal Democrats making significant gains due to their clear stance on one of the most polarizing events in British politics,” Sporting Index’s Phill Fairclough said.

On Tuesday, May offered lawmakers a vote on whether her Brexit deal should be subject to a referendum, in a last-ditch bid to save it. Last time MPs voted on a second referendum, there was just a 12- vote difference, with 280 backing a confirmatory vote on a deal and 292 against it.

Eoin Treacy's view -

There is a large contingent of UK voters who thought they would never be voting in a European election again. Presented with the opportunity to stuff the European parliament with Eurosceptics they are likely to leap at the chance.  The UK isn’t the only country where parties at odds with the European union’s aim of further cohesion are likely to gain ground. France, Italy, Austria, Sweden, Denmark and Spain all have room for electoral upsets. Perhaps the greatest irony is from next week the continent will have a more Eurosceptic voice than Westminster.



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May 21 2019

Commentary by Eoin Treacy

PGM Market Report

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

Eoin Treacy's view -

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

The diesel cheating scandal had a huge effect on demand for platinum from the automotive sector in 2017 and 2018 which resulted in a significant drawdown. The automotive sector has been busy trying to clear up its image and play catch up with Tesla so diesel fell by the wayside. However, the significant surge in palladium prices, to levels where substitution becomes economic, raises questions about the bearish hypothesis on platinum.



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May 21 2019

Commentary by Eoin Treacy

Email of the day - on cryptocurrency exchanges:

I noticed that you did not mention Coinbase as a vehicle to use cryptocurrency; what would be the risks of opening an account with coinbase vs stockbrokers. Thank you.

Eoin Treacy's view -

Thank you for this question which is highly topical for anyone considering buying cryptocurrencies via an exchange. The reason Fidelity’s move to provide custody is such a big deal is because it lends security to your holding.



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May 21 2019

Commentary by Eoin Treacy

Email of the day - on battery powered flight:

I loved Lex’s tongue-in-cheek view of lithium-on batteries. A useful energy density chart that shows where lithium-ion batteries are - roughly in between lead batteries and liquid hydrogen.

Eoin Treacy's view -

Thank you for this story and I also enjoyed the tongue and cheek nature of the energy density comparisons. I suppose it is no longer politically correct to point out that whale blubber has about 87% the specific density of kerosene which is better than lithium ion batteries. If that could be artificially replicated, we really could see whales fly.



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