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October 20 2017

Commentary by Eoin Treacy

October 20 2017

Commentary by Eoin Treacy

Email of the day on China's yield curve

Thank you for such an eloquent financial service! Further to your comment on China today, according to Tracy Alloway of Bloomberg, the Chinese 5-10 Yield curve inverted yesterday. Is this a bad omen or can China be different!? 

Eoin Treacy's view -

Thank you for your kind words and this email which may be of interest to subscribers. The Chinese yield curve is inverted between the 5 and 10-year maturities but, generally when we talk about the yield curve spread, which is what I believe you are referring to, we look at the difference between the 2 and 10-year maturities. 



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October 20 2017

Commentary by Eoin Treacy

Machine Learning in Finance

Thanks to a subscriber for this how-to report from Deutsche Bank covering quantitative strategies and how they are applied to finance. Here is a section from the introduction:

Machine learning is everywhere 
“Machine learning” repeatedly appears in the news, from the game of go to autonomous cars: what can those algorithms do for us in finance? 

Supervised learning and its pitfalls in finance 
In this first report in the series, we focus on supervised learning and note that while machine learning is very relevant to us, there are dangerous pitfalls, sometimes specific to the type of data we deal with. In particular, we examine penalized regression (lasso and elastic net), decision trees, and boosting – we also mention, in passing, support vector machines and random forests. 

Application to the Japanese equity market 
To make things more concrete, we try to use those algorithms to combine the investment factors in our database in order to build a stock ranking system for the Japanese market; this shows the limitations and pitfalls of traditional machine learning practices in finance. 

Eoin Treacy's view -

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

Long Term Capital Management represented something of a genesis for quantitative strategies and their sophistication has been enhanced considerably since. The pace of adoption has accelerated in the last few years as the breadth of data from both conventional and unconventional sources has increased at an exponential rate and companies like Google and Baidu have demonstrated in real terms what is possible with these tools. 



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October 20 2017

Commentary by Eoin Treacy

Investment Implications of the Final Frontier

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

We estimate that the ~$350b Global Space Industry will grow into a $1.1+ Tr Global Space Economy by 2040. However, there is significant execution risk, and we, accordingly, estimate a wide range of potential outcomes, from ~$600 bn (-60 bps v. Global GDP) to ~$1.75 Tr (+400 bps v. Global GDP). Working with our aerospace & defense, internet, satellite, and telecom analysts, we estimate a $400 bn+ incremental revenue opportunity from providing internet access to under- or unserved parts of the world, and a ~$725 bn revenue opportunity for internet companies focused on social media, search/online advertising, and, in particular, e-commerce, if global internet penetration reaches 100%. Ultimately, this will depend on the success of the new low Earth orbit (LEO) satellites from players like OneWeb and SpaceX.

In the short to medium term, most of the value of the industry is linked to internet bandwidth. Satellite broadband is responsible for ~50% of the Global Space Economy, and ~70% of our Bull Case. The demand for data is growing at an exponential rate, while the cost of access to space (and, by extension, data) is falling by orders of magnitude. However, over the long term, the discussion expands to topics such as national security, research, deep space exploration, high speed travel, … even mining asteroids. In this report, we discuss the potential for the BFR from SpaceX to disrupt the freight transportation industry.

Space is the "ultimate high ground" for national security. With the United States military's expenditures exceeding $600 bn/ year, and global military expenditures ~$1.7 Tr, compared to NASA's budget of ~$20 bn, there appears to be substantial room to increase the investment in space. While we expect the topic of space to increase in importance, our view is balanced by a recognition of realworld budgetary constraints, and other priorities.

Eoin Treacy's view -

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

How do companies that depend on the number of internet users reach the 3 billion or so potential customers not already under their purview? For leading technology/social media companies it’s a big question because it is what their continued organic growth depends on. That is why investment continues to pour into space related ventures. 



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October 20 2017

Commentary by Eoin Treacy

Electric Vehicle Revolution and Implications for the Nickel Market

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

 

Electric vehicles will usher in a new age for nickel

A more balanced nickel consumption profile between stainless and non-stainless applications

Batteries need high purity nickel sulphate, cannot readily use Class II such as nickel pig iron or ferronickel units – today, only ~50% of global production is suitable

Nickel industry needs to grow significantly in suitable units to meet demand for battery manufacture

Growing in suitable nickel units is expensive

Eoin Treacy's view -

A link to the full presentation is available in the Subscriber's Area.

The message from this report is very clear. The global economy is going to need a lot more nickel and Vale is going to need to raise quite a lot capital if it is to have any chance of meeting demand. 



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October 20 2017

Commentary by Eoin Treacy

48th Year of The Chart Seminar

Eoin Treacy's view -

The Chart Seminar 2017 

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

London November 16th and 17th 

If you are interested or would like to suggest a venue please contact Sarah at [email protected] 

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



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October 19 2017

Commentary by Eoin Treacy

October 19 2017

Commentary by Eoin Treacy

Email of the day on the Dow Jones Industrials outperformance

You already commented a bit on the state of the US stock market yesterday (October 17). But I want to share with you FT story on similarities and differences between today's market and the one 30 years ago, "How big is the risk of another Black Monday equities crash?"- While reading it, I looked at Dow Jones chart. It is not visible on 1- or 2- or even 3-year charts, but 5- and 10-year ones show rather obvious acceleration this year, don't they? What do you think?

Eoin Treacy's view -

Thanks for this question which others may have an interest in. The Dow Jones Industrials Average has been among the best performing indices globally this year and has been led higher by shares like Boeing, Caterpillar, Visa and McDonald’s, while General Electric has been a notable underperformer. 

Here are two charts of the Index, a candle chart and a point and figure chart



 



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October 19 2017

Commentary by Eoin Treacy

Email of the day on p&f charts

I love PnF charts but these are getting as rare as hens’ teeth these days. Sad really. I notice you don’t use them in your newsletter. I use them in the Chart Library and prefer to customise mine (the 3 box reversal variety). They seem to work with Indices but not with individual stocks. Tried the Aussie stocks eg. Kingsgate Consolidated(KCN), Codan (CDA) but I get a blank page. What am I doing wrong?

Eoin Treacy's view -

Thank you for this question. I created this video to demonstrate how to use the Chart Library’s p&f facility. I tend to rely on candle charts and will occasionally look at a p&f chart when trading activity is noisy or subject short-term volatility. 



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October 19 2017

Commentary by Eoin Treacy

From Cells to Cities: A Conversation with Geoffrey West

Thanks to a subscriber for recommending this 2-hour podcast with the author Scale: The Universal Laws of Growth, Innovation, Sustainability, and the Pace of Life in Organisms, Cities, Economies, and Companies. I’ve been working my way through this book for a while now. It’s a dense read but certainly worth the time. 

Eoin Treacy's view -

What I find particularly interesting is the discussion of fractals which is a topic we discuss at The Chart Seminar. You can observe exactly the same interplay of crowd psychology and supply and demand in very short-term charts as long-term charts. Of course, we see these trends play out in slow motion on long-term charts but that does not challenge the fractal view. 



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October 19 2017

Commentary by Eoin Treacy

Why We Don't Trust Government Inflation Statistics...

Thanks to a subscriber for this interesting report from Oppenheimer which may be appreciated by the Collective. Here is a section:

We all know that nominal interest rates are a function of real interest rates and inflation expectations. The nub of our argument is that the consumer price index (CPI) as measured by the Bureau of Labor Statistics (BLS) sharply understates what bond investors should incorporate into their inflation expectations. 

The first component of our three-part argument is that CPI measures inflation where the people are, not where the money is. That is an appropriate stance for BLS since CPI is used to set government benefit levels, but consider that the top 20%, who effectively own all the bonds, generate as much consumer spending as the lower 62%. The basket of goods that 20% buys likely differs significantly from the basket of the average person. 

Second, we look at the healthcare anomaly. Healthcare accounts for 17.7% of GDP and 14.5% of the S&P 500 but only 8.5% of CPI. Most private sources estimate healthcare costs have been increasing by ~6%+ in recent years, but BLS puts the number at 2.8%. A recent study found that the average health insurance plan now costs ~$19K (with ~$6K from the employee), but healthcare insurance is just 1.004% of CPI.

Third, in looking at how CPI is calculated, we suspect there is a "streetlight effect," where one searches where the light is good rather than where the sought object is likely to be. In the case of CPI, we suspect they measure what is easily quantified. There is incredible granularity on the cost of apples, bananas and peanut butter but only big sweeping categories for healthcare and housing. 

The bottom line is that we think CPI substantially understates the inflation expectations that investors should incorporate into the pricing of bonds and that long-term rates should increase. One does not have to believe this to own bank stocks as they remain cheap in any case at a 66% relative P/E, but if we are correct about CPI, the upside should be even better.

 

Eoin Treacy's view -

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

Anyone who lives in the real world and pays their own bills, mortgage and taxes knows inflation is understated. Additionally, since government spending is integrally tied to official statistics, politicians have an interest in the understatement persisting not least because fiscal deficits are already wide. However, it is reasonable to conclude that we have had such an uptick in reactionism against the status quo is because consumers have direct experience of inflation which the statistics refuse to acknowledge. 



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October 19 2017

Commentary by Eoin Treacy

October 18 2017

Commentary by Eoin Treacy

Video commentary for October 18th 2017

October 18 2017

Commentary by Eoin Treacy

Email of the day on Brexit, Ireland and Political Polarization

Well said Eoin. My vote was 'remain' but if there was another vote it would now be 'leave'. I admit I was wrong. I lost income from the leave vote (I used to consult for the EU) but, unlike others with vested interests, I will think independently and logically about what is best in the long term, as also you exemplify. My feelings at the time of the referendum were a reflection of the UK population, close to 50:50, but events since the referendum have made me absolutely a leaver, and the sooner the better. If we decided to 'crash out' tomorrow I would cheer, whatever the turmoil. Actually, I think that would be the best solution now. (Ironically, the EU would then beg for a deal.) There will not be another referendum, but if there was I strongly suspect the remoaners would get a shock at the increased majority for 'leave'. 

The EU has several serious and possibly terminal problems. 

1. It is frighteningly anti-democratic. Note I say 'anti-democratic' not just 'undemocratic'. It's shown its colours several times - vote until you give the 'right' answer then you are not allowed to vote again. Now they are moving to not allowing any democratic votes at all. EU leaders are not elected and not removable by Europe's voters. Voters have no say about federalisation - except by leaving!

2. Taxes in Europe and already cripplingly high, causing slow growth and massive unemployment, yet the EU wants to raise taxes even higher. How can Europe compete with emerging economies if it maintains crippling tax rates? It's a death spiral. That will become increasingly apparent as interest rates rise. EU taxation on top of country taxation is coming. the opposite needs to happen - Both EU and government spending needs to reduce and taxes to fall. 

3. What is the definition of a country? For me, control of its own borders; control of its own defense, control of its own taxation and spending; control of its own judicial system. (Maybe you can add more). All are being lost by EU members. How many will truly give up everything to become a 'region' or 'state' of the EU, and no longer a country? 

There are battles ahead, and the voters of the UK were wise to make the first move. I only wish Ireland would do the same. I love the country and its people, and worry how much it will suffer now the EU is removing all its competitive advantages for the future.

Once again, Eoin, thank you for your very clear views on this and many other matters. You are impressive.

 

Eoin Treacy's view -

Thank you for this balanced email and your kind words. Brexit represents a challenge for Ireland because of the difficulties that would arise from both creating and policing a land border with Northern Ireland. Additionally, the UK is Ireland’s largest trading partner and the only other major economy in Europe it shares a language with. The challenges are far from insurmountable since neither country is party to the Schengen agreement but it is being used as a political football during the current negotiations. 



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October 18 2017

Commentary by Eoin Treacy

Big Data and AI Strategies Machine Learning and Alternative Data Approach to Investing

Thanks to a subscriber for this invaluable primer from JPMorgan covering the evolution of quantitative strategies in a world where the quantity of data is exploding.  Here is a section:

Machine Learning methods to analyze large and complex datasets: There have been significant developments in the field of pattern recognition and function approximation (uncovering relationship between variables). These analytical methods are known as ‘Machine Learning’ and are part of the broader disciplines of Statistics and Computer Science. Machine Learning techniques enable analysis of large and unstructured datasets and construction of trading strategies. In addition to methods of Classical Machine Learning (that can be thought of as advanced Statistics), there is an increased   focus on investment applications of Deep Learning (an analysis method that relies on multi-layer neural networks), as well as Reinforcement learning (a specific approach that is encouraging algorithms to explore and find the most profitable strategies). While neural networks have been around for decades10, it was only in recent years that they found a broad application across industries. The year 2016 saw the widespread adoption of smart home/mobile products like Amazon Echo11, Google Home and Apple Siri, which relied heavily on Deep Learning algorithms. This success of advanced Machine Learning algorithms in solving complex problems is increasingly enticing investment managers to use the same algorithms.

While there is a lot of hype around Big Data and Machine Learning, researchers estimate that just 0.5% of the data produced is currently being analyzed [Regalado (2013)]. These developments provide a compelling reason for market participants to invest in learning about new datasets and Machine Learning toolkits.  

 

Eoin Treacy's view -

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

Over the years I’ve seen a great deal of commentary about the petrodollar and the oil economy and no doubt that has been lynchpin of economic growth for much of the last century. After all every country uses oil but not every country produces it and the fact it is denominated in Dollars gives the USA, as the onetime largest consumer, an important advantage. However, if we look forward rather than backward, there is a compelling argument for considering that the data driven economy is what is likely to drive economic growth in future. 



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October 18 2017

Commentary by Eoin Treacy

Xi Skips Old Growth Pledge as China Seeks Quality Not Quantity

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

"China’s policy makers are likely to tolerate growth to have another leg down to 5 to 6 percent in the next five years, so that they could have bigger room to fix the structural problems and make growth more sustainable," Hu wrote.

That’s in line with earlier messages of tolerance of slower growth in exchange for stable development. Xi told a meeting of the Communist Party’s financial and economic leading group last year that China doesn’t need to meet the objective if doing so creates too much risk, Bloomberg News reported in December.

Xi’s speech, which ran for more than three hours and mapped out a grand strategy for China’s development by 2050 implies "a change in growth and development objectives," said Chen Xingdong, chief China economist at BNP Paribas SA in Beijing.

The party is seeking to share "growth and prosperity for the majority of people through reformation of income distribution," Chen said

 

Eoin Treacy's view -

The larger an economy becomes the more difficult it is to sustain double digit growth rates. China is a perfect example of this and its size is a clear example for why smaller economies like India or the Philippines are currently outpacing its expansion. 



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October 17 2017

Commentary by Eoin Treacy

October 17 2017

Commentary by Eoin Treacy

Market and Volatility Commentary

I asked around for this note from Marko Kolanovic for JPMorgan back in June but it finally turned up in my inbox today. Despite the fact the trading advice is dated, the discussion of the animating factors behind low volatility remain valid and I commend it to subscribers. Here is a section: 

Low Volatility is not a new normal or fundamentally justified – it is result from macro de-correlation and massive supply of volatility through yield generation products and strategies. Finally, Big Data Strategies are increasingly challenging traditional fundamental investing and will be a catalyst for changes in the years to come. 

And

What is really driving the low volatility? As we discussed recently low correlations (driven by quant flows, sector and thematic trading) are temporarily reducing volatility by 2-4 points, and a massive supply of volatility pressures implied and extension realized volatility by another 2-4 points. We estimated that supply from yield seeking risk premia strategies grew by $1Bn vega (30% of the S&P500 options market). In addition to these, large inflows in passive funds put further pressure on volatility. Keep in mind that passive investors almost never sell. Quant investors don’t take large directional bets and don’t overreact either (at least not for the same reasons humans do). Regardless of those, we think current low levels of volatility is not a new normal and will not last very long given the amount of leverage, rising rates, and the approaching reduction of central bank balance sheets. 

 

Eoin Treacy's view -

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

Volatility has not increased to any meaningful extent since April but there have been occasional pops on the upside which have not been sustained. These occurred in May, June and August so it has been two months since the last one. 



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October 17 2017

Commentary by Eoin Treacy

Amazon to make sportswear push in industry-jolting move

This article by Lindsey Rupp and Daniela Wei for Bloomberg may be of interest to subscribers. Here is a section:

Amazon has developed its own brands in part because they fill gaps in its inventory. If customers are searching for a certain type of shoe or skirt, and don’t see much of a selection from established brands, Amazon wants to be able to offer its own options. Oftentimes, shoppers may not realize that the names -- such as Scout + Ro and North Eleven -- are owned by Amazon.

This also sends a message to brands reluctant to sell their full inventory on Amazon. If shoppers can’t find your products on the site, Amazon will make its own substitutes and become your competitor.

For suppliers like Eclat, forging alliances with e-commerce companies reflects shifting demand from consumers, Chiu said in a note.

“Online apparel sales accounted for 19 percent of all apparel sales in 2016, up from 11 percent in 2011,” Chiu said.

“Online sales are primed for strong growth.” Eclat expects new clients to contribute as much as 12 percent of 2018 sales, she said. The shipments to Amazon began in August, according to Chiu. “The contribution this year will be small, but the potential is high,” she said.

Eoin Treacy's view -

Amazon has a wealth of data about what people search for and can also cross reference that with what people in fact end up purchasing and returning. That puts it in an enviable position to design product lines around what people want rather than guessing what the next fashion forward idea is going to be. 



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October 17 2017

Commentary by Eoin Treacy

London House Prices Fall Most Since Financial Crisis

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

In London, values fell for a sixth consecutive month. If the provisional estimates are confirmed, the average price of a home in the capital was less than 582,000 ($773,000), the lowest since the end of 2015.

The downbeat picture was confirmed in a separate report from Rightmove Plc, which said asking prices in London fell an annual 2.5 percent in October. While they rose 3.1 percent on the month, driven by owners of more expensive properties, achieving these prices is far from assured as buyers now have more choice, according to Rightmove director Miles Shipside.
Values at the top end of the market have come under the most pressure, with prices falling in almost half of London’s 33 boroughs in the year through August, according to Acadata. It illustrates the toll being taken by Brexit uncertainty, higher property taxes for landlords and the prospect of the Bank of England raising interest rates for the first time in a decade.

 

Eoin Treacy's view -

Increasing supply is finally beginning to come to market in London at just the same time that property taxes have risen and the Bank of England’s looks likely to raise rates.  



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October 16 2017

Commentary by Eoin Treacy

October 16 2017

Commentary by Eoin Treacy

The World Turned Upside Down

Thanks to a subscriber for this edition of John Mauldin’s note which may be of interest. Here is a section:

* the excess liquidity provided by the world’s central bankers,
* serving up a virtuous cycle of fund inflows into ever more popular ETFs (passive investors) that buy not when stocks are cheap but when inflows are readily flowing,
* the dominance of risk parity and volatility trending, who worship at the altar of price momentum brought on by those ETFs (and are also agnostic to “value,” balance sheets,” income statements),
* the reduced role of active investors like hedge funds – the slack is picked up by ETFs and Quant strategies,
* creating an almost systemic “buy on the dip” mentality and conditioning.  
when coupled with precarious positioning by speculators and market participants:
* who have profited from shorting volatility and have gotten so one-sided (by shorting VIX and VXX futures) that any quick market sell off will likely be exacerbated, much like portfolio insurance’s role in a previous large drawdown,
* which in turn will force leveraged risk parity portfolios to de-risk (and reducing the chance of fast turn back up in the markets),
* and could lead to an end of the virtuous cycle – if ETFs start to sell, who is left to buy?

 

Eoin Treacy's view -

It’s 30-years since the 1987 crash which has likely been a contributing factor in why so many bearish reports have been hitting my desk in the last week. 



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October 16 2017

Commentary by Eoin Treacy

Email of the day on Brexit

I guess the young voted for Corbyn out of a form of rebellion because they feel they got screwed by the old with Brexit? that's very much my take on those election results... I also think that another Labour, with an explicit no Brexit agenda, not feeling compelled to ratify the referendum result in Parliament (effectively abdicating to the Daily Express and such-likes) would have wiped away the Tory easy. 

Re the difficulty of leaving the EU: that had been made abundantly clear by the so much derided experts. Shame they were not listened to, maybe risks and rewards would have been weighted more accurately. 

For the rest: we live in highly structured and complex societies with sophisticated regimes (governments and central banks) that accommodate and fulfil the needs of most people through an apparently undisputed economic model; with much to lose and - as you say - a full belly it is hard to see revolutions erupting across Europe as we have seen in e.g. Northern Africa. This is an extraordinary achievement, although it presents some obvious risks: institution will still need to continue to innovate and change, and what will prompt innovation if not even a financial crisis such as the one endured 10 years ago prompted significant change? 

Democratic regimes - almost by definition - have resisted reforms implying austerity (e.g. cost cutting, restructuring of debt, tax increases) and have often diverted from putting in place measures to improve productivity (rather than it being - as it should - their everyday obsession). Monetary policies have dampened the effects of the crisis, yet the QE presented its collateral effect (in the case of the UK: inequality). 

Various detours were offered as distractions to the voting public, and the illusion of revolution via direct participation was a perfect cathartic offer to make to the electorate after such economic shock: change everything (to not change anything). The whole digression of the idea of sovereignty we have seen in the UK and the willingness of the ruling party to push the narrative of the evil enemy EU should be seen in this context, with the tragedy (I can't stress this enough, as it has been badly overlooked) of the misuse of the referendum and the permanent damage this inflicted to the very core of the democratic process. 

As for Catalonia, or Scotland, the desire to join the EU does not derive by the fact there is no other choice, but by the desire to fall back into a set of regulations that allows to operate internationally with highest degree of freedom and protection, while dissociating from their enemy entity (be it Spain or the UK); the EU on the other hand has done nothing to promote or aid these attempts of independence, as it represents the sovereign states these regions are part of.

It may sound simplistic or a bit of a conspiracy theory. But I find impossible to see the EU is as a superstate (why did we have a Euro Crisis then? and it could potentially still happen! spreads still open from time to time); it may become one (extremely unlikely after the last elections in Germany), and it is still very open to debate whether this is appropriate or not. Also, assuming it has taxing power because it is asking what is due is forgetting a much more simple fact: what is not paid by the UK will be paid by the citizens of other countries (that simply won't happen, hence the mandate to solve this issue given by the other governments: the UK government voted for those expenses, hence it will tax its citizens - and me - to pay for them... anything different may not be exactly like a classic default, but it is very very close to it). Sadly, the current attitude on this matter suggests no deal is the most likely scenario yet. I think however that the UK stance is untenable, and that we will see a capitulation on the GBP before being confident support has been found: a change of government may provide the trigger?

 

Eoin Treacy's view -

Thank you for this additional email which highlights a number of additional points. The difficulty of leaving the EU is not an argument to support the current structure. Which of us as a child was not told that persevering in a difficult pursuit will allow us to reap outsized rewards in future? The very fact that the UK is willing to forgo short-term gain for the opportunity to achieve long-term benefit is a powerful example that democracies are in fact capable of choosing delayed gratification. Germany’s labour market reforms and reunification are another example, as are India’s market reforms of the last few years. 



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October 16 2017

Commentary by Eoin Treacy

Ray Kurzweil's Most Exciting Predictions About the Future of Humanity

This article from Futurism.com contains of video of Kurzweil’s presentation at SXSW which may be of interest to subscribers. Here is a section: 

Kurzweil continues to share his visions for the future, and his latest prediction was made at the most recent SXSW Conference, where he claimed that the Singularity — the moment when technology becomes smarter than humans — will happen by 2045. Sixteen years prior to that, it will be just as smart as us. As he told Futurism, “2029 is the consistent date I have predicted for when an AI will pass a valid Turing test and therefore achieve human levels of intelligence.”

Kurzweil’s vision of the future doesn’t stop at the Singularity. He has also predicted how technologies, such as nanobots and brain-to-computer interfaces like Elon Musk’s Neuralink or Bryan Johnson’s Kernel, will affect our bodies, leading to a possible future in which both our brains and our entire beings are mechanized.

This process could start with science fiction-level leaps in virtual reality (VR) technology. He predicts VR will advance so much that physical workplaces will become a thing of the past. Within a few decades, our commutes could just become a matter of strapping on a headset.

 

Eoin Treacy's view -

Technological innovation is occurring not only at a rapid pace but is affecting many different areas at once. Nvidia’s CEO believes the CPU is going to be left in the dust by the GPU which is being used in everything from VR to Ethereum mining, artificial intelligence systems and self-driving cars. At the same time, the evolution of cloud computing and quantum computing means the market for computing as a service is on a growth trajectory. 



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October 16 2017

Commentary by Eoin Treacy

Email of the day on investing in Africa

Thank you for a very informative big picture on Friday. Do you know of any fund managers that are investing in Africa with good track records for us to consider investing with?

Eoin Treacy's view -

Thank you for this question which I’m sure will be of interest to subscribers. Investing in Africa is not a simple matter. The entire continent has 1649 listed companies with major markets like South Africa, Nigeria and Egypt representing significant weightings.  



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October 13 2017

Commentary by Eoin Treacy

October 13 2017

Commentary by Eoin Treacy

Email of the day on the revolutionary zeal of youth

Was listening to your market commentary and re GBP specifically… don’t think it I s fair to draw comparisons between Brexit and the Catalunya independence attempts… the 2 things are different: 

• Catalunya is a region within a national state, the UK is a sovereign state part of a supranational union… so for example the EU has no taxing power on citizens of the member states, there is no conscription in a EU military service, and generally speaking the bare minimum for having a functioning Economic Union is agreed between member states via the Council and the Parliament;

• If looking for a parallel, the situation in Spain is similar to that in Scotland, the Basques region, Sardinia, Corsica, some part of Northern Italy (by the way there is a referendum coming in a few days there)… it is significant that all these regions seek immediate shelter from and within the EU;

• The movement for the independence of Catalunya has a long history, and various degrees of independence have been negotiated between Madrid and Barcelona over the years after a lengthy period of violent repression; 

Also I disagree on the argument of Brexit being a success because there are more young people in the UK: it has been shows several times the young were overwhelmingly in favor of remaining in the EU; it was the old who voted out.

As for the so called “Brexit bill” that you also mention: this is an obligation the UK has towards the EU whatever the local politicians feed to the public (i.e. it is not a matter of what the EU “feels”, there is no ambiguity regarding its nature). Not paying this obligation is equivalent to defaulting on debt, which I doubt any government would do. The current narrative is the result of the government trying to leverage whatever it can to obtain concessions on access to the EU market.

Eoin Treacy's view -

Thank you for this email which gives me the opportunity to clarify some of my thoughts. 

I believe it is a measure of just how dysfunctional the status quo has become that we are getting revolutions in the political make up of Europe, led by older people. Throughout history revolution has been a young person’s endeavour and the lack of food or its high price is usually the catalyst. The dawn of the Arab Spring in Tunisia is a classic example of this. 

 



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October 13 2017

Commentary by Eoin Treacy

October 13 2017

Commentary by Eoin Treacy

Email of the day on recent trades

I bought the Nikkei as it broke out of its range and it has been doing well on the back of an Abe victory which would lead to increased monetary spending and a lower yen, thus boosting the Nikkei.

I have read that very frequently pre-Japanese elections, the market runs up as people look to buy shares in industries that have been targeted by politicians for help, but that on the day of the election the market usually corrects. A buy the rumour, sell the news scenario. I wondered your thoughts on this. I know you are long the Nikkei and wondered if this was a potential long-term or short- term position, or what the charts are saying?

Also bought the US Tech 100 which broke out of its range but has been travelling sideways since it broke out and I wondered if that was not a good sign, since you usually talk about explosions waiting to happen either up or down. Best regards,

 

Eoin Treacy's view -

Thanks you this email and congratulations on grasping opportunities. 
 

 



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October 13 2017

Commentary by Eoin Treacy

Email of the day on the wool price

Hi Eoin, There is a chart in the library in commodities for Fine Wool (OS2 COMB COMDTY). But it stopped updating in 2014. Can it be 'switched on' again, or is there another fine wool price chart available? Thanks in advance 
P.S. will email you an update on the sewing machinery exhibition that we attended in Shanghai soon

 

Eoin Treacy's view -

Thank you for this inquiry but, unfortunately, I can no longer find a wool price that is updated regularly. The US, Australian and South African futures no longer have any liquidity. I look forward to hearing your insights from the garment industry. 



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October 13 2017

Commentary by Eoin Treacy

Here's why City analysts aren't getting too excited about Provident Financial's soaring share price

This article by Rebecca Smith for Cityam.com may be of interest to subscribers. Here is a section:

Meanwhile, Laith Khalaf, senior analyst at Hargreaves Lansdown, said the share price showing some relief "in these circumstances is natural", but said a "long rocky road" was ahead for the firm.

"The market clearly likes what it sees with the shares rising sharply," he said.

Khalaf added: "There are still reasons to be cautious though. Companies in recovery can go one of two ways, and the rewards, or losses, are usually high. Provident still doesn’t have a CEO, and the financial watchdog is investigating sales of its repayment option plan to Vanquis Bank customers, a product which looks a lot like PPI.

"Meanwhile the group’s credit rating is teetering on the edge of being downgraded to junk, a step down which would limit the availability of creditors, and push up the price of borrowing."

 

Eoin Treacy's view -

Provident Financial was a leader in the fast and loose consumer credit market aimed at doorstep lending and has collapsed as its business model came under scrutiny. Quite whether it is capable of recovery is an open question but a lot of bad news has certainly been priced in. However, while Provident has been garnering headlines there is another area of the consumer credit market worthy of mention. 



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October 13 2017

Commentary by Eoin Treacy

The big questions for Africa's next three decades

This article from the World Economic Forum may be of interest to subscribers. Here is a section: 

There will be 1.3 billion more Africans by 2050, according to a UN estimate.

As a young African entrepreneur, what that number means to me is 1.3 billion more consumers of goods and services. This is a staggering increase that equates to more than double the continent's current population.

Africa needs to begin preparing and planning for this tremendous growth, not just economically but from a social and infrastructural perspective. Three decades from now, we as a continent surely cannot be singing the aid song. With the number of qualified Africans today who have received education and practical work exposure in some of the world's best institutions and corporations, we surely have what it takes not only to imagine, but to begin to shape the Africa we want to see.

We African millennials are now tasked with the responsibility of transforming the continent and growing the economy significantly for the benefit of future generations. This growth can and should be led by Africans, both in the diaspora and those back home. As someone who is and always has been based in Africa, I often engage in conversations with my peers who are now based in the diaspora, and I listen to how they dream and long for the day they will come back home and begin to make a difference. This is great and refreshing to hear - but without a timeline or commitment it will only remain a distant hope. I believe that when someone feels the need and the urge to make a difference, they should begin doing so from wherever they are and in the smallest of ways, rather than wait for a perfect time.

Eoin Treacy's view -

If economic growth is dependent on population growth then the 21st century belongs to the African continent. That is of course dependent on standards of governance improving, which can only occur on a country by country basis. 



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October 12 2017

Commentary by Eoin Treacy

October 12 2017

Commentary by Eoin Treacy

An Investor's Guide to Understanding Gene Therapy: A Paradigm Shift Whose Time Has Come

Thanks to a subscriber for this heavyweight 239-page report from Raymond James which may be of interest. Here is a section: 

What started off as a clinical off-shoot of molecular biology in the 1970s has moved from a therapeutic concept to a viable therapy to address various rare and not so rare genetic diseases. While the gene therapy field has gone through nearly three decades of ups and downs, in our opinion, we are at the cusp of ushering in a new era of therapies that can address the underlying biology of many inherited disorders.

Two therapies have already been approved for commercialization in Europe, although calling either a commercial success is a stretch. UniQure’s Glybera, the first approved in Europe in 2012, experienced extremely limited usage in the commercial setting and was withdrawn from the market early this year. GlaxoSmithKline’s Strimvelis, approved in 2016 at a price tag of $594,000 euros (about $665,000 USD), is currently treating patients with ADA deficiency, although given the size of the patient population, we see this platform more as a good will gesture as compared to a robust money generating machine.

That said, we view these two products largely as proof of concept therapeutics whereby clinical trials were able to show efficacy and long-term safety, both of which helped clear regulatory hurdles with flying colors. While the pessimist might view the turbulent history of the gene therapy space as more of what’s to come, we view this field as a potential revolution. In short, within the next few years, we expect multiple U.S. approvals of gene therapy products…

 

Eoin Treacy's view -

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

Subscribers will be familiar with my enthusiasm for the immuno-oncology sector which is rapidly approaching commercialisation and has been the focus on enthusiastic M&A activity. Car-T cell reprogramming is an exciting field which has led to considerable success in previously untreatable leukemia and research is now underway to employ similar strategies in solid tumors. 



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October 12 2017

Commentary by Eoin Treacy

Hammond Warns U.K. Must Prepare For "Bad-Tempered Brexit"

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

“There will be some areas where we need to start spending money in the new year if we can’t tell ourselves we’re moving steadily and pretty assuredly towards a transition agreement,” Hammond told parliament’s Treasury committee on Wednesday.

Earlier, he pushed back at the suggestion that he should release cash now.

“I don’t believe we should be in the business of making potentially nugatory expenditure until the very last moment where we need to do so,” he said. “We will be ready, we will not spend it earlier than necessary just to make some demonstration point.”
He added, in a sign of defiance to EU negotiators: “Some are urging me to spend money to show the EU we mean business. I think the EU know we mean business.”

 

Eoin Treacy's view -

Rather than state categorically there will not be another referendum Theresa May refused to say how she would vote in one. That’s created a messy situation which has thrown the onus for talking up Brexit onto her cabinet colleagues. The Chancellor was castigated in some sections of the media today for his ambiguous support for Brexit because of his refusal to begin instituting plans for separation. Meanwhile Michel Barnier reportedly agreed to the idea of a transition today suggesting perhaps Mr. Hammond knows more about the negotiations than commentators baying for his ouster. 



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October 12 2017

Commentary by Eoin Treacy

Australia Doesn't Have the Answers

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

Finally, the system may well fail in its primary objective -- that is, to minimize the need for the government to finance retirement. The typical accumulated balance at retirement age is around A$200,000 for men and around A$110,000 for women. The averages are artificially increased by a small pool of people with large balances, yet they're still well below the A$600,000 to A$700,000 estimated to be necessary for homeowning and debt-free couples to finance their retirements, which may last 20 or more years.

The Australian government will need to cover the shortfall for a large proportion of the population. In fact, it will lose doubly, having already suffered a loss of revenue from the generous tax breaks provided for the schemes (estimated at A$30 billion annually and increasing), which have been used, especially by wealthy individuals, as a way to reduce their tax burden.

Future generations will also be affected adversely, having to finance payments to older generations through higher taxes or additional government debt, reduced wealth transfers from parents, and lower benefits than those awarded to their predecessors.

 

Eoin Treacy's view -

Australia has gone decades without a recession not least because it has benefitted from the evolution of commodity demand from China, the growth associated with inward migration of a highly educated workforce and the evolution of the services sector. That has allowed it to retain the mantle of a AAA rated credit while much larger economies like the USA and UK have been downgraded. 



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October 12 2017

Commentary by Eoin Treacy

Rally Restored? Bitcoin Is Up 75 Percent from 30-Day Lows

This article by Omkar Godbole for Coindesk may be of interest to subscribers. Here is a section:

Fresh off setting a new all-time high this morning, bitcoin is once again increasing its 2017 gains.

Yet for those just tuning in, it might not be immediately obvious how strong the cryptocurrency's recent performance has been or the conditions under which it's seen the boost. After all, as recently as mid-September, bitcoin's perceived bubble had all but burst when the price fell from $5,000 levels to below $3,000.

Yet, out of this doom and gloom, bitcoin has seen a phenomenal rally, delivering more than 70 percent returns in under 30 days.


Further, it's done so in the face of powerful headwinds – China, the world's largest market had just banned ICOs, throttling a thriving use case, and there is still the silent specter of yet another upcoming fork that could split the network, this time more acrimoniously.

 

Eoin Treacy's view -

In a bull market prices will advance on both good and bad news. What are the trend’s consistency characteristics?



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October 11 2017

Commentary by Eoin Treacy

October 11 2017

Commentary by Eoin Treacy

Email of the day on over representation of tech in emerging market indices

Think, this issue discussed in Reuters article may be of interest to you and subscribers. The boom in emerging market technology stocks is becoming a problem for fund managers of all stripes. The soaring market capitalization of a handful of companies such as China’s Alibaba (BABA.N) and Tencent (0700.HK) is steadily lifting their weighting in the MSCI emerging equities index. This means investors in funds that track indexes (exchange traded funds or ETFs) - who want exposure to a range of companies for a lower fund management fee - are finding themselves increasingly exposed to a single sector. Meanwhile, active fund managers, who justify charging higher fees for their individual stock-picking expertise, are under pressure to buy those tech stocks to ensure their funds keep up with the index’s gains. And with both sets of investor chasing the same thing, the risk of dramatic outflows increases if the sector falters.

Eoin Treacy's view -

Capitalism trends towards concentration and the nature of bull markets is to increasingly favour winners as they mature. There is no doubt that the technology sector has been the clear leader in this economic expansion so it is to be expected it occupy an increasingly large segment of major market indices in both developed and developing markets. As you point out that contributes to deteriorating diversification in portfolios. 



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October 11 2017

Commentary by Eoin Treacy

Email of the day on negative sentiment

October 11 2017

Commentary by Eoin Treacy

Email of the day on Mexico

I'm forwarding to you the most recent free, weekly commentary of Michael Drury, in house economic analyst for McVean Traders, a Memphis (Tennessee) based commodities broker-dealer. I find the commentary, an evaluation of the current status of the Mexican economy, to be quite lucid and educative. Perhaps others of your readers would find it so, too?

Warm regards and with great appreciation for the service you render.

 

Eoin Treacy's view -

Thank you for your kind words and this report which may also be of interest to subscribers. Here is a section:

At the Bank of Mexico, much of the conversation centered on Mexico’s current very high rate of inflation – which is largely due to surging energy costs after deregulation of the electricity sector a year ago.  As with Japanese VAT tax increases, these reforms caused a pig in the python effect as they work their way through reported annual CPI increases.  Mexico’s CPI should plunge lower toward 4% early  next year as the energy hikes pass out of the data.  This is still high compared to the 3% target, but should drift within the 1% acceptable band around the target.  The Bank sees more recent data as confirming that new inflationary pressures (which were mostly from the pass through effect of higher energy cost) are small.  As a result, recent hikes in the central banks reference rate are expected to end – though they will not be quickly reversed.  The combination of sticky rates and plunging inflation suggest a threat to Mexican growth from sharply higher real interest rates.  However, real economic growth has surprised to the upside recently, while high inflation has reduced the burden of earlier debt accumulation.  Long term interest rate appear already to have peaked as Bank rate hikes are ending. 

One perennial problem for Mexico is a low domestic savings rate and underdeveloped financial markets.  Combined with the earlier commitment to the view that all Mexican oil is a resource for the people and so no foreign ownership should be allowed, this meant that Mexican oil resources were underutilized and inefficiently operated.  However, as the deregulation of the telecom industry has shown, competition increases consumer options and lowers prices.  Private firms (from Italy and Houston) have recently found 3.4 million barrels of oil – out of an estimated 9 billion in Mexican reserves.  Perhaps those figures will have to be revised higher.  However, issues concerning crossownership and the upcoming election – where Obrador is campaigning for a roll back of energy reforms -- are clouding the speed with which these huge finds will be developed.  

 



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October 11 2017

Commentary by Eoin Treacy

JD Logistics Launches World's First Unmanned Parcel Sorting Centre

This video is representative of the highly or fully automated future of logistics. 

October 10 2017

Commentary by Eoin Treacy

October 10 2017

Commentary by Eoin Treacy

Not Business as Usual

Thanks to a subscriber for this heavyweight 329-page report from Deutsche Bank which may be of interest. Here is a section:

Not business as usual for the oilfield services industry 
This is an industry that is still in transition, and these are companies that still need to navigate this transition. The commercial development of tight oil reserves in the US was disruptive and it derailed the normalization of the cycle. The business models that worked last cycle will not necessarily work again this cycle. We believe in the long term, the oilfield service franchises that will be the winners will be those that evolve with innovative business models, and those that acquire or invest in niche technology leaders. 

Pressure pumping demand poised to recover to 2014 highs 
The biggest common denominator among our top picks is exposure to pressure pumping. As US producers tailor their drilling programs to focus increasingly on their core acreage and best wells, there will be a disproportionate mix of leading edge, longer lateral wells with tighter stage spacing and higher sand loadings. This will drive the average completion intensity per well even higher, which should restore the demand for horsepower to the 2014 highs despite a lower rig count.

 

Eoin Treacy's view -

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

Oil service companies have been among the primary targets for cost cutting by major oil producers. As wave after of wave of rationalization gripped the sector during the oil price collapse the major oil producers cancelled green field sites, abandoned deep-water drilling and committed to a lower for longer price forecast which dramatically altered their spending plans. The result was that the oil service sector is now a fraction of the size it attained at the oil peaks in 2008. That is before one considers the current optimism for electric vehicles, renewable energy and domestic batteries. 



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October 10 2017

Commentary by Eoin Treacy

Funding Battle Heats Up for World's Strongest Material

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

“Our revenue is starting to come through but it’s not substantial enough yet to offset the costs in the business,” Applied Graphene Chief Executive Officer Jon Mabbitt said in a phone interview, adding that its number of graphene-related projects has quadrupled to about 100 during the past year. “The momentum is building and the U.K. is doing pretty well."

Applied Graphene has little competition in its specialty of using the material in coatings and composites, according to the CEO. The company is working with about 50 manufacturers including Sherwin-Williams Co. on displacing traditional additives like chromates, phosphates and glass flakes used by coatings industry.

Eoin Treacy's view -

Graphene is often referred to a wonder material and for good reason. However rather than speculate on the myriad uses it can conceivably be put to the obstacle to widespread adoption has been mass production. That is the area where the majority of R&D money is being spent. A race is on to gain market share as the sector evolves and explains why small companies are attempting to source fresh capital. 



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October 10 2017

Commentary by Eoin Treacy

Commodities report

Thanks to a subscriber for this report from MacQuarie which may be of interest. Here is a section on precious metals: 

In the PGMs, we have again reduced our platinum price expectations. The rally we had been calling for from July did happen, but when it came it was so unconvincing, mainly based on a higher gold price, it might have been better if it had not happened at all. When gold lost steam it was exposed for what it was. A number of bullish factors we had cited – such as strong Chinese imports – have faded, and our expectations of a stabilisation of the European diesel share look to be premature. We continue to believe – absent a sharp decline in the rand – that platinum’s worst days are behind it, and our gold and FX forecasts imply decent gains in 2018/2019. A better world economy should help platinum jewellery demand, while the Chinese diesel sector offers some respite from the European negativity. But platinum simply isn’t in short supply at present. 

Whereas palladium is. We still can’t quite believe it should be worth more than platinum, and we don’t think it will be for long. But the internal forces that would bring this about are currently quite weak – gasoline engines continue to gain market share vs diesel, and substitution of platinum, while now making more sense than the reverse, is not an immediate thing. So while palladium is still set to fall back over 2018, that will be largely on external factors – weaker US and Chinese car sales – and that process has been delayed by the stronger-for-longer world economy we now see. Adding to this, investor sales have dried up. This matters as the market is in deficit, and we had expected investors, scared by the prospect of EVs, to fund it. That EVs haven’t scared them is perhaps understandable given limited volumes so far, but the deficit still needs funding, and a higher price for longer is the result. 

 

Eoin Treacy's view -

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

Palladium has been outperforming the other precious metals and indeed the industrial metals all year but it has paused in the region of $1000 and some consolidation has been underway for the last couple of months. Nevertheless, a sustained move below the trend mean would be required to question medium-term scope for additional upside. 



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October 10 2017

Commentary by Eoin Treacy

October 09 2017

Commentary by Eoin Treacy

October 09 2017

Commentary by Eoin Treacy

Beneath Hurricane-Hit Payrolls, U.S. Labor Market Shows Strength

This article by Patricia Laya and Sho Chandra for Bloomberg may be of interest to subscribers. Here is a section: 

“You have to qualify a lot in this report,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. That said, outside of the hurricane effects, the labor market “seems to be still solid.” The drop in unemployment and rise in participation are positive signs, and “we’re still creating more than enough jobs to absorb new entrants. The slack is diminishing.”

Average hourly earnings jumped from a year earlier by the most since the expansion started in 2009, in part because the storms boosted utility workers’ overtime pay and kept people away from work, especially in low-wage industries such as leisure and hospitality. There was also a calendar quirk that tends to produce stronger wage growth when the 15th of the month falls within the survey week.

 

Eoin Treacy's view -

Labour force participation has been a worrisome missing ingredient for the Fed as it moves towards raising interest rates. However, it stands to reason that with plenty of jobs on offer it is only a matter of time before wages increase enough to encourage people back into the workforce. 



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October 09 2017

Commentary by Eoin Treacy

During Irma's Power Outages, Some Houses Kept The Lights On With Solar And Batteries

This article by Adele Peters for fastcompany.com may be of interest to subscribers. Here is a section: 

Of course, if a storm is strong enough to tear solar panels off a roof and the battery can’t recharge, this type of system wouldn’t work for long. It’s also expensive: A single Powerwall unit, which can store 14 kilowatt-hours of energy, costs $5,500 plus supporting hardware and installation that can cost up to $2,000. A similar battery from Mercedes-Benz ranges from $5,000 to $13,000 for a 20 kilowatt-hour system including installation. In the U.K., where Ikea now sells both solar panels and batteries, its batteries are also nearly $4,000 at current exchange rates. Beyond cost, if someone rents an apartment or house and can’t install solar panels, it’s not an option.

But the cost is likely to drop, and battery storage and solar power could also be used in community solar projects, where customers don’t have solar panels at their own homes, but invest in or buy power from a nearby microgrid. In Orlando, customers can buy solar energy from a 12-megawatt solar farm built on top of a landfill; while the power is currently sent back to the grid, in the future, it’s possible that it and other community solar farms could use batteries to provide local backup power from multiple locations in emergencies.

 

Eoin Treacy's view -

Microgrids, batteries and solar cells have the potential to grow exponentially as costs come down and business models evolve. There are two additional points that are likely to prove attractive to consumers as well as government. The first is that the utility network is likely to be a target in any future war and foreign governments have already demonstrated both the intent and ability to tamper with it. 



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October 09 2017

Commentary by Eoin Treacy

Spain Warns Catalonia Independence Bid Risks Economic Meltdown

This article by Maria Tadeo, Esteban Duarte, and Angeline Benoit for Bloomberg may be of interest to subscribers. Here is a section:

Spanish 10-year bonds rose, with the spread over German bunds narrowing by six basis points at 11:38 a.m. in Madrid to 119 basis points. Spain’s benchmark stock index has lost about 1.2 percent since Catalans voted in defiance of the Constitutional Court, while Catalan companies including lender CaixaBank SA are moving their legal bases out of the region.

Nadal, the energy minister, suggested Catalonia would be jeopardizing electricity supplies and communications networks. Catalonia has little control over energy supplies and is reliant on the big Spanish companies that, in theory, could suspend service and turn the lights off.

“It so terrible a scenario the idea of independence, that everything won’t work from the single moment from which independence is declared," Nadal said in a Bloomberg Television interview. "There will be a problem in the energy sector, there will be a problem in the telecom sector, in the financial sector of course.”

 

Eoin Treacy's view -

The only way an independent Catalonia can function would be to introduce capital controls. There is already evidence of capital flight with Caixa Bank, for example, moving its headquarters to Madrid. If the Catalan administration does in fact wish to declare independence they have no time to waste. 



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October 06 2017

Commentary by Eoin Treacy

October 06 2017

Commentary by Eoin Treacy

Macro Morsels

Thanks to a subscriber for this edition of Hardings report for Maybank which today includes a section by Russell Napier. Here is a portion:

While developed world central bankers claim and deserve some credit for saving the world from a depression in 2009, their colleagues in the emerging markets may also have been key players in staying disaster. As OECD broad money growth actually contracted in late 2009, China saw broad money growth around 30% and India around 20%. 

Could this have been a key factor in preventing a debt deflation? If so, we need to be concerned that as broad money growth in the OECD slows rapidly the growth of broad money in India and China has reached new lows. 

In China M2 growth year on year, at 8.9%, is the lowest level of growth recorded since records began. That is a marked slowing from the growth rate of above 11% when the world thought Chinese growth was collapsing in 1Q 2016. That tightening in monetary policy occurs as three-month interest rates in China have risen from a low of 2.7% in 2016 to 4.7% today.  

Eoin Treacy's view -

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

China is attempting to clamp down on property market speculation as prices continue to climb. That could well be behind the slow pace of money growth. However, it is also worth considering that the cuts to reserve requirements on its banks announced Wednesday were designed to act as some incentive to increase money supply

The Hong Kong Financials Index, which is comprised primarily of mainland banks and insurance companies, continues to outperform the China Enterprises (H-Share) Index. The 4000 level has acted as an area of psychological resistance since 2008 and it rallied above it on Wednesday. A break in the progression of higher reaction lows would be required to question medium-term scope for additional upside.

 

The Shanghai Property Index pulled back sharply before the mainland market closed for the Mid-Autumn festival and is now testing the region of the trend mean and the progression of higher reaction lows. It will need to bounce soon if potential for higher to lateral ranging is to be given the benefit of the doubt.

 

Russell Napier’s contention that risk is growing in the financial sector is far from a lone voice in the wilderness and there is some weight to the argument however if we assess the consistency of trends across global markets there is scant evidence of top formation development, at least right now.  



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October 06 2017

Commentary by Eoin Treacy

Baidu Invites China's Cybercops to Label, Rebut Fake News

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

The platform links 372 police agencies who will use sophisticated artificial intelligence-driven tools to monitor and respond to fake news, blogposts and other items across about a dozen Baidu services, including the popular search engine, the official Xinhua News Agency reported. More than 600 organizations and experts in different areas will be enlisted to weigh in on their respective fields, according to an email sent by Baidu. They included official organs such as the Chinese Academy of Social Sciences, as well as media outfits such as Shanghai United Media Group and Caijing.

Internet giants from Facebook Inc. to Twitter Inc. are struggling to deal with a proliferation of spurious news articles across social media services. Baidu’s approach allows the Chinese government to intervene directly and write articles in rebuttal. Items that its system decides are fake will be clearly labeled a “rumor” at the very top of search results, alongside an explanation penned by the relevant agency or organization, according to a sample page Baidu provided.

Eoin Treacy's view -

One of the reasons companies like Alphabet and Facebook cannot gain access to China’s market is because they are unwilling to acquiesce to the demands the central government makes in terms of unfettered access to user data. Domestic Chinese companies do not have the luxury of choice. 



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October 06 2017

Commentary by Eoin Treacy

Amazon Is Said to Test Delivery Service to Rival FedEx, UPS

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

 

Last year, Amazon introduced Seller Fulfilled Prime, which lets merchants who don’t stow items in Amazon warehouses still have their products listed with the Prime badge, meaning they’ll be delivered within two days. The merchants had to demonstrate they could meet Amazon’s delivery pledge, and many used UPS and FedEx for deliveries. The new service gives Amazon control over those deliveries instead, even if it continues to use third-party couriers.

Amazon has started looking beyond its own warehouse network to give shoppers quick access to an abundant assortment of goods. Its Fulfillment by Amazon offering already lets merchants ship goods to Amazon warehouses around the U.S., where they can be stored, packed and shipped to customers. That centralized approach can create logjams, particularly during the busy holiday shopping season.

Seller Flex would also give Seattle-based Amazon more visibility into the warehousing and delivery operations of its merchant partners, potentially helping it make full use of their product inventory, storage space and proximity to customers while still guaranteeing quick delivery.

Eoin Treacy's view -

Mrs.Treacy’s Amazon business was invited onto Seller Fulfilled Amazon yesterday so I will inform subscribers of how that works out once we have some experience of it. 



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October 05 2017

Commentary by Eoin Treacy

October 05 2017

Commentary by Eoin Treacy

India's Digital Leap - The MultiTrillion Dollar Opportunity

Thanks to a subscriber for this highly educative heavyweight 124-page report from Morgan Stanley which may be of interest. Here is a section:

Digitization is that idea in India, right now. The government and the Central Bank are on a mission to rapidly formalize and financialize the Indian economy. India has introduced a universal biometric identification system (Aadhaar), initiated measures to boost financial inclusion (Jan Dhan), moved to a new fully online value-added goods and services tax system and implemented real-time payment systems (Unified Payments Interface and Bharat QR). Coupled with rising smartphone penetration, likely doubling from 300 million to nearly 700 million by 2020, these changes are driving India's digitization. We expect a step change in India's per capita income, banking system and stock market performance over the coming years. The channels of change include more financial penetration,
greater tax compliance and increased credit to micro enterprises and consumers.

The result could be a multi-trillion dollar investment opportunity. Aside from the near-term teething issues involved in execution of such big changes and other cyclical problems faced by the economy, there is scope for visible shifts in economic activity starting in 2018 eventually leading to India being a) the third-largest economy in the world with a GDP of US$6 trillion, b) among the top five equity markets in the world with a market capitalization of US$6.1 trillion and c) the country with the third-largest listed financial services sector in the world with a market cap of US$1.8 trillion by 2027. We also expect India's consumer sectors to add about US$1.5 trillion to their current market cap of US$500 billion over this period.

There are implications beyond India. The concomitant increase in e-commerce, consumption basket, financial products and investments will make India a significant market for global corporations. Most importantly, if India succeeds, it will become the template for other emerging nations. While increasing financial inclusion has been the policy objective across emerging nations, India can provide leadership with its unique model. Hence, it is very important for corporates, investors and policymakers across the globe to observe and understand these developments in India. Indeed, there may be lessons for developed countries too.  

 

Eoin Treacy's view -

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

Governance is Everything but it is not an absolute designation. Governance is all about the trajectory of policy and in India we can unabashedly say the trend is upwards. That is of course in full realisation that is it coming from a low base. 



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October 05 2017

Commentary by Eoin Treacy

More Lean, More Green

Thanks to a subscriber for this report from Goldman Sachs dated June 5th which is no less relevant today and may be of interest to subscribers. Here is a section:

We expect the costs of wind and solar to fall below the level of European power prices in the early 2020s (Exhibit 4). As costs fall below the price of the marginal technology, we expect utilities to ramp up their renewables installations, to keep/gain market share in the generation mix. We expect this to significantly change the generation mix in Europe, and would expect thermal technologies (mainly coal and gas) to be negatively impacted in terms of output. We would expect most governments (aside from those keen to protect a particular technology, such as domestic coal) to support this, as it should help reduce carbon emissions and lower electricity tariffs.  

Profits for wind developers/manufacturers to accelerate We estimate that the reduction in costs for wind/solar that we forecast will trigger a 30% step-up in annual global renewables investment (MWs) globally, post 2020, for the main European developers (Exhibit 7). We expect this trend to accelerate net income growth to c.2.5% (2017-36E) from 1.5% currently (Exhibit 8). 

For the European wind turbine manufacturers, we expect an average step-up in annual revenues of c.17% globally over 2017-36E, vs. 2017E (9 pp higher than previously anticipated), boosting annual net income by 58%. We estimate that this will support an equity value c.15% higher than we previously anticipated for the manufacturers.  

Our forecasts assume a significant change in the generation mix only in Europe: therefore, we would see upside to our renewables estimates if we were to extrapolate this globally.

 

Eoin Treacy's view -

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

When thinking about the march of technology we need to force ourselves to think about the consequences of something that is happening today on the future. The pace of innovation is accelerating; often in an exponential manner so the linear trajectory of our personal experience is often not the best way to think about the how markets will evolve. It would be easy to look at the wind or solar sector today and conclude it is not yet competitive but technology is changing so quickly that it is almost inevitable it will be cost competitive in future. That is the whole point of the exponential way of thinking Ray Kurzweil pioneered. 



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October 05 2017

Commentary by Eoin Treacy

The Human-Robocar War for Jobs Is Finally On

This article by Aarian Marshall for Wired.com may be of interest to subscribers. Here is a section:

It’s a small but noteworthy loss for the burgeoning self-driving trucking industry and the innovators therein, like Uber, Tesla, and Amazon, which have all lobbied for clear national rules governing the autonomous big rigs they want to build, sell, or use. And it’s an early win for the labor unions, whose influence in Washington has taken a precipitous dive since the 1980s, and more specifically for the Teamsters, which represents almost 600,000 truck drivers nationally and had asked legislators to keep their commercial vehicles out of the discussion, at least for the time being.

“The issues facing autonomous commercial trucks are fundamentally different, and potentially more calamitous, than those facing passenger cars, and warrant their own careful consideration,” Teamsters rep Ken Hall told the Senate during a hearing on autonomous trucks earlier this month.

It makes sense that trucking is the focal point of nascent AV regulation. From a technological perspective, implementing self-driving in trucks is easier than self-driving personal cars, or even self-driving taxis. Big rigs primarily operate on highways with long, straight stretches and (mostly) clear lane markers and signs. (City driving, by contrast, includes more mercurial creatures: cyclists, pedestrians, traffic lights.) Autonomy offers clear safety benefits, because trucks are overrepresented in road fatalities, and kill about 4,000 people a year on US roads. The economic case is also obvious: Trucking is a $676 billion industry in the US. Shipping faster, more efficiently, and without paying a human driver could only make it more profitable.

 

Eoin Treacy's view -

Subscribers are probably more than familiar with our refrain that technological innovation is changing the world but it is also worth considering regulation represents the framework in which all businesses perform. This is why companies spend so much time lobbying. If they can bend rules to their favour or limit the abilities of others to compete the effort is worth it. Unions think along exactly the same lines, as they attempt to protect the interests of their members even if that curtails the roll out of innovative solutions.



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October 05 2017

Commentary by Eoin Treacy

on a missing link to a talk on bitcoin

Your Comment of the Day yesterday (Oct. 3) included an article regarding Bitcoin which referenced an 18min video which I would like to view. Perhaps I missed it but I do not see a link to the view. Perhaps you have one? Warm regards (to you and to David) and eternal thanks for your service,

Eoin Treacy's view -

Thanks for letting me know and I apologise for the omission. I've added the link to the original article and here is a link to the talk.



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October 04 2017

Commentary by Eoin Treacy

October 04 2017

Commentary by Eoin Treacy

Shale Oil What the Thunder Said

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

After a year-long investigation, we challenge the orthodoxy on shale oil. Breakevens will deflate from $50/bbl to c$25-30/bbl. Ultimate production potential is 25-30Mbpd by 2025-30, overwhelming agency forecasts for 5-7Mbpd. The implications extend far beyond the oil industry.

What has changed is our perception of shale oil as a new technology paradigm: a digital revolution, offering 50-70% further productivity gains. Unlocking the full potential requires $100bn pa of upstream investment to be attracted by improving economics. Requisite political support is also warranted by reshaping global geopolitics and manufacturing, in favour of the US.

But world-changing trends are rarely realised in smooth trajectories. The conventional oil industry will contest shale’s ascent. International costs will continue deflating. Tax regimes will be overhauled to reinvigorate investment. Incumbent producers must compete with shale. OPEC’s last resort may be to incite periodic oil price volatility, potentially as soon as 2018.

Investing in this era is challenging. Our models now assume sustained deflation, averaging $46/bbl oil to 2020. The forward curve is too optimistic. Complacent companies will disappoint shareholders. But the leading European Majors are becoming remarkably resilient and can at least preserve equity value.

The prize lies in shale, with 25% upside and lower risk than conventional oil, even amidst low, volatile oil prices. US Super-Majors will capture the opportunity, by pivoting to short-cycle investment. Chevron is preferred. Shorter term bottlenecks will also emerge, benefiting select Oil Services.

Eoin Treacy's view -

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

The energy sector is in a state of flux. That is the natural reaction to a prolonged period of high prices which encourage economisation, greater technological innovation and investment in more supply. We now see a broad spectrum of responses to high prices which have contributed to better efficiency and more potential options for both production of electricity and storage as well as uses for electricity. Meanwhile oil is likely to remain a vitally important commodity for the foreseeable future not least as the global economy continues to industrialise and the chemical industry innovates the cracking process to prioritise commodities as the market demands. 



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October 04 2017

Commentary by Eoin Treacy

Micro-grids at the threshold

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

Batteries allow micro-grids to tap multiple revenue streams: Storage is helping micro-grid to transition beyond suppliers of just back-up power. Aggregation of storage and generation assets within a micro-grid creates a VPP and is capable of providing much-needed resiliency services to the central grid. Demand for these services is more than doubling every five years due to rising renewables in the generation mix. In Europe, this trend will likely continue considering targets to increase renewables by 20% by 2020. 

Block-chain and batteries make electricity trading possible: Utilities in the US and Europe are trialling block-chain technology, which, coupled with storage, can enable electricity trading within and also between micro-grids. Unhindered electricity trading is necessary if we are to overcome the intermittent, geographical and seasonal limitations of renewables. Batteries only offer a limited solution as overcoming these issues in the absence of fossil fuel generation would need uneconomic oversizing of storage capacity. 

Smart grid will be based on storage, micro-grids and electricity trading: We forecast the grid-connected micro-grid market globally to grow to $10bn by 2021 from under $0.5bn in 2016. Battery storage (residential and large) is estimated to play a major role and we expect 30GWh of micro-grid, which translates into a $5bn market opportunity by 2021. Fuel cells could be important for micro-grids as they are the most efficient generation technology – 15% adoption of fuel cells in microgrids will translate into 7.5Gw of demand and a market worth more than $2bn.       

Eoin Treacy's view -

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

Electricity traders have represented one of the largest demographics at The Chart Seminar over the last few years. At least part of the reason for that interest in Behavioural Technical Analysis is because it is a market with a bewildering array of fundamental inputs; coming with a slew of local considerations which contribute to volatility. That is before one considers the innate volatility of the energy markets. Therefore, an understanding of crowd psychology, the rhythm of markets and how one market can affect another are valuable tools which are going to be all the more important as the energy markets fracture with the growth of microgrids. 



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October 04 2017

Commentary by Eoin Treacy

Space: The Next Investment Frontier

Thanks to a subscriber for this report from Goldman Sachs which is dated April 4th but is no less relevant today. Here is a section:

The commercial space economy has stood nearly still for decades. More satellites have gone up and growth has been solid, but the fundamental commercial landscape has remained relatively stagnant. We are witnessing an inflection point in the significance of the space economy, where it becomes central in providing Internet access and basic services to more than half the world’s population, compounding growth. The coming decade will be one of pruning, where only the strongest and most innovative survive the wave of new technology and business models, but that is necessary to propel the mainstay manufacturing and services industries forward. 

The commercial satellite services industry is entering an arms race to acquire the most capacity as pricing collapses in end markets. A single satellite is now being built with more Internet bandwidth than everything launched into orbit, ever. A constellation of small satellites will likely grow the amount of bandwidth on orbit by a factor of at least 10X, at a rapidly falling cost. At the same time, pricing in the launch industry is plummeting. On a cost per kg to LEO basis, prices will soon have fallen by about 90% over the last decade. Decreased launch cost lowers the barrier to entry and helps incumbents that may take advantage of lower capex to flood the market with additional capacity. 

We do not expect all existing players to survive the turbulence that is unfolding, but we also expect new companies to rise to the challenge to take the place of those that fail. The near term will present challenges, but in the back half of the next decade we see supply and demand balancing once prices have fallen sufficiently to fit the budgets of the rural populations of developing countries. Given our view on elasticity in the space economy, though with some stickiness, we expect lower prices to spur demand for launch, spacecraft, and satellite services.

Eoin Treacy's view -

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

A few years ago the 21st century was heralded as China’s century but advances in technological innovation suggest that provided standards of governance continue to improve the region most likely to benefit will be Africa. The introduction of microgrids for power, satellites for internet connectivity and the potential elimination of malaria will allow the focus of infrastructure development to focus on roads, schools and healthcare which should contribute to continued urbanisation and improving crop yields. Since Africa will account for the bulk of global population growth in the first half of this century the stakes couldn’t be higher for achieving a better standard of living for literally billions of people. 



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October 04 2017

Commentary by Eoin Treacy

How is David?

Eoin Treacy's view -

I made a pilgrimage down to Devon today to visit David in the most pastoral of settings. I was delighted to see he is well on the mend and is in high spirits following what was a traumatic time for him over the summer. His new team of specialists in Exeter have made all the difference, treating him like the individual he very much is rather than a commodity. He asked me to extend his thanks to all the subscribers who have sent through their well wishes.  



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October 03 2017

Commentary by Eoin Treacy

October 03 2017

Commentary by Eoin Treacy

European Equity Strategy

Thanks to a subscriber for this heavyweight 153-page report from Deutsche Bank which is chock full of charts many of which are worthy of additional consideration. Here is a section on Europe:

Flash Euro area composite PMI new orders rebounded to a six-year high of 56.3 in September, up from 55.5 in August and consistent with Euro area GDP growth of 3%+ (slide 6). However, PMI momentum – the six-month change in the PMI and a key determinant of European equity market momentum – remains close to zero, having peaked at +4 points in February. We think the current level of the PMI is unlikely to be sustained, given that: (a) PMIs are consistent with GDP growth significantly above our economists’ forecasts (2.2% for this year, 2.0% for 2018) and consensus (2.1% for 2017, 1.8% for 2018); and (b) the PMI has overshot the level suggested by the Euro area credit impulse, which, at 0.1% of GDP, is consistent with a PMI of 51. We expect the PMI to fade back to around 53 by year-end, consistent with our economists’ growth projections. This would imply PMI momentum turning negative over the coming months. Yet, because of the slower-than-expected fade in macro momentum and a sharper-than-expected fall in the European political uncertainty index, our models now point to a flat market by year-end (with temporary upside to 400 on the Stoxx 600, or 4% above current levels; slide 7), before renewed weakness in response to negative PMI momentum in Q1 2018 (with a projected trough below 360 on the Stoxx 600). We expect to turn tactically positive on European equities on signs that PMI momentum is troughing, which is typically associated with a strong rebound (slide 9). Our current projections imply a trough in PMI momentum in early Q2 2018.

Eoin Treacy's view -

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

The Eurozone’s impressive Purchasing Managers’ Index (PMI) survey was also a subject covered by Jeff Gundlach at his talk last week. It reflects both the fact we are in a period of synchronised global economic expansion and that the ECB’s monetary largesse has in effect bought an economic expansion. If the PMI weakens it will represent another reason why the ECB should hold off on tapering. 



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October 03 2017

Commentary by Eoin Treacy

Email of the day on blockchain

Been following some of your spreadbets successfully and thought I'd repay the favour with an interesting video on blockchain. Some readers may want to skip to about half way through this 18 min video

Best regards

Eoin Treacy's view -

Thank you for this thought provoking video and congratulations on taking opportunities as they appear in the markets.

The idea he proposed that each person can take back their identity and only share what they choose is a powerful notion and could easily be a rallying call around which people coalesce to support the technology. The continued rise of cyber criminality and the enormous profits of companies like Facebook and Alphabet could both become politicised topics which help to grow participation in blockchain applications. 



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October 03 2017

Commentary by Eoin Treacy

Chinese EV market nearing 2% penetration

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

In 2016 Chinese electrical vehicle makers represented 43% of the global EV market, or 873,000 units, overtaking the United States for the first time, according to a July report by McKinsey & Company. The report notes that not only did China up its share of the EV market by 3% compared to 2015, it also made gains on the supply side of EVs including components such as lithium-ion batteries and electric motors. "One important factor is that the Chinese government provides subsidies to the sector in an effort to reduce fuel imports, improve air quality, and foster local champions," McKinsey explained.

The Chinese government has announced that "new energy vehicles" (NEVs, which includes hybrids) should account for 8% of the passenger vehicle market by 2018, 10% by 2019 and 12% by 2020, according to EV Volumes.com.

Eoin Treacy's view -

Anyone who has spent any time in Beijing over the winter knows how badly the entire north east of the country needs to combat air pollution. On my first strip in 2005 I developed a cough as if I have been smoking my entire life that only let up once I got back on the plane home. If anything, the air is worse today than it was then. 



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October 02 2017

Commentary by Eoin Treacy

October 02 2017

Commentary by Eoin Treacy

October 02 2017

Commentary by Eoin Treacy

How Far Can the Catalan Rebellion Go?

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

Rajoy would need someone reliable to enforce the ruling. With the loyalty of the Catalan police force in doubt, that probably means the estimated 10,000 national police and Civil Guard officers who’ve been sent to Catalonia as reinforcements.

They have the numbers to remove Puigdemont, but it would trigger a rejection in the streets. More than 800 people were injured when those officers tried to shut down Sunday’s vote, so there’s a clear risk that the situation could spin out of control.

The Catalan police force adds another element of uncertainty. Sunday also saw a minor scuffle between Spanish and Catalan police, one Catalan officer was arrested for attacking a national police vehicle and tensions between the different forces are running high. If Spain took control of Catalonia, Rajoy would probably need support from the Catalan police to impose and maintain order.

 

Eoin Treacy's view -

The Catalan independence vote can be seen in the wider context of a condemnation of the severe fiscal austerity handed down by the European Commission and ECB, to countries on the Eurozone’s periphery, in response to the credit crisis. Forcing governments to absorb the bad debts of private institutions, without recourse to a sharply devalued currency, has put great pressure on the populations of the respective countries and Spain’s current political impasse is a real-time example of what that can lead to.



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October 02 2017

Commentary by Eoin Treacy

Missile Defense: Money Well Spent; Budgets Unlikely to Stay Flat

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

The threat from expanding missile technology by potentially adversarial nations is on the rise and has been since the early 2000s (see Figure 3). The most visible signal of that being the acceleration in missile technology breakthroughs and launches by North Korea. On the back of this accelerating tension is a rising tide of political support. A bipartisan call for higher missile defense spending seems to be gaining traction, with the "Advancing America's Missile Defense Act of 2017" gaining 27 cosponsors in the Senate (21 Republicans, 5 Democrats and 1 Independent) introduced in May 2017. The bill laid out a few points for its rallying cry, but in particular drove home that a 23% decline in Missile Defense Agency budget since 2006 (while Iran and North Korea activity was going in the opposite direction) needed to be corrected. In the Bill, there is explicit language to: 1) increase the number of ground-based interceptors (by 28 with expansion to 100 interceptors vs. the 44 scheduled to be in place at the end of 2017, 2) reintroduce the development and deployment of space-based missile defense sensors (e.g. Space Tracking and Surveillance System--STSS), and 3) evaluation and testing of radar and sensors for the ground-based midcourse systems (e.g. LRDR) as well as the system as a whole (for which testing funding has declined over 83% since 2006). More additions are possible following recommendations from the Department of Defense's upcoming Ballistic Missile Defense Review ("BMDR") and Missile Defeat Review ("MDR"). Even more near-term, the DoD this week released details of a budget reprogramming request for 2017 for over $400M ~5% of the Missile Defense budget) toward previously unfunded missile defense efforts consistent with the desires laid out in the "Advancing America's Missile Defense Act of 2017". 

Eoin Treacy's view -

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

Subscribers are probably aware that I was intrigued by the many topics covered in Elon Musk’s presentation to the 68th International Astronautical Congress. There were some big claims made which highlighted the rapid pace of innovation in the space sector, the introduction of private capital has achieved. However, there are some pressing geopolitical considerations that should also be considered from this evolution. 



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October 02 2017

Commentary by Eoin Treacy

China sees new world order with oil benchmark backed by gold

This article by Damon Evans for the Nikkei news agency may be of interest to subscribers. Here is a section: 

China's move will allow exporters such as Russia and Iran to circumvent U.S. sanctions by trading in yuan. To further entice trade, China says the yuan will be fully convertible into gold on exchanges in Shanghai and Hong Kong.
"The rules of the global oil game may begin to change enormously," said Luke Gromen, founder of U.S.-based macroeconomic research company FFTT.

The Shanghai International Energy Exchange has started to train potential users and is carrying out systems tests following substantial preparations in June and July. This will be China's first commodities futures contract open to foreign companies such as investment funds, trading houses and petroleum companies.

And 

The existence of yuan-backed oil and gold futures means that users will have the option of being paid in physical gold, said Alasdair Macleod, head of research at Goldmoney, a gold-based financial services company based in Toronto. "It is a mechanism which is likely to appeal to oil producers that prefer to avoid using dollars, and are not ready to accept that being paid in yuan for oil sales to China is a good idea either," Macleod said.

 

Eoin Treacy's view -

This is an interesting gambit from China because while it is the biggest importer of oil it is the largest producer of gold. The futures contract is not yet active but for oil producers who are not happy to transact in Dollars, physical gold has definite attractions. It also raises the stakes in China’s attempts to establish the Renminbi as a viable reserve country. 



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October 02 2017

Commentary by Eoin Treacy

African entrepreneurs have made Guangzhou a truly global city

This article by Gordon Meadows for Quartz may be of interest to subscribers. Here is a section: 

A Kenyan gave a more analytical view, comparing China to his own country: “You . . . have to be impressed with Guangzhou and with China. The infra- structure, the town planning. The government can provide for a billion people, with a rail network, roads, recreational facilities, parks— things that are lacking in Africa. All the time I’ve stayed here, I’ve not experienced a single electricity blackout. Yes, I want Kenya to become like China!” 

A West African trader with long- term residence in the United Kingdom had a darker view: “Africans who come to China straight from Africa see it as wonderful, and they want China to be like that. But those who have lived in Europe or the U.S. don’t like China much. For me, after the United Kingdom, China was like ‘the world turned upside down.’ The laws aren’t followed in China. Contracts are like toilet tissue.”

A Kenyan gave a more analytical view, comparing China to his own country: “You… have to be impressed with Guangzhou and with China. The infrastructure, the town planning. The government can provide for a billion people, with a rail network, roads, recreational facilities, parks—things that are lacking in Africa. All the time I’ve stayed here, I’ve not experienced a single electricity blackout. Yes, I want Kenya to become like China!”

 

Eoin Treacy's view -

One of the reasons I am still optimistic about the ability of impoverished African nations to lift themselves out of the poverty is because of how many ambitious African traders I’ve met all over China, not just in Guangzhou. 



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September 29 2017

Commentary by Eoin Treacy

September 29 2017

Commentary by Eoin Treacy

Musk Wants to Build a Rocket That Will Get You Anywhere on Earth in an Hour

This article by Dana Hull and Perry Williams for Bloomberg includes a video of Musk’s full presentation at the 68th International Astronautical Congress. Here is a section:

"Fly to most places on Earth in under 30 mins and anywhere in under 60," Musk wrote in an Instagram post after he’d left the stage without taking questions. "Cost per seat should be about the same as full fare economy in an aircraft. Forgot to mention that."

With many commercial satellite operators as customers, the revenue from those contracts will help fund the development of the BFR, which would be capable of carrying satellites to orbit, crew and cargo to the International Space Station, and complete missions to the Moon and Mars, said Musk. He said the BFR would contain 40 cabins capable of ferrying roughly 100 people at a time.

 

Eoin Treacy's view -

The cost of lifting payloads into space is dropping fast. Meanwhile the size of satellites is decreasing meaningfully while their technical specifications are improving even more rapidly. Economics 101 dictates that if the cost comes down demand will rise. 



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September 29 2017

Commentary by Eoin Treacy

Russian campaign on Twitter and Facebook aims to splinter America

This article by Rhys Blakely for The Times may be of interest to subscribers. Here is a section: 

Thousands of Twitter accounts linked to the Kremlin were churning out material designed to splinter America along political, racial and religious lines yesterday, even as tech executives arrived at Capitol Hill to field questions on Russian meddling in last year’s US election.

An analysis of 600 Twitter accounts linked by the German Marshall Fund, a think tank, to the Russian government has provided the most vivid insight yet into how the Kremlin is seeking to use social media to undermine western societies.

 

Eoin Treacy's view -

United we stand, divided we fall. The Russians and Chinese know that as well as anyone. Maybe Western constitutional democracies need to wake up to that reality. 



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September 29 2017

Commentary by Eoin Treacy

A $6.4 Billion Windfall Awaits Big U.S. Banks in Trump's Tax Cut

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

The six largest U.S. banks could see net income rise $6.4 billion, or 7 percent, if President Donald Trump and Republicans in Congress can push through their proposed corporate tax rate cut.

Banks stand to benefit more than other industries because they typically have fewer deductions. The top six firms -- JPMorgan Chase & Co., Bank of America Corp., Wells Fargo & Co., Citigroup Inc., Goldman Sachs Group Inc. and Morgan Stanley -- paid an average of 26 percent in federal taxes last year, almost twice the average for nonfinancial companies, according to data compiled by Bloomberg. The Republican framework released Wednesday calls for lowering the corporate rate to 20 percent from 35 percent.

The estimates for the tax savings are based on the firms paying a 20 percent effective U.S. federal rate, assuming current deductions are no longer allowed. While earlier versions of Republican tax proposals have talked about eliminating some deductions, the latest plan has scant information on such changes. If some deductions are kept, banks would end up with a lower effective tax rate and their savings would be even greater.

Eoin Treacy's view -

US Banks were among the biggest initial beneficiaries of President Trump’s election victory last November, but have spent much of this year ranging as details of just how they might benefit have remained elusive. The plan currently proposed lends some clarity. Since the cut to corporate tax rates is a cornerstone of the legislation, banks will benefit both from paying less but also from customers with more free cash flow. 



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September 29 2017

Commentary by Eoin Treacy

Catalan Independence Drive to Haunt Madrid Whatever Happens Next

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

Catalonia, which includes Barcelona and accounts for a fifth of Spain’s economy, is attempting to become the first of 17 autonomous regions that already enjoy a measure of self-government to hold a binding plebiscite on independence. It staged a nonbinding ballot three years ago that was backed by about 80 percent of voters, though barely 30 percent of those eligible turned out.

The rebel administration is pressing ahead with the referendum even after Rajoy’s government seized 10 million ballots, deployed thousands of police and arrested more than a dozen Catalan officials.

“This is the most serious constitutional crisis Spain has faced,” said Alejandro Quiroga, professor of Spanish history at the University of Newcastle in the U.K. “The Catalan question could trigger a competition among the other regions to test how far they can go. It’s a very complex matter.”

 

Eoin Treacy's view -

How much did the discovery of America, and the riches that flowed into Spain as a result, cement the binding together of Castille and Aragon when Isabella and Ferdinand were wed? There is no doubt economic abundance reduces nationalistic tendencies but the opposite is also true. 



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September 28 2017

Commentary by Eoin Treacy

September 28 2017

Commentary by Eoin Treacy

Trump's Tax Cuts Seen Producing Short Job Growth 'Sugar High'

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

There is good news for Trump and the Republican Congress: A short-term economic jolt might help make congressional elections next year smoother for them.

In effect, making the deduction temporary would “pull forward” companies’ future purchases and “juice economic activity in the front, during this term leading into re-election,” said Michael Drury, the chief economist of McVean Trading & Investments in Memphis.

Grover Norquist, the president and founder of the conservative group Americans for Tax Reform, says he thinks the tax plan would produce sustained growth. But he acknowledged the issue’s political importance.

“This tax bill, and its growth, is going to be the central piece of legislation that voters will vote on in October and November of 2018,” Norquist said earlier this week.

 

Eoin Treacy's view -

The Trump administration is going to need to deliver on at least one major success if it is to succeed in sustaining the Republican Party’s electoral success. That will be a central motivation for politicians as they assess the merits of this plan which is still notably skimpy on details. That also suggests a willingness to negotiate on the details so long as the central thesis of lower corporate tax rates and higher tax-free bands remain. 



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September 28 2017

Commentary by Eoin Treacy

Gleanings: "When Smart People Talk, We Listen"

Thanks to a subscriber for this report from Jeffrey Saut for Raymond James which may be of interest. Here is a section: 

1. Invest in something when people say they never want to invest in it again, when they are throwing it out the window. Think about that.  We know people that liquidated their portfolios around the March 2009 lows vowing to never buy a stock again.  The same can be said about tech stocks as they were bottoming between November 2002 and May 2003.  Currently, the same thing is being said now about energy stocks, especially the midstream MLPs.

2. Investing is both qualitative and quantitative. There is room for both disciplines (qualitative and quantitative) in one’s portfolio just like there is room for both passive and active investment management, although currently we favor active. 

3. The more people ridicule and question you, the more likely you are probably onto a good thing no matter what it is. This was like us buying oil sands stocks in the late 1990s when everyone was buying tech.  Or like when we bought tech stocks near the end of 2002; and, what we are doing now in buying the out of favor energy stocks. 

4. Don’t invest in an area just because it is depressed, find and wait for the change and invest just before it happens while still unrecognized by the market. My father use to tell me, “Good things happen to cheap stocks,” but stocks can stay cheap for a really long time if other investors do not recognize their cheap valuations.  The charts will tell you when other investors will recognize them too.

 

Eoin Treacy's view -

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

Many investors seeking to follow the buy-low-sell-high maxims laid out in this report are hunting for sectors that look cheap by historical standards. The most obvious candidate is the energy sector which is still struggling with the profound changes unconventional supply have wreaked, not to mention the anticipated surge in demand for electric vehicles. 



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September 28 2017

Commentary by Eoin Treacy

The World Is Creeping Toward De-Dollarization

Thanks to a subscriber for this article by Ronald-Peter Stöferle for the Mises Institute. Here is a section:

A clear signal that something is afoot would be the abolition of the Saudi riyal's peg to the US dollar. As recently as April of this year economist Nasser Saeedi advised Middle Eastern countries to prepare for a “new normal” — and specifically to review the dollar pegs of their currencies: “By 2025 it is clear that the center of global economic geography is very much in Asia. What we’ve been living in over the past two decades is a very big shift in the political, economic, and financial geography.”

While the role of oil-producing countries (and particularly Saudi Arabia) shouldn't be underestimated, at present the driving forces with regard to de-dollarization are primarily Moscow and Beijing. We want to take a closer look at this process.

There exist numerous political statements in this context which leave no room for doubt. The Russians and Chinese are quite open about their views regarding the role of gold in the current phase of the transition. Thus, Russian prime minister Dimitri Medvedev, at the time president of Russia, held a gold coin up to a camera on occasion of the 2008 G8 meeting in Aquila in Italy. Medvedev said that debates over the reserve currency question had become a permanent fixture of the meetings of government leaders.

Almost ten years later, the topic of currencies and gold is on the Sino-Russian agenda again. In March, Russia's central bank opened its first office in Beijing. Russia is preparing to place its first renminbi-denominated government bond. Both sides have intensified efforts in recent years to settle bilateral trade not in US dollars, but in rubles and yuan. Gold is considered important by both countries.

 

Eoin Treacy's view -

Oil and its derivative products are used in every country in the world so it is logical that the acquiescence of major suppliers to a Dollar standard is a necessary condition of the USA’s international currency hegemony. However, it is not the only consideration. 



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September 27 2017

Commentary by Eoin Treacy

September 27 2017

Commentary by Eoin Treacy

Trump Hails Tax Plan as "Revolutionary Change" for Middle Class

This article by Julie Hirschfeld David and Alan Rappeport for the New York Times may be of interest to subscribers. Here is a section:

The framework also gives Congress the option of creating a higher, fourth, rate above 35 percent to ensure that the rich are paying their fair share. But it does not specify what income levels would be associated with the higher rate, what that new rate might be or explicitly direct Congress to implement a fourth bracket.

The plan aims to simplify and cut taxes for the middle class by doubling the standard deduction to $12,000 for individuals and to $24,000 for married couples. That would allow people to avoid a complicated process of itemizing their taxes to claim various credits and deductions. It would also increase the child tax credit from $1,000 to an unspecified amount and create a new $500 tax credit for dependents, such as the elderly, who are not children.

Provisions such as the alternative minimum tax and the estate tax, a tax on inherited wealth which Mr. Trump has derided over the years, would be gone under the Republican proposal. Most itemized deductions, including those widely used for state and local tax expenses, would also be eliminated. However, the plan would preserve the deductions for mortgage interest expenses and charitable giving and keep incentives for education and retirement savings plans.

 

Eoin Treacy's view -

A point Jeff Gundlach made yesterday is that the only way the Trump tax plan can remain revenue neutral is to remove the state and local tax deductions. That is primarily a challenge for high income earners in high tax states like California and New York which are also the most populous states. That represents a major challenge in getting this legislation passed. It’s certainly not impossible but neither should we ignore the challenge in getting these proposals passed. 



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September 27 2017

Commentary by Eoin Treacy

September 27 2017

Commentary by Eoin Treacy

2017 at the Three Quarter Pole

Thanks to a subscriber for securing an invitation for me to attend Jeff Gundlach’s presentation yesterday which as always was an educative experience. 

Eoin Treacy's view -

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

There were a number of interesting points raised but I believe the most relevant for subscribers’ centre on what he said about shrinking the Fed’s balance sheet, the outlook for the Dollar, commodity markets, the relative attractiveness of emerging markets and his best guess for when to expect the next recession.



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September 27 2017

Commentary by Eoin Treacy

Another Look at Why the Return to Capital is Low

Thanks to a subscriber for this highlighting this article by Marc Chandler for Brown Brothers Harriman. Here is a section:

Similarly, a new strategy to deal with the surplus capital, not within our grasp.  In the meantime, officials are trying to come up with other ways to absorb the surplus, including changes in the regulatory environment.   In some ways, it might be helpful to think about QE itself as an attempt to deal with the surplus capital.

When farmers have a bountiful crop, and the price threatens to fall below the cost of production, governments often invent schemes to buy the crop and warehouse it and let it agricultural produce come to market when at a better (i.e., lucrative) time.  In some ways, QE can be understood as a similar strategy:  Warehouse the surplus capital.  This is not a permanent solution.  There is a political push back on the grounds that it blurs monetary and fiscal policy.  There is an ideological resistance to the “interference” with market forces.  There are economic arguments against the distortion of prices and the mutation of printing signals.

Interest rates are low, not simply because central banks are buying bonds and maintaining large balance sheets by recycling maturing issues.  Interest rates are low because there is too much capital.  It is a recurring source of the crisis in market economies.  We should anticipate that returns to capital will remain low until a new strategy to deal with the surplus is devised and accepted, and the risk is that we are still in denial.

 

Eoin Treacy's view -

This is an interesting take on the condition we see today in the financial markets and is a topic worthy of consideration because it will influence how high interest rates can rise in the current environment. 



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September 27 2017

Commentary by Eoin Treacy

Sam Zell on Global Growth: "Where's the Demand?"

Thanks to a subscriber for this article by Julie Hammond for the CFA Institute may be of interest to subscribers. Here is a section: 

“Last year, I was saying that the CRE industry was relatively benign and supply and demand was in balance,” he said. “In the last 18 months, however, there has been an enormous increase in supply.”

Zell is concerned about oversupply in nearly every segment of the real estate market. Growth in multifamily residential units is at an all-time high, he observed, with 380,000 being added in 2017 — a pace not seen since 1972, a time when the sector was the only game in town.

Office space supply is rising when occupancy rates are on the decline. Due to secular shifts in the way we work — towards higher density workspaces and more efficient use of space — occupancy has fallen from 240 square feet per employee to 180 square feet, maybe less.

“We are behind the rest of the world in terms of adapting to shrinking office space,” he said. Zell says retail space has a difficult road ahead given excessive supply, though he believes there will always be room for brick and mortar. “Only the very top-end malls and the very bottom ones are doing okay,” he said. “Anything in between is obsolete.”

Hotels in major cities like New York and Chicago are overbuilt by about 20%, he said. The only segment that has an appeal from a supply-and-demand perspective is mobile homes because of how difficult it is to obtain park permits and because of the “not in my backyard” (NIMBY) stigma associated with them.

 

Eoin Treacy's view -

When one is shipping to Amazon the last thing you want is to have the name of the factory you are ordering from emblazoned on the container. The number of small businesses Amazon has simply bypassed so it could sell their goods itself is high so caution is warranted. Therefore when Mrs. Treacy is importing her inventory she needs a warehouse for a few days before shipping it to Amazon. This year she used a large public storage locker.



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September 26 2017

Commentary by Eoin Treacy

September 26 2017

Commentary by Eoin Treacy

Ermotti Rues EU's Future While Diamond Sees Benefits of Brexit

This article by Francine Lacqua and Christian Baumgaertel for Bloomberg may be of interest to subscribers. Here is a section: 

Bob Diamond says Brexit is bringing the Continent together, or at least benefiting its banks. That prompted Sergio Ermotti, days after Germans gave Angela Merkel a weaker mandate, to say the European Union is broken.
Ermotti, head of Switzerland’s UBS Group AG, warned Europe is doomed to fall behind the U.S. and Asia unless the EU breaches the “taboo” of closer federalism. He struck a gloomy note in response to Diamond, the ex-Barclays Plc boss turned optimistic investor in Greek and Italian banking, who called Brexit a “net positive” for European bank reform moments earlier.

 

Eoin Treacy's view -

What I found most interesting today about Macron’s speech on EU reform was he made special mention of his belief mutualisation of debt across the EU was unnecessary; not to mention untenable considering the current political environment in Germany. 



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September 26 2017

Commentary by Eoin Treacy

Email of the day on Tesla's gigafactory

If one assumes a breakthrough in battery composition and manufacturing in the near to medium term future, then one would have to question Musk's wisdom in investing in building his battery mega factory which apparently is designed to build conventional lithium batteries.

Eoin Treacy's view -

By going for scale even in conventional battery production Tesla has in many respects broken the mould of what had been the battery manufacturing sector by introducing economies of scale. It is true that the gigafactory is churning out batteries that are in many respects scaled up versions of what we have in our phones, but what else is the company supposed to put in its cars today?



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September 26 2017

Commentary by Eoin Treacy

BHP, world's largest miner, says 2017 is 'tipping point' for electric cars

This article by Clara Ferreira-Marques and Gavin Maguire for Reuters may be of interest to subscribers. Here is a section: 

Balhuizen said he expected the electric vehicle boom would be felt - for producers - first in copper, where supply will struggle to match increased demand. The world’s top mines are aging and there have been no major discoveries in two decades.

The market, he said, may have underestimated the impact on the red metal: fully electric vehicles require four times as much copper as cars that run on combustion engines.

BHP, Balhuizen said, is well-placed, with assets like Escondida and Spence in Chile, and Olympic Dam in Australia. BHP said last month it was spending $2.5 billion to extend the life of the Spence mine in northern Chile by more than 50 years.

 

Eoin Treacy's view -

Copper is currently in contango suggesting a short-term supply deficit is not what has driven prices higher over the last couple of months. The outage at Escondido which restricted supply was a consideration that contributed to the gain but was not enough to push the futures curve into backwardation. Enthusiasm about the demand vector electric vehicles represents for metals like copper, nickel, lithium and cobalt could be a better explanation despite the fact these represent medium rather than short-term considerations. 



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September 26 2017

Commentary by Eoin Treacy

Email of the day on Chinese customer service

My first experience of Shanghai customer service was in 1987. One afternoon we were bussed around the local Friendship Stores to spend money; but, I was having no more of it and took my camera to get some shots of real locals rather than Communist Party guides! My broken Mandarin got me an invite to join some locals at a table for food and beer. I politely declined the offer of food but said I would indulge in a beer. Unfortunately, the glass had a viral bug on it which 2 hours later caused my anatomy to require plenty of boiled eggs to help reverse my problem! We were staying at a hotel on The Bund. At 5pm we asked for room service and requested lots of boiled eggs on toast, only to be told, sorry, we only serve eggs at breakfast time! 30 years ago, Customer Service was unheard of.

Eoin Treacy's view -

Thank you for sharing you experience which gels with my own, at least until this most recent trip. 



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September 25 2017

Commentary by Eoin Treacy

Video commentary for September 25th 2017

Eoin Treacy's view -

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

Some of the topics discussed include: Lots of political events influencing markets, oil jumps on Kurdistan referendum, Euro down on AfD success, Wall Street pausing ahead of tax reform announcement, New Zealand Dollar weaker on election upset, Yen firmer on Japanese election announcement. Gold steadies and VIX may rallies.



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September 25 2017

Commentary by Eoin Treacy

The Next Financial Crisis

Thanks to a subscriber for this report by Jim Reid for Deutsche Bank. Here is a section: 

Perversely, the current post Bretton Woods system also allows for huge operations/stimulus to overcome any crisis/shock. We also shouldn’t underestimate the positive impact that this can have on nominal asset prices. Cash is arguably a far more dangerous asset in a fiat currency but unstable regime than it is in a more stable less crisis prone one. However, by continually using stimulus to deal with crises and not letting creative destruction take over, you make a subsequent crisis more likely by passing the problem along to some other part of the global financial system, and usually in bigger size. In a fiat currency world, intervention and money creation is the path of least resistance. In a Gold standard world, mining new gold was the only stable way of increasing the money supply.  

We think this leaves the current global economy particularly prone to a cycle of booms, busts, heavy intervention, recovery and the cycle starting again. There is no natural point where a purge of the excesses is forced by a restriction on credit creation.  

So we’re quite confident that there will likely be another financial crisis/shock pretty soon with their frequency continuing to be high until we create a more stable global financial framework.

 

Eoin Treacy's view -

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

When I read this report three of David’s Fullerisms came to mind. “Central banks are serial bubble blowers”. Another is “central banks have killed off more bull markets than all other factors combined”. To round out the triumvirate “Money policy beats most other factors most of the time”. Therefore, monetary policy is critical if we are to have any hope of identifying the difference between medium-term topping activity and a major top. 



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September 25 2017

Commentary by Eoin Treacy

Turkey Warns Iraq Kurds It Can "Close the Valves" on Oil Exports

This article by Onur Ant and Khalid Al-Ansary for Bloomberg may be of interest to subscribers. Here is a section:

The referendum isn’t limited to the three Kurdish governorates, or provinces, of Iraq; people in the disputed, oil-rich area of Kirkuk are also participating in the poll.

Iraq’s central government also condemned the KRG for including Kirkuk in its referendum and has threatened to retaliate.

Turkey and Iran, which also has a population of Kurds, have been among the most outspoken opponents of the referendum and were among the first to act. Iran’s Tasnim news agency reported that Iranian airspace bordering the Kurdish region had been closed at the request of Iraq’s government, and that the Iranian military was conducting exercises in frontier provinces.

The vote was “laying the ground for hot conflict,” Turkey’s Prime Minister Binali Yildirim said Monday. Turkey now considered the Iraqi government the sole counter party in its arrangement over oil exports to Turkey’s Mediterranean coast, he said.

Eoin Treacy's view -

No one in the region wants a sovereign Kurdistan except of course the Kurds themselves. Today’s referendum is a landmark event but the fact it also included Kirkuk is almost certainly going to set the region up for additional disagreement and potentially conflict. Turkey, in particular, is ambivalent to the idea of a sovereign Kurdish state on its border. 



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September 25 2017

Commentary by Eoin Treacy

Merkel wins fourth term but far-right populists make gains

This article by Stefan Wagstyl, Guy chazan and Tobias Buck for the Financial Times. Here is a section: 

AfD supporters were jubilant. Alexander Gauland, a party leader, pledged to “hunt” Ms Merkel in parliament and said: “We will take our people and our country back.”

The Social Democrats, Ms Merkel’s coalition partner, suffered their worst defeat and said they would go into opposition. Martin Schulz, the SPD leader, said it was “a difficult and bitter day for German social democracy”.

Official results published on Monday by the federal returning officer gave Ms Merkel’s CDU/CSU bloc 33 per cent of the vote. The Social Democrats won just 20.5 per cent. The AfD secured 12.6 per cent.

Under Germany’s election system, the parliament will have 709 members compared with 631 during the last session. The AfD is set for 94 seats.

The chancellor, who will remain at the heart of European affairs, benefited from Germany’s strong economy and low unemployment record, as well her role as a cautious global leader in an uncertain world, characterised by crises and surging nationalism, not least in Donald Trump’s White House.

But she lost many votes, especially in the former communist east, to the AfD as Germans protested against her decision to keep its borders open for more than 1m asylum seekers in 2015-16.

 

Eoin Treacy's view -

The illusion Germany has been immune to the rising tide of populism was questioned over the weekend with the surge in support for the AfD. That is going to have a profound effect on the cosy environment of the Bundestag which has been the preserve of the major parties for the last sixty years. It is above all going to create a national platform for the AfD to debate its agenda which will likely elicit a policy response from the established parties to try and blunt it. 



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September 22 2017

Commentary by Eoin Treacy