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July 19 2019

Commentary by Eoin Treacy

July 19 2019

Commentary by Eoin Treacy

Email of the day on gold and negative yields

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

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

Eoin Treacy's view -

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

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



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July 19 2019

Commentary by Eoin Treacy

Excerpt from "Xi Jinping: The Backlash"

This excerpt from Richard McGregor’s new book may be of interest to subscribers:  

To complicate matters, Americans are suffering buyer’s remorse with China. Washington, or at least much of its national security leadership, long believed that China would not buck the US-led global order because they were such beneficiaries of it, either through a liberal trade regime or, for example, through the constraints the United States forced on regional rivals in Asia such as Japan. “The United States has always had an outsize sense of its ability to determine China’s course,” wrote Kurt Campbell and Ely Ratner, who both moulded Asia policy in the Obama administration. “Again and again, its ambitions have come up short.”

Washington’s policy was based on a series of misjudgements, many of them quite reasonable at the time. Sandy Berger, Bill Clinton’s late national security adviser, for example, depicted China in a speech in June 1997, as being a divided country, “with conflicting forces pulling in opposite directions: inward-looking nationalism and outward-looking integration”. In truth, China’s integration with the world has always been tailored to reinforce the nationalist narrative at home. In the words of analyst Tanner Greer, the ‘let’s engage China to make it a responsible stakeholder’ policy was not as stupid as it is now portrayed. “What should have been an opening gambit became a stale dogma,” said Greer. “But it was a good strategy initially, one that terrified the Party leadership, so they took action to defeat it.” 

The Americans overrated their intrinsic attractiveness and strength as a benign, inclusive, unassailable superpower, especially in the post-Cold War glow of victory against the Soviet Union, another rival communist state. More to the point, they underestimated the Party’s equal and opposite sense of its own exceptionalism. “We wanted to believe that we could convince China that they would be better off with us in charge, and that somehow, with more interaction and engagement, the Chinese would come to believe that, ‘I like to be told what to do by the United States’,” said Oriana Skylar Mastro, of Georgetown University. The United States also failed to understand, says Ms Mastro, that China felt compelled to build up its military. China’s leaders never “felt safe surrounded by the US military, and … at some point, if they could, they would reduce US military presence in their periphery”. 

Eoin Treacy's view -

I don’t think voters had any conception of how the big bet on civilizing China was been collateralised. We know the decision was made to allow China into the WTO based on the assumption that if GDP per capita reached the magic $3500 level it would miraculously become a free and open society and a willing partner in the spread of rule of law and good governance. What is never discussed is this bet destroyed several million US jobs and at least an equal number in Europe, Canada and Australia.



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July 19 2019

Commentary by Eoin Treacy

Email of the day on climate change.

Regarding the Allen Brooks piece on Climate change. I have to say I find the benign conclusions of the report totally unconvincing. Over the years I have read widely on the subject and have been especially impressed by the publications and books of one of the most eminent climate scientists whose work goes back more than 50 years. I refer to Professor James Lovelock. In a recent BBC interview, he suggested that global warming may be entering an acceleration phase. As I write this reply a news story has just announced that a high-pressure dome is due to affect the Eastern states of the US with predicted city temperatures likely to exceed 40 deg C. The simple fact is that you cannot expect hydrocarbons that have been trapped in the Earth’s crust over many millions of years, to be exploited by man over a few decades with the bye products going into the atmosphere, without grave consequences.to follow. Globally we have just experienced the hottest June ever and significantly Siberia has been 7 deg C above normal for the time of year. I mention this in respect of the melting permafrost which is now releasing methane in significant amounts. A gas thirty times more significant than CO2.as a greenhouse gas Of course this topic is an extremely emotional one, simply because the decisions made now on how we collectively proceed could not be more important. On balance I think I would go with the IPCC and James Lovelock. His books on Gaia theory, by the way, are worth reading

Eoin Treacy's view -

Thank you for this email which may be of interest to others. Higher median temperatures and more humid conditions in some areas than we are accustomed to are a fact. Coral bleaching and marine calcification are also facts we cannot dispel. Pollution of our rivers, lakes and oceans, desertification following logging and rapid expansion of cities to accommodate billions more people all represent significant challenges that need to be dealt with.



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July 19 2019

Commentary by Eoin Treacy

Eoin's personal portfolio: crypto long increased July 15th 2019

Eoin Treacy's view -

One of the most commonly asked questions by subscribers is how to find details of my open traders. In an effort to make it easier I will simply repost the latest summary daily until there is a change. I'll change the title to the date of publication of new details so you will know when the information was provided. 



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July 19 2019

Commentary by Eoin Treacy

2019: The 50th year of The Chart Seminar

Eoin Treacy's view -

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

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

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

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



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July 18 2019

Commentary by Eoin Treacy

Video commentary for July 18th 2019

Eoin Treacy's view -

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

Some of the topics discussed include:Japan weak on global growth, industrials underperform, defensives outperform, nickel, silver, gold break out. Treasuries steady, US Dollar weakens while Pound and Australian Dollar find support. 



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July 18 2019

Commentary by Eoin Treacy

Email of the day on the Australian Dollar

You may have seen this but thought it worth sending as it has potentially big impact for us Aussie’s.

Eoin Treacy's view -

Thank you for this article which I’m sure will be of interest to subscribers. Here is a section:

Wilson, however, says that given Australia's funds have accumulated such a large stock of foreign assets, an aggregate decision of super funds to hedge their exposure will result in flows that will be twice as large as a percentage of GDP.

And it is the hedging of those exposures that is becoming a more relevant focus for market participants and policy makers

"A 10 percentage point shift in super fund hedge ratios was equivalent to a flow of 1.5 per cent of GDP in 2013. This is now 3.5 per cent."

It is therefore plausible that strengthening in the Australian dollar could trigger a "scramble to hedge" particularly among performance ranking obsessed super funds.

"A discrete increase in hedge ratios by Australian super funds now has the capacity to overwhelm the underlying outflow."

Australia, Wilson says has actually built up a "significant stock of foreign currency exposure" – well in excess of $1 trillion, or the equivalent of or 60 per cent of GDP.

That is because the banks, which borrow heavily from offshore, hedge the currency risk of virtually every dollar they raise, while super funds are prepared to take on more foreign exchange exposure.



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July 18 2019

Commentary by Eoin Treacy

Oil Dips as Russian Pipe Flow Is Restored, Earnings Are Mixed

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

Russian pipeline operator Transneft PJSC, meanwhile, said it resumed full flows from the country’s largest crude producer, Rosneft PJSC, after imposing restrictions amid concerns about contamination.

Oil has fallen all week as the specter of a renewed U.S.-China conflict dented the demand outlook, while American fuel stockpiles jumped. That’s overshadowed worries that Iran may shut down the Strait of Hormuz, a key chokepoint for much of the world’s oil shipments.

Eoin Treacy's view -

This week we have been treated to two examples of how much the energy sector has changed. First a hurricane shut down most gas supply in the Gulf of Mexico and hit the New Orleans area which is where a lot of processing infrastructure is situated. The price of gas fell instead of rising because so the market no longer relies on the Gulf of Mexico as a swing producer.



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July 18 2019

Commentary by Eoin Treacy

Musings from the Oil Patch July 16th 2019

Thanks to a subscriber for this report from Allen Brooks which may be of interest. Here is a section on climate models:

What is most important about the Institute’s climate model was its near perfect replication of the temperature history of 1861-2013.  Projected into the future, the Institute’s model projects an unalarming temperature increase to 2100 of 1.4C (2.52 F).  Note that the Institute’s projection falls below the 1.5C increase environmentalists say is necessary to keep the planet from selfdestruction.  That target can be met without upending our entire economic system and how it is powered.  

 The Institute’s temperature forecast is well below those produced from the climate models utilized by the IPCC, which in some cases are as much as five times greater.  The criticism of climate models is that they are biased to the warm side.  An interesting chart shows the temperatures from climate models attempting to recreate actual temperatures at various elevations of the atmosphere for 1979-2010.  The chart shows that the models always exceed the actual observations when they rely on CO2 as the forcing mechanism.  Without CO2, the models come much closer to replicating temperature history, demonstrating the warming bias of the carbon emissions thesis.  

Understanding that natural variables are more important in explaining our temperature history is important since such a climate model projects a smaller temperature increase.  This goes against the preconceived basis for founding the IPCC, and weakens the attack on fossil fuels.  The Institute’s climate model results suggest that adaptive steps, more fuel-efficient vehicles, equipment and appliances, as well as increased use of cleaner fossil fuels could be a more palatable and less costly route for the global economy than draconian plans such as the Green New Deal.  

Eoin Treacy's view -

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

Guilt is one of the most powerful of human emotions. When we fail it is because we did something wrong and need to atone for our sins. When we succeed it is happenstance and we don’t deserve the rewards we have received. This latter point is particularly relevant for people who become much more successful than they had initially expected, and even more so if there is a wide difference in performance relative to their kin or community.



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July 18 2019

Commentary by Eoin Treacy

Nickel's Spike Isn't Over Yet for Citi as LME Stockpiles Dwindle

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

Nickel has a history of attracting speculative interest on expectations of supply shortfalls, only to see rallies quashed once it became clear there wasn’t a shortage. The metal attracted a lot of interest in late 2017 from investors betting on its future role as a vital ingredient in high-performance batteries for electric vehicles, but that remains a small part of demand for now.

For Nugent, reduced LME inventory is spurring the latest bout of tightness and encouraging the spike in price. For example, it’s pushed LME September futures to a $20 premium over October, after being at an $18 discount on July 2. It’s a backwardation that contrasts with nickel’s more usual contango structure, he said.

“What I think you’re seeing now is that a lot of stock has moved from on-exchange to off-exchange,” he said. “It’s that kind of tightness that will be discouraging people from entering short positions against a rally. It’s something that is happening more often when you’re losing that on-exchange stock.”

That view is bolstered, he said, by the fact that the LME appears to be leading the Shanghai Futures Exchange, rather than the other way around. While open interest and speculative long positions have also risen on the SHFE, the gap between London and Shanghai prices has widened in the past month.

Eoin Treacy's view -

Batteries for electric vehicles are the primary demand growth driver for high purity nickel. While declining global automotive demand has been a drag on automakers the share of electric vehicles in the market continues to increase. That’s positive for the price. Additionally, the run-up in iron-ore prices may be having an effect on nickel because its role in stainless steel production.



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July 17 2019

Commentary by Eoin Treacy

Video commentary for July 17th 2019

July 17 2019

Commentary by Eoin Treacy

Paradigm Shifts

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

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

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

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

Eoin Treacy's view -

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



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July 17 2019

Commentary by Eoin Treacy

Most of the World's Companies Are Duds

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

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

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

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

Eoin Treacy's view -

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



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July 17 2019

Commentary by Eoin Treacy

Tesla's Surprise $6,410 Price Cut Sparks a Rant From One Devotee

This article by Keith Naughton and Kyle Lahucik for Bloomberg may be of interest to subscribers. Here is a section:

Musk has fielded many complaints personally -- and publicly -- on Twitter. Much like Tesla has wavered with its pricing, he’s oscillated from adamant, to apologetic, to apathetic, to argumentative. And for the chief executive officer of a company that’s sought to revolutionize car-buying, he’s offered up a perhaps unlikely excuse: Hey, other automakers are doing this, too.

 

Eoin Treacy's view -

The automotive sector has not been this interesting in a century. There are multiple arguments for which view of the future will prevail. There are competing technologies and perhaps most important there are competing business models. Tesla hasn’t quite figured out what its business model is just yet and that is because autonomous driving, when it finally happens, will change everything.



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July 16 2019

Commentary by Eoin Treacy

Video commentary for July 16th 2019

July 16 2019

Commentary by Eoin Treacy

Consumer Staples Still the Place to Be During Initial Periods of Fed Easing?

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

July 16 2019

Commentary by Eoin Treacy

Yes Bank May Complete $1.2 Billion Capital Raise In Two Tranches

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

The bank, which is currently in capital conservation mode, will be able to return to a focus on growth once the fundraising exercise is complete.

This growth, however, may be more modest than what was seen under the previous chief executive Rana Kapoor.

Yes Bank will be looking to grow its loan book at 20-25 percent for some time to come, bringing down its growth rate from the over 40 percent year-on-year growth seen until a few quarters ago.

Yes Bank is also in the process of adjusting its exposure to a few corporate groups, where the lender was in breach of the Reserve Bank of India’s large exposure framework, the person quoted above said.

The private sector bank will move from an asset-led growth strategy to a liabilities-led growth strategy as it aims at bringing in more retail and small business customers. It intends to do this by leveraging its 1,100 branches and mining customer data from its digital offerings such as the Unified Payments Interface (UPI). A liabilities-led growth could help the bank bring down its cost of funding by 100-150 basis points, the person quoted above said.

Eoin Treacy's view -

Yes Bank’s new CEO has stated they have already accounted for most of the bad loans on the balance sheet. With a central bank employee sitting on the board, if that information is factually inaccurate it represents a major problem for the credibility of the RBI. The earnings announcement tomorrow is going to help to at least answer that question.



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July 16 2019

Commentary by Eoin Treacy

Bad Loans in Europe Tumble, but They Are Never Fully Gone

This article by Patricia Kowsmann and Margot Patrick for the Wall Street Journal may be of interest to subscribers. Here is a section:

You are pushing out the door the risk, but part of this risk comes back in through the window,” said Massimo Famularo, a Milan-based adviser on bad-loan deals.

The ill-health of Europe’s banks is a drag on the economy and a factor for why the area has yet to fully bounce back from the crisis. When banks retain exposure to bad loans rather than selling them outright, they have less capital to back fresh lending to the economy.

Lending growth has been weak in countries with the most nonperforming loans, or NPLs, such as Italy, Portugal and Greece.

“The sale of NPLs is good for the balance sheets of the banks, but it doesn’t solve the NPL problem in the system,” says Giovanni Bossi, former chief executive of Italy’s Banca IFIS SpA. He estimates only a small portion of the disposed loans has been worked out by their buyers.

Eoin Treacy's view -

The nonperforming loan problem in Europe is half the size it was at the height of the crisis. There are two ways of looking at this development. The first is the easy to exit loans have been dispensed with, so the second half must be stickier and, therefore, harder to deal with. The other is that real progress is being made but it is not as quick as many would like.



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July 16 2019

Commentary by Eoin Treacy

Pound Sinks to Lowest Since 2017 on Threat of No-Deal Brexit

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

The beleaguered U.K. currency is finding few backers, with both leveraged funds and asset managers increasing their pound short positions, according to the latest data from the Commodity Futures Trading Commission. Deutsche Bank AG’s global head of currency research George Saravelos said the currency is not cheap enough, even after its recent slide, and that there is now close to a 50% chance of a hard Brexit.

The president-designate of the European Commission, Ursula von der Leyen, said she was ready for a further extension of the Brexit deadline “should more time be required for a good reason.” However, a meeting of Brexit negotiators last week was one of the most difficult of the last three years, according to European officials, as they brace for talks to become more hostile under the next British government.

Johnson and Hunt, who have long said they want the Irish backstop renegotiated, appeared to limit their room for compromise in a debate late on Monday.

“This leaves only two options, no-deal Brexit, or no Brexit,” said Thu Lan Nguyen, a currency strategist at Commerzbank AG. “As both Johnson and Hunt have made clear they want Brexit, chances of a no-deal Brexit are rising.”

Eoin Treacy's view -

The members of the Conservative Party who vote on leadership contests demand a hard line on Brexit so that is what the candidates have offered. Showing a willingness to walk away is a basic component of any negotiation so a hard Brexit needs to be an option. The biggest question is what the new leader is going to deliver once the mantle of power comes to rest on his shoulders. The EU has stated they will not reopen negotiations so the question is what sweeteners they will offer and whether that will be enough to get a deal done.



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July 15 2019

Commentary by Eoin Treacy

Video commentary for June 15th 2019

Eoin Treacy's view -

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

Some of the topics covered include: China growth moderates but market expects assistance, copper steadies, nickel outperforming, oil eases, gold steady, silver and platinum firming, Wall Street steady, bonds firm, Dollar eases particularly against emerging market currencies.



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July 15 2019

Commentary by Eoin Treacy

Saut Strategy July 15th 2019

Thanks to a subscriber for this report by Jeffrey Saut. It focuses on a defence of monitoring charts which may be of interest. Here is a section:

Eoin Treacy's view -

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

The charts tell us everything people have already done with their money and they offer the clearest reality check on our personal theories for market action. The simple fact is that if our view of the market is not support by the price action then we need to change it.



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July 15 2019

Commentary by Eoin Treacy

EM Succumbs to Sub-Zero Epidemic as Debt Pile Doubles in a Week

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

A sinkhole of negative-yielding debt in emerging markets has doubled in size over the past week. This time last year it was non-existent.

The amount outstanding soared to $246 billion, driven mostly by the growing pile of corporate debt with sub-zero rates, which almost tripled in seven days, according to data compiled by Bloomberg.

Corporate heavyweights such as China Everbright Bank Co. and Petroleo Brasileiro SA, and sovereigns including Poland and Hungary have seen their rates drop below zero after a dovish turn at Federal Reserve and the European Central Bank sparked a mad dash for yield. Emerging-market bonds handed investors 3.5% over the past two months, more than a percentage point above returns on U.S. Treasuries, according to Bloomberg Barclays indexes.

The amount of negative-yielding corporate bonds almost tripled to $109 billion from a week ago
Sovereign bonds with sub-zero rates climbed about 50% to $136 billion

“This is a global phenomenon, not an EM phenomenon,” said Warren Hyland, who manages emerging-market debt at Muzinich & Co. in London. “Ultimately if less and less of bonds generate a positive yield, that means more and more people are looking for a positive-yielding bond and EM has more of that than elsewhere.”

Eoin Treacy's view -

Negative yields are a problem for investors and represent a massive momentum trade for traders. Moving further out the risk curve is an inevitability for many asset managers and the destination for flows will heavily depend on mandates. Emerging markets are a particularly attractive destination for fixed income investors if they have the currency on their side.



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July 15 2019

Commentary by Eoin Treacy

Bitcoin Tumbles as Trump Critique Tests Stellar Run for 2019

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

The tumble comes days after U.S. President Donald Trump criticized digital coins on the heels of this year’s stellar rally. Trump wrote on Twitter Thursday that he is “not a fan of Bitcoin and other Cryptocurrencies, which are not money, and whose value is highly volatile and based on thin air,” adding that “Unregulated Crypto Assets can facilitate unlawful behavior, including drug trade and other illegal activity.”

Bitcoin “continues to trade lower as comments from President Trump put downward pressure on the cryptocurrency,” said Alfonso Esparza, senior market analyst at Oanda Corp. in Toronto. Drawing Trump’s ire means “it could fall further to $8,000, giving back all the gains made in June.” Bitcoin initially climbed after Trump’s comments, but has since more than erased the gains.

 

Eoin Treacy's view -

There is a tendency in the opaque crypto market to attach causality to coincidence. I am not at all sure how much credence to give the conclusion that President Trump’s tweets were behind this weekend’s sell off.



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July 15 2019

Commentary by Eoin Treacy

Copper Rises After China Data Flags Resilience

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

“The easing cycle and a potentially stronger demand environment in China will be enough to allow base metals a bit more upside,” JPMorgan analysts Natasha Kaneva and Gregory Shearer say in an emailed report received Monday “We reiterate that this bullish view is more near-term tactical rather than long-term fundamental,” they say “We agree and believe that Chinese metals demand is sufficiently solid to support prices but not strong enough to push them higher,” Carsten Menke, an analyst at Julius Baer, says in an emailed note.

Eoin Treacy's view -

I will be travelling to China and Taiwan between August 5th and 19th this year. The one big take away from last year’s China trip was the sense of unease evident on the street and among vendors. That was in response to the tightening of government oversight on every day life, the attempts to stamp out lending by the shadow banks and the souring sentiment resulting from the first salvos of the trade war. Understandably that has contributed to slowing growth.



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July 12 2019

Commentary by Eoin Treacy

July 12 2019

Commentary by Eoin Treacy

A Whale Is Accumulating Silver Futures

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

 

Instead of selling futures to suppress the price, our market whale appears to have turned buyer; buying enough to cover China’s annual silver imports, the equivalent of about 43,000 Comex contracts. Clearly, the new strategy is to hedge against rising prices instead of suppressing the silver price. Given this new development, one would have thought that the other seven large traders would have tried to limit their silver shorts and at least keep an even book. There are several reasons why they may not have not felt the need to do so:

There are ample quantities of bullion in the vaults in London and Comex depositories, currently totalling 1.66 years’ worth of mine supply, unlike gold where the underlying bullion stock is very small relative to the paper contracts based upon them.

They appear to be unaware of China’s actions and motives. They may not even be aware of the existence of this long position. If they are aware of it, they may think it is just a technical long, against a short in London’s OTC market.

With global commercial demand declining due to the economic slow-down, they probably feel relaxed about the price outlook for silver, which they will regard as an industrial metal. Base metals show little sign of entering a bull market.

Therefore, with the Swaps category only moderately oversold (net short 12,735 contracts) and the Managed Money category only average overbought (net long 21,923 contracts), the other seven largest traders are likely to feel individually comfortable with their short positions, unaware of the extent to which their fellow traders are also short. What they fail to realise is that they are the shorts against the one largest trader who is long.

Eoin Treacy's view -

Silver is a lot less liquid than gold in the futures market, yet there is a lot more silver in the physical market than gold. That typically creates a volatile trading environment for the metal and is why investors have seen silver as a high beta play on gold historically.



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July 12 2019

Commentary by Eoin Treacy

Email of the day - on predicting in which direction a breakout will take

Hoping for a quick refresher, please. The Chart Seminar reinforces that stocks are either trending or ranging. What I am interested in are the indicators which may suggest a stock could breakout of its range (to the upside or downside) in the near term. Thanks for a wonderful service.

Eoin Treacy's view -

Thank you for this question which others may have an interest in. Markets either trend or range so every range is following by a breakout and vice versa. Ranges are explosions waiting to happen because ranges and boring relative to the trending phases. That means expectations for future potential deteriorate at just the same time that energy is being stored up for the next breakout.



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July 12 2019

Commentary by Eoin Treacy

Can Low Rates Explain High Stock Prices? Not So Fast

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

One such model was proposed in a 2017 article in the Journal of Portfolio Management by Research Affiliates founder Robert Arnott and several colleagues. They found that P/E ratios tend to be lower when real interest rates, or those adjusted to remove the effects of inflation, are either too high or too low. The “sweet spot,” as far as P/E ratios are concerned, is when real rates are between 3% and 4%. Since real rates currently are below 1%, Mr. Arnott’s research provides no support for the above-average current P/E ratio.

In an email, Mr. Arnott poses a rhetorical question for those who believe that today’s low interest rates should automatically translate into higher P/E ratios. If that were the case, “then why don’t negative real interest rates in Europe and Japan justify even higher valuation levels [than in the U.S.]?! Instead, these markets are priced 20-40% cheaper than the U.S.” as judged by their P/E and CAPE ratios, he writes.

Eoin Treacy's view -

Taking historical comparisons as a basis for a world with trillions in negative yielding bonds does not make sense. Once interest rates go below zero it sets of a stampede for yield among yield-to-worst investors and creates a momentum driven trade in the opposite direction for traders. The big difference between Europe and Japan compared to the USA is urgency.



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July 12 2019

Commentary by Eoin Treacy

A $117 Billion Chinese Wealth Manager Says It Was Scammed

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

To be sure, Noah is not alone. Central China Securities Co., a mid-sized brokerage, said on Thursday two asset management products totaling 240 million yuan are in danger of defaulting after the borrower falsified documents. It didn’t provide more details.

For Noah, the incident has raised questions about the firm’s approach to risk management, said Yan Hong, a finance professor at Shanghai Jiao Tong University.

“It exposed the lack of credit-risk controls and absence of a verification mechanism for contract authenticity, which is a low-level mistake for a manager of private credit products,” Yan said.

It’s not the first time that Noah’s investments have run into trouble, as JPMorgan Chase & Co. analysts noted in a July 8 research report. In 2017, products managed by Gopher had exposure to China Huishan Dairy Holdings Co., which collapsed after being targeted by short sellers. In May 2018, Noah’s Hong Kong unit was fined by the city’s securities regulator for failing to comply with know-your-customer, due diligence and other requirements.

One lesson for asset managers is that they should talk to all of the relevant parties in an investment before committing money, said Jesse Si, a Beijing-based senior manager at Mintz Group, which specializes in due diligence investigations.

Eoin Treacy's view -

A clear trend is emerging of fund managers who invested in opaque instruments in an effort to generate outsized returns and are now suffering the consequences. GAM in Switzerland, Neil Woodford in the UK, France’s H2O and a string of Chinese firms have all suffered from being unable to meet redemption requires because they invested in highly illiquid instruments.



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July 12 2019

Commentary by Eoin Treacy

July 11 2019

Commentary by Eoin Treacy

Video commentary for July 11th 2019

July 11 2019

Commentary by Eoin Treacy

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

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

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

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

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

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

Eoin Treacy's view -

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



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July 11 2019

Commentary by Eoin Treacy

Walmart's Supplier Says Chinese Factories in "Desperate" State

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

“U.S. clients are definitely very, very worried,” Fung said in an interview with Bloomberg. “Everyone is making razor-thin margins already and most people have a huge percentage in China. So if the biggest source increases the price by 25%, they are worried,” he said, referring to the scale of tariffs threatened on all Chinese imports to the U.S. by President Donald Trump.

Though Fung didn’t specify Walmart by name, the U.S. retailer is the company’s second-biggest customer after Kohl’s, accounting for 7.6% of revenue, according to Bloomberg data. A spokeswoman for Walmart declined to comment.

Eoin Treacy's view -

The size of China’s manufacturing sector dwarves that of any other country and therefore the migration of US business is hitting choke points because of a lack of infrastructure elsewhere to deal with the demand. That represents a once in a lifetime opportunity to spur manufacturing in cheaper locations like India and Africa to pick up US business.



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July 11 2019

Commentary by Eoin Treacy

Email of the day - on uranium and investing in illiquid shares

How do you think about liquidity in the context of a narrow theme like Uranium? And how would you measure it in this case? Volumes picking up and an increase in market capitalization of the sector? Or does it all tie back to the Fed and other central banks

Eoin Treacy's view -

Thank you for this question which may be of interest to other subscribers. Uranium is a comparatively small market with lots of minor constituents and a couple of large producers. When investing in any illiquid market, whether a sector or country index, weight of money moving in and out can have an inordinate effect on prices. That generally means you will not have an issue buying but selling often needs to be done in anticipation of a peak because liquidity can quickly evaporate during a downturn.



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July 11 2019

Commentary by Eoin Treacy

Email of the day on technical indicators

Do you like/follow momentum given that momentum often leads price?

Eoin Treacy's view -

Thank you for this question which may be of interest to other subscribers. Generally speaking, I look at momentum indicators a couple of times a year. This service is more about chart reading than technical analysis. The basis for our behavioural approach is to assume everything you need to know about the market is right there in the price action if you are willing to allow yourself to see it. 



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July 10 2019

Commentary by Eoin Treacy

Video commentary for July 10th 2019

July 10 2019

Commentary by Eoin Treacy

Powell Signals Rate Cut as Trade War Outweighs Strong Job Market

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

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

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

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

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

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

Eoin Treacy's view -

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



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July 10 2019

Commentary by Eoin Treacy

China's Venture Capital Boom Shows Signs of Turning Into a Bust

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

But the rise of China’s tech industry put it squarely in the crossfire of the trade war. The Trump administration has accused China of stealing intellectual property and unfairly subsidizing companies in strategic fields, including semiconductors, artificial intelligence and autonomous driving. In May, the U.S. blacklisted Huawei Technologies Co., preventing the telecom giant from buying American components, and is considering doing the same to a swath of startups.

The trade war gives investors one more reason for caution. Valuations had already grown vertiginous. High-profile startups such as smartphone-maker Xiaomi Corp. and delivery giant Meituan Dianping saw their stocks tumble after they went public, reinforcing the impression that private-market valuations had gotten out of hand.

So-called sharing economy startups have also tested the patience of their investors. Companies like Didi, Meituan and bike-sharing provider Ofo blitzed the market with heavy subsidies to grab market share from rivals, making up for their losses with venture money. Now there’s skepticism that many such companies will ever turn a profit.

“You’re really reaching the end of the shared economy -- this idea of let’s give away services for free and make up for it in volume,” Rieschel said. “Some companies -- Didi is the classic case -- are just not showing any ability to become profitable.”

Eoin Treacy's view -

Do visionaries appear at the just the right time, or do they get the opportunities to turn their ideas into a semblance of reality because liquidity is cheap and abundant? A confluence of technological innovations can coalesce to create wonderful new products like the iPhone. Alternatively, we can find new ways of doing things because the cost of running interminable losses is so low relative to the potential pay-out that any venture can secure funding. The latter group have clearly dominated in this cycle which tells us liquidity is the dominant reason behind the surge in valuations for private companies.



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July 10 2019

Commentary by Eoin Treacy

The Future of Housing Rises in Phoenix

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

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

Eoin Treacy's view -

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



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July 10 2019

Commentary by Eoin Treacy

German Vow to Cancel Permits Sends Carbon to 11-Year High

This article by Brian Parkin and Mathew Carr for Bloomberg may be of interest to subscribers. Here is a section:

“We’ve seen an encouraging rise in permit prices, so it’s no surprise that we see it as essential that the instrument continues to work as it should do,” Schulze said. “That’s logical. It makes no sense at all to implement an exit from coal here, only to export pollution licenses into the wider European system.”

And

“Scarcity is central to the aims of the European carbon trading market.”

Eoin Treacy's view -

Regardless of how one feels about the merits of carbon credits there is no arguing with state sponsored bull markets.

 



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July 09 2019

Commentary by Eoin Treacy

Video commentary for July 9th 2019

July 09 2019

Commentary by Eoin Treacy

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

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

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

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

Eoin Treacy's view -

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

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



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July 09 2019

Commentary by Eoin Treacy

Uber Drivers

Eoin Treacy's view -

Many of the Uber’s we used to get around Columbus had cracked windshields. Generally speaking, insurance covers windshields but that may not be the case with a ride-hailing service. I don’t know enough about it to make a judgement. More than a few claimed it was because of all the grit on the road from construction but that does not explain the number of cars with cracked windshields that had not been fixed.



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July 09 2019

Commentary by Eoin Treacy

Signs of Gloom Push Pound to Its Lowest Level Since April 2017

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

The pound has been hobbled in recent weeks by concern about the U.K.’s political risk as the contest to elect the next prime minister approaches its endpoint, with front-runner Boris Johnson keeping a no-deal Brexit on the table. The pound has fallen about 2% since Prime Minister Theresa May indicated that
she would be stepping down.

“A general pound malaise has taken us through the lows from Friday,” said Jeremy Stretch, head of G-10 currency strategy at Canadian Imperial Bank of Commerce. “It looks increasingly probable that second-quarter GDP is likely to be negative for the first time since the end of 2012. With the third-quarter outlook also poor, this will add to debate about the BOE joining the global easing trend.”

Eoin Treacy's view -

Until quite recently the Bank of England was talking about raising rates. That is a near impossibility today given the global growth outlook and the trajectory of policy in response to deteriorating data.



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July 08 2019

Commentary by Eoin Treacy

July 08 2019

Commentary by Eoin Treacy

Downgrading Global Equities to Underweight

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

Eoin Treacy's view -

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

The argument at this stage in the market cycle is less about valuation and more about the fear of missing out. If bond yields are compressing because of the anticipation of massive monetary easing that bond-equity spread will be a significant tailwind for equities on a breakout scenario.



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July 08 2019

Commentary by Eoin Treacy

Erdogan Draws the Line on Rates After Shock Central Bank Ouster

This article by Firat Kozok and Cagan Koc for Bloomberg may of interest to subscribers. Here is a section:

Hours after unexpectedly forcing out the central bank’s governor, Turkish President Recep Tayyip Erdogan made clear that he expects both the successor and the rest of the establishment to toe the government’s line on monetary policy.

The decision to dismiss Murat Cetinkaya, whose four-year term was due to end in 2020, was announced in the early hours on Saturday following a pause in interest rates that lasted for over nine months. Deputy Governor Murat Uysal was named as a replacement. Investors weren’t impressed -- the lira slid more than 3% in early Asian trading before paring losses.

During a closed meeting after the decree came out, Erdogan told lawmakers from his ruling party that politicians and bureaucrats all need to get behind his conviction that higher interest rates cause inflation, according to an official who was present. He also threatened consequences for anyone who defies the government’s economic policies, the official said.

Erdogan’s office of communication didn’t respond to calls and text messages seeking comment. “By abruptly dismissing Cetinkaya, Erdogan reminded everyone who is in charge of monetary policy,” said Piotr Matys, a London-based strategist at Rabobank.

Eoin Treacy's view -

Governance is everything and when you have an autocrat in power who is resorting to progressively more desperate measures to hold onto power there is a problem. Losing the re-run election for mayor of Istanbul, a couple of weeks ago, was a wake-up call for Erdogan. That’s a position he once held himself and retaining control of the largest city is essential if he wants to hold onto power. That is probably what precipitated the ouster of the central bank chief.



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July 08 2019

Commentary by Eoin Treacy

New Democracy Meets Old Greek Problems After Mitsotakis Win

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

“The weight of responsibility is heavy,” Mitsotakis said in his victory speech in Athens Sunday night. “I assume the burden with complete awareness of the situation the country is in.” Greece’s economy expanded 1.9% in 2018 and is on track for about 2% growth this year. Since Mitsotakis’s victory in the May 26 European Parliament elections, the Athens Stock Exchange general index has risen more than 20%, while yields on 10-year bonds have fallen to record lows. Greece is planning a new bond sale by the end of the month to capitalize on that momentum to secure sustainable access to financial markets that was lost in 2010

Eoin Treacy's view -

Greece has exited its assistance program and has benefitted from some debt forgiveness. The rationalisation of the economy remains underway and significant asset sales have occurred so the new administration does have some leeway in which to move. Perhaps the most important development is the replacement of a leftwing populist with the market friendly administration. That could be particularly beneficial in a recovery scenario.



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July 08 2019

Commentary by Eoin Treacy

China Is Forcing Tourists to Install Text-Stealing Malware at its Border

This article from vice.com maybe of interest to subscribers. Here is a section:

Together with the Guardian and the New York Times, the reporting team commissioned several technical analyses of the app. Penetration testing firm Cure53 on behalf of the Open Technology Fund, researchers at Citizen Lab from the University of Toronto, and researchers from the Ruhr University Bochum as well as the Guardian itself all provided insights about BXAQ. The app's code also includes names such as "CellHunter" and "MobileHunter."

Once installed on an Android phone, by "side-loading" its installation and requesting certain permissions rather than downloading it from the Google Play Store, BXAQ collects all of the phone's calendar entries, phone contacts, call logs, and text messages and uploads them to a server, according to expert analysis. The malware also scans the phone to see which apps are installed, and extracts the subject’s usernames for some installed apps. (Update: after the publication of this piece, multiple antivirus firms updated their products to flag the app as malware).

Eoin Treacy's view -

Xinjiang is one of China’s buffer states which separates the heartland from its neighbours. It is also an energy producer and bread basket so China has additional reasons to quell even a whiff of separatist sentiment. The extend of surveillance and re-education programs (incarceration) is unparalleled in modern history and is a testament to just how overtly authoritarian the administration is.



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July 05 2019

Commentary by Eoin Treacy

July 05 2019

Commentary by Eoin Treacy

Guide to the Markets Q3 2019

Thanks to a subscriber for this chartbook from JPMorgan which may be of interest to subscribers. Here is an important graphic.

Eoin Treacy's view -

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

2018 saw significant multiple compression. The rebound in the first quarter unwound the entire decline but also unwound much of the multiple compression. Earnings guidance for the upcoming reporting season is a lot weaker than over the last few years and is the basis for the opinion that we are about to see an earnings recession.



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July 05 2019

Commentary by Eoin Treacy

Betting Against The Gods Is Now Impossible

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

Eoin Treacy's view -

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

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



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July 05 2019

Commentary by Eoin Treacy

Iron Ore's "Disconnected From Fundamentals" After Huge Rally

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

Iron ore has skyrocketed this year, hitting the highest level in more than five years, after a dam disaster at Brazil’s Vale SA and bad weather in Australia curtailed shipments just as Chinese demand expanded. The steelmaking material made another dash higher in recent weeks after Australian miner Rio Tinto Group cut output guidance again following operational problems. The ascent has spurred concerns the advance may prove to be unsustainable.

“Supply is looking pretty decent, with the exception of Rio,” Hedborg said. Exports from Australia in June should be strong as some miners ramp up in the last month of their financial year, he said. In Brazil, Vale has also restarted its Brucutu mine, a major operation that was suspended after the dam
collapse.

Eoin Treacy's view -

The iron-ore price remains in a steep uptrend and exhibits an increasingly wide overextension relative to the trend mean. The first clear downward dynamic is likely to signal a peak of at least near-term significance and the beginning of a reversion towards the mean.



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July 04 2019

Commentary by Eoin Treacy

Video commentary for July 4th 2019

July 04 2019

Commentary by Eoin Treacy

Email of the day on our investment philosophy.

New subscriber here and enjoying the site/audio. Anything on the site or audio that explains your philosophy on markets and approach? I've purchased your book as well so maybe that is the simple answer!

Eoin Treacy's view -

Welcome to the Service and thank you for this email which others may also have an interest in. Crowd Money was my best attempt at creating a companion guide to The Chart Seminar back in 2013 and the principles of crowd psychology and trend consistency covered in it are the basis for the analysis performed in this Service.

FullerTreacyMoney is a top down macro behavioural global strategy service. The best place to be in any market is in a consistent trend. In order to find the most consistent trends we scour the world. Having an appreciation of what a consistent trend is, how they evolve and how they end allows us to form trend running strategies.

There are really only two big factors in the market; crowds of people and monetary policy. Central banks kill off bull markets so we need to pay attention to what they do. Likewise, when oil is surging or when banks can’t make money that impairs liquidity creation so we need to monitor those markets. Of course, the opposite is also true. Central banks help create the liquidity conditions for bull markets to prosper and falling energy prices improve industrial profitability. That also leads to an awareness of long-term cycles in the behaviour of crowds.

Liquidity is not enough. You also need a fundamental story or theme to animate investor interest over the span of secular bull markets. Big themes, supported by abundant liquidity are what drives long-term bull markets. That is why we focus on the rise of the global consumer, the accelerating pace of technological innovation and secular bear market in energy. 

The evolving path of extraordinary monetary policy, rise of populism and geopolitical rivalry can all be viewed in the historical framework of liquidity and crowd psychology.  



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July 04 2019

Commentary by Eoin Treacy

Swiss Standoff With EU Belies Country's Deep Economic Dependence

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

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

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

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

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

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

Eoin Treacy's view -

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



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July 04 2019

Commentary by Eoin Treacy

Email of the day on Christine Lagarde

A fairly damning assessment of Ms Lagarde that does not bode well for the Eurozone.

Putting Christine Lagarde in charge of the ECB will lead the eurozone into catastrophe

 

Eoin Treacy's view -

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

A smooth functionary might be fine at the ECB in normal times. Over the next five years, however, the eurozone will certainly face another crisis. The German banking system is teetering on the edge of collapse (the once mighty Deutsche Bank’s share price remains the scariest chart in the world). Bond yields have turned negative, signalling recession. Interest rates are already below zero. A currency war is starting with Donald Trump’s America.

The ECB will have to find new ways of holding a rackety currency together. What is that likely to involve? Some form of helicopter money, as printing cash and giving it away is known, bailing out the German banks without anyone noticing, and allowing Italy to quietly float away with a parallel currency. Draghi’s flexibility and creativity might just have allowed him to navigate all that.

Lagarde will stick to precedent and orthodoxy with lawyerly inflexibility – and that will plunge the zone into a potentially terminal crisis.

The accusation that Christine Lagarde lacks the imagination to lead the ECB is potentially important, in extremis, but the reality is she does not need a great deal of imagination to print more money. That is the conclusion of the market.



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July 03 2019

Commentary by Eoin Treacy

July 03 2019

Commentary by Eoin Treacy

Email of the day on the gold/gold miners' ratio:

Thank you very much for your excellent analysis of the precious metals on Friday's video. If possible, can you please also comment on the gold/gdx ratio in one of your future videos and/or comment of the day. As always thanks very much for your excellent service.

Eoin Treacy's view -

Thank you for your kind words and I am delighted you enjoyed the Big Picture video. It’s been a big month for gold and gold shares but the relationship between the two deserves a special mention.

I prefer to look at the ratio the other way around and I use the Gold BUGS Index because it has a more back history.

Gold shares massively outperformed in the early part of the last bull market. They had a lot of leverage to the gold price because they had not been able to invest in new supply for years and were running very tight operations. The focus was on survival rather than expansion. As profits rose and confidence improved the majority of gold miners went on a spending spree in an effort to replace depleted reserves. That erased their free cash flow and loaded their balance sheets with debt. Gold miners’ performance relative to gold peaked in 2003 and investors moved on to ETFs and leveraged products.



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July 03 2019

Commentary by Eoin Treacy

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

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

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

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

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

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

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

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

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

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

Eoin Treacy's view -

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



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July 03 2019

Commentary by Eoin Treacy

India's Water Crisis Is Man-Made

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

Climate change activists have long argued that water will be the political flashpoint of the 21st century. Water-stressed India will likely be one of the first places to test that theory. The state of Tamil Nadu complains that it doesn’t receive its fair share of the waters of the Cauvery River; recently, the authority that nominally manages the river accused the government of neighboring Karnataka of holding onto water that it should have allowed to flow down to the Cauvery delta.


Things might get even testier up north, where more than a billion people depend upon rivers that rise in the Himalayas. Bangladesh and Pakistan feel that India is being stingy with river water.  Indian strategists constantly worry that China will divert water from the Himalayan rivers that rise in Tibet to feed the thirst cities in its own north.

The floods in Chennai are a warning. As the world warms, the rains on which India depends have become erratic: They frequently fail to arrive on time, and they fall in a more disparate and unpredictable pattern. The country can no longer afford to waste its dwindling resources.

A rapidly urbanizing and developing India needs to drought- proof its cities and rationalize its farming. Water-harvesting must be a priority, alongside mechanisms for groundwater replenishment. As it is, every summer is hotter and less bearable. If Indians run short of water as well, one of the world’s most populous nations could well become unlivable

Eoin Treacy's view -

India’s population is likely to exceed China’s sometime in the middle of the 2020s and peak around 1.6 billion sometime in the middle of the century. That’s a lot of people in a country that already seems crowded.

Generally speaking, water shortages are usually more about mismanagement of resources than an absolute lack of the precious commodity. There are exceptions of course but when rains fall every year the question is less about quantity and more about the quality of governance. In just the same way countries need clear national energy, commercial, military and political action plans, national water managements plans are also necessary for the long-term welfare of populations.



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July 02 2019

Commentary by Eoin Treacy

Video commentary for July 2nd 2019

July 02 2019

Commentary by Eoin Treacy

Roubini Lives Up to Dr. Doom Alias With Global Recession Call

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

On the trade front, deglobalization looms as countries around the world have to choose which country to align with -- the U.S. or China -- once the bilateral negotiations collapse, Roubini said. “This divorce is going to get ugly compared to the divorce between the U.S. and the Soviet Union.”

On top of that, an oil-price shock coming from Iran tensions would raise the prospect of 1970s-style stagflation as a rise in crude prices coincides with slower growth, Roubini said.

Speaking at a blockchain summit in Taipei, Roubini reiterated his skepticism toward cryptocurrencies such as Bitcoin.

“There’s massive, massive amounts of price manipulation” in cryptocurrency trading, he said in remarks at the conference. As for blockchain, “it’s the most overhyped technology ever, it’s nothing better than a glorified spreadsheet,” Roubini said. “Nobody’s using it, and nobody’s ever going to use it.”

Eoin Treacy's view -

The stock market is at a new all-time high, but there is still such an impending sense of doom. That is not what one expects from market tops. Nouriel Roubini has a particular talent for soundbites, not least about cryptocurrencies. However, the challenges he alludes to are worthy of consideration.



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July 02 2019

Commentary by Eoin Treacy

Lagarde to Succeed Draghi as ECB Chief As Economy Weakens

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

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

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

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

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

Eoin Treacy's view -

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



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July 02 2019

Commentary by Eoin Treacy

Musings From The Oil Patch July 1st 2019

Thanks to a subscriber for this edition of Allen Brooks ever interesting report. Here is a section:

Growing gas production has also allowed buyers to worry less about having substantial volumes in storage to meet winter demand.  Therefore, buyers see little need to lift gas prices to encourage storage injections.  That dynamic has been demonstrated by the low level of storage we reached last year, and now how quickly we are rebuilding storage, while also meeting increased gas consumption from the power and export markets.  

The recent gas production growth, which accelerated starting in 2016, appears to be slowing.  To some degree, it is a function of the Permian Basin crude oil pipeline capacity shortage, which has restricted associated natural gas output.  Will that change when the new oil pipelines begin operating later this year?  Only time will tell, but official forecasts call for a slowdown in the growth of gas production.  That means the bigger question for the natural gas market will be demand.

A recent webinar on the natural gas market and outlook through 2020 had two charts we found very interesting.  The first dealt with the significantly different gas storage picture in Europe.  Today, storage is well ahead of last year, which may have an impact on the amount of future liquefied natural gas (LNG) shipments.  So far, it appears to have had little impact, but the lack of clarity about output levels from the Dutch gas fields could also impact the market for U.S. LNG shipments to Europe.  

The most interesting chart was explaining the firm’s gas price forecast compared to the NYMEX futures strip price.  The forecasters were able to frame their perspective about the upside and downside to their forecast by listing and quantifying the positive and negative factors for gas demand and supply.  We are not endorsing the forecast, but rather pointing out that there are a number of plusses and minuses that need to be considered when making a gas price forecast.  

Eoin Treacy's view -

Natural gas is in a secular bear market. There is no shortage of it and a steep contango remains evident. That continues to exert downward pressure on the price. New sources of outsized demand are required to resolve this condition. Outsized economic growth, hydrogen fuel cells or shifting demand from coal are all candidates.  The downtrend suggests these sources of potential demand are not yet strong enough to influence the market.



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July 02 2019

Commentary by Eoin Treacy

Why India's Troubled Shadow Banks Spook the Market

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

4. Is the crisis spreading?
Mortgage lender Dewan Housing Finance Corp Ltd. missed debt payments in June and Care Ratings Ltd. slashed its AAA credit rating to D this year. A news site alleged in January that the company diverted funds to shell companies, a claim Dewan Housing has denied. Other companies including Reliance Capital Ltd. and Piramal Capital & Housing Finance Ltd. have also had their credit ratings cut on liquidity concerns. Access to funding has gotten tougher for many non-bank financing lenders in credit markets, and they have a record 1.1 trillion rupees ($15.9 billion) of debt due in the third quarter of 2019.

5. Where is this heading?
The worst is probably still to come. Observers warn the credit crunch may hit the property sector next. It is heavily dependent on funds from shadow banks, and concerns are already being reflected in some realtor bonds. The nation’s conventional banks may also see more pain, as about 7% of their loans are extended to non-bank financing companies.

6. How are shadow lenders coping?
As access to funds in onshore debt markets has dwindled, shadow lenders are tapping overseas markets where they have to pay 25 to 50 basis points more than onshore rates to get cash.

7. What’s the economic impact?
India’s consumption engine is sputtering because the shadow-banking sector plays a key role in the nation’s financial system, particularly in delivering credit at the grassroots. A prolonged slowdown in lending from the sector poses a significant challenge to the Indian economy, where consumer spending growth has cooled on everything from toothpaste to air tickets. It expanded just 5.8% in the quarter ended March -- the slowest pace in five years and lagging behind China.

Eoin Treacy's view -

India’s shadow banks are experiencing a liquidity crisis which is throwing the wider market’s valuation premium into focus. We know how this process ends. First, a bad bank will need to be set up and filled with the nonperforming assets of the housing finance companies/shadow banks. If shadow banks are to be rationalised, the conventional banking sector will need to pick up the slack in terms of liquidity provision.  



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July 01 2019

Commentary by Eoin Treacy

Video commentary for July 1st 2019

July 01 2019

Commentary by Eoin Treacy

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

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

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

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

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

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

Eoin Treacy's view -

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



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July 01 2019

Commentary by Eoin Treacy

Bitcoin Tumbles as Cryptocurrency's 2019 Surge Starts to Waver

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

Bitcoin slumped, undoing some of this year’s epic rally and amplifying a recent trend of outsized weekend moves.

The largest cryptocurrency fell more than 18% from Friday to trade at $10,294 as of 11:58 a.m. in New York, according to prices compiled by Bloomberg. It’s still up almost 200% since the start of the year. Most other large coins also dropped, with Bitcoin Cash and Dash declining at least 7.6%. Litecoin erased an earlier gain.

Optimism surrounding a potential increase in adoption of cryptocurrencies helped fuel price increases on Bitcoin last month. That took prices back to levels last seen at the start of 2018. The slide over the weekend is at odds with recent moves higher on Saturday and Sunday: surges in weekend activity since the start of May accounted for about 40% of Bitcoin’s price gains this year, according to data compiled by Bloomberg.

Raising the possibility that central banks may feel the need to create tokens, Bank for International Settlements General Manager Agustin Carstens said in an interview with the Financial Times that it may be “sooner than we think that there is a market and we have to create our own digital currencies.”

Eoin Treacy's view -

Bitcoin was originally designed as a response to the debauchment of fiat currencies in response to the credit crisis. By creating a digital asset with limited supply, it aims to hold value in a manner fiat currencies can’t. This limited supply feature is a significant factor in its value proposition but it is incompatible with the wider aim of delivering an alternative financial system.



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July 01 2019

Commentary by Eoin Treacy

Gold Sinks Most in a Year as Trade Truce Deals Blow to the Bulls

This article by Ranjeetha Pakiam and Elena Mazneva for Bloomberg may be of interest to subscribers. Here is a section: 

Gold tumbled back below $1,400 an ounce after the U.S. and China reached a truce in their trade war, dealing a blow to havens.

Prices fell the most in a year after Donald Trump and Xi Jinping agreed to resume negotiations in a bid to resolve differences between the world’s top-two economies. Still, the setback may be temporary as investors now train their focus on U.S. jobs data due Friday for clues on the Federal Reserve’s next move on policy.

“Gold was well overdue a period of consolidation and gold bulls should welcome it,” said Ross Norman, chief executive officer of gold brokerage Sharps Pixley Ltd. “This provides a welcome entry point.”

Eoin Treacy's view -

“Don’t pay up for commodities” is about the most useful adage we came to live by in the commodity bull run of the early 2000s. Commodities are volatile but even that provides a consistency characteristic that is useful for traders. Breakouts are seldom sustained.



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June 28 2019

Commentary by Eoin Treacy

June 28 2019

Commentary by Eoin Treacy

Platinum Giants Resist Pay Demands After Hitting Price Jackpot

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

“These kind of wage demands will keep investors away,” said Ross Harvey, an independent economist. “The costs of doing business in South Africa remain too high, and the policy environment too risky, to warrant large sunk-cost investments.”

While its sister metals have surged, the price of platinum is trading near a decade low, leaving producers claiming they have little cushion to invest. Lonmin rebounded to profit in the six months through March, but only after four years of losses.

“These demands mean that there will be no money to reinvest, which is necessary for a sustainable industry,” said Wellsted.

Still, there are some causes for investor optimism. AMCU’s Mathunjwa has so far dispensed with most of his usual fiery rhetoric in favor of a more conciliatory tone. Moreover, three years ago, the union accepted a 12.5% wage increase for the lowest-paid workers after initially demanding 47%.

Much will depend on whether platinum miners toughen their stance in a bid to limit any wage deal to a single-digit increase, said Ben Davis, a mining analyst at Liberum Capital.

Eoin Treacy's view -

Mining is, perhaps, the best paid job people with less than a tertiary education can have. It obviously comes with drawbacks, not least an increased risk of death. As a result, mining unions have tended to me more militant than most and the pay demands they come up with bear little resemblance to what is considered normal in other industries.

The issue with granting demands for higher pay are multi-faceted, but the two most important are the precedent it sets and what can be requested in return for more money. Mine efficiency, implementation of labour-saving devices and automation are generally not supported by unions because of the effect that would have on the number of people employed. However, if South Africa is to have any hope of revitalising its industry these kinds of work-practice reforms have to implemented.



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June 28 2019

Commentary by Eoin Treacy

Elliott's $34 Billion Roundup Fix Is No Magic Pill

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

Fighting to settle, rather than win, would be the best approach. Bayer has argued Roundup is safe when correctly used, but it has lost three consecutive cases. Its expert evidence has been weighed by juries and has failed to convince them.

A new legal team could try to put different arguments and experts in front of jurors. But consider, too, the heavy punitive damages being awarded – $2 billion in the last case. These are likely to reflect jurors’ dim view of Monsanto's corporate conduct as concerns about the weedkiller’s safety emerged. This issue will recur in every future case.

Appealing would cost Bayer time. By the same token, a settlement would deliver a certain and faster resolution for the thousands of plaintiffs. The individual circumstances of each case make it hard to gather them together into a swiftly-resolved class action.

The snag is that even a fair settlement would not mean a return to business as usual. The best financial scenario for the company would be a deal that is affordable, with farmers continuing to use glyphosate and Roundup staying on sale, perhaps with modified instructions about how consumers should use it appropriately. This is not assured.

Moreover, Bayer will still merit a management discount for all that has happened, and a conglomerate discount given its unproven strategy of combining pharmaceuticals and crop science. CEO Werner Baumann misjudged the risks of buying Monsanto, a deal that brought Roundup with it; he has taken too long to revise his litigation strategy. He could yet turn the situation around by resolving the lawsuits and extracting synergies from the acquisition. Until he does, the jury is out both on his future and a break-up.

Eoin Treacy's view -

Bayer made a mistake in taking on Monsanto’s Roundup liability. However, it also underestimated the animus directed at the company for its work practices over years of rising seed prices, cases against farmers and the anti-GMO movement. Anything that can arrest the risk of both more negative headlines will be a positive, not least because the market has already priced in a disaster.



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June 28 2019

Commentary by Eoin Treacy

Banks Soar as Fed Paves Way for Better-Than-Expected Payouts

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

The biggest U.S. banks, including Bank of America Corp., JPMorgan Chase & Co. and Goldman Sachs Group Inc., rallied to the highest in more than a month on Friday, after the Federal Reserve cleared them to boost payouts.

“Ask and ye shall receive” was the common theme with the results of this year’s Capital Analysis and Review, known as CCAR, Evercore ISI’s Glenn Schorr wrote in a note. Most of the banks he covers beat Evercore ISI’s, and consensus, expectations for total dollars of capital return, and all the banks beat in terms of payout ratios.

The “enormous” capital plans announced by JPMorgan, BofA, Citigroup Inc. and Wells Fargo & Co., amounting to a combined total of over $130 billion, show that “the industry is extremely well capitalized,” RBC’s Gerard Cassidy wrote in a note.

Even so, Morgan Stanley’s Betsy Graseck cautioned that the party won’t last. This year’s results were “the last hurrah,” she wrote in a note, with payouts probably declining 21% in 2020, as “capital is now close to optimized.” Her advice? “Enjoy it while you can.”

Eoin Treacy's view -

- Higher dividends are what investors have been waiting for in the banking sector so this is good news. The biggest question raises in the last paragraph above it where the revenue growth is going to come from to sustain payouts?



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June 27 2019

Commentary by Eoin Treacy

June 27 2019

Commentary by Eoin Treacy

For China, Kicking a $9 Trillion Habit Is Tough

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

For now, Beijing doesn’t appear to have many options: The fact that activity is picking up even as officials attempt to calm nerves in the interbank funding market shows the economy’s deeply rooted, steadfast reliance on these institutions for credit, especially when banks are flinching.

For years, trust companies worked alongside China’s banks to keep credit flowing in the system. The headline drop in their assets under management has largely come from a decline in trust beneficiary rights products. These are loans put in a trust special-purpose vehicle, which effectively allows banks to reclassify souring debts. Trust companies have also acted as agents between companies lending to each other. Together, so-called entrusted loans and trust loans stood at 20.1 trillion yuan at the end of the first quarter.

Most of trust-backed products are concentrated at regional lenders – the likes of Baoshang Bank Co., which was recently taken over by regulators. In the early part of 2017, such products, in the form of investment receivables, increased between 10% and 40% at smaller banks. At Baoshang, they rose close to 15% and stood at 153 billion yuan, or a quarter of its assets, according to its latest financials.

Eoin Treacy's view -

When I was the Bloomberg account manager for DWS in Luxembourg back in the early 2000s one of the primary roles the team had was to create special purpose vehicles for loans of dubious quality that management of Deutsche Bank wanted to keep off book. We all know how that turned out and the bank is still reeling from its experiment with balance sheet leverage.



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June 27 2019

Commentary by Eoin Treacy

Ship Owners Need to Step Up Demolition Activity For a Sustainable Market Rebound

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

n a separate note this week, GMS, the world’s leading cash buyer said that “the stagnating inertia in the international ship recycling markets continued this week, with Pakistan, Bangladesh and Turkey entirely offline due to Eid holidays (winding down the Holy Month of Ramadan) and the traditionally quieter monsoon season gradually getting under way in the Indian sub-continent. There was a brief bounce in the Indian market following the election victory of the pro-business Mr. Modi, but local steel prices have begun to cool off ever since and Alang Buyers appear notably reluctant to commit on new vessels as most of the market focus is now shifting to Alang, due to the overall intransigence from Pakistan and Bangladesh and the higher offers emanating from India. The market in Bangladesh remains the quietest of all, with the upcoming budget on June 13th likely to determine the immediate direction on prices, which have already lost USD 20 – USD 30/LDT over the last few weeks. Most yards in Chattogram also remain stuffed with tonnage and demand is at the lowest it has been all year, with essentially no new enquiries emanating from local Buyers. The expectation (as seems to be the case year-after-year) is that new duties / taxes are set to be announced in this budget and prices are likely to decline further thereafter. As such, Bangladeshi Buyers are no longer keen to import fresh tonnage before the date of the budget, given the likelihood of increasing duties within the next week”, GMS concluded.

Eoin Treacy's view -

I had hoped to create a composite chart of the volumes of vessel demolitions in places like India, Turkey, Bangladesh and China. Although Bloomberg has indices for all these metrics, none of them appear to have any data so that is not going to be possible. The reason I wanted to view some clear data on vessel demolitions is because it would give us some intelligence into how clear a signal the rally in the Baltic Dry Index is providing for the health of the global economy.



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June 27 2019

Commentary by Eoin Treacy

Morningstar Downgrades H2O Allegro

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

 

The fund was placed under review on June 19 after Dobrescu flagged up concerns over a conflict of interest. H2O’s chief executive Bruno Crastes was named as a board member of Tennor, a holding company run by Lars Windhorst. Shares in Paris-listed Natixis - H2O's parent company - slumped after the fund was placed under review. Following Morningstar’s announcement, Natixis said Crastes had resigned from Tennor, saying the risk of a possible conflict of interest was "groundless".

Morningstar's Dobrescu said the H2O Allegro fund, which has seen millions of euros of outflows this month, needs to regain investors’ trust. The fund, which takes long positions on the U.S. dollar and eurozone debt, has produced stellar annualised returns of 16.5% over the past eight years but this has been achieved at a “higher risk than investors could have expected”.

The majority of the illiquid bonds that analysts had concerns over have now been sold off or marked down. The exposure to these bonds has been cut from 10% of the portfolio to 3.8% as of June 24.

Eoin Treacy's view -

The siren call of stellar returns from illiquid assets has claimed more than a few funds lately. This practice represents a special type of hubris; that assets under management will never be called back.



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June 27 2019

Commentary by Eoin Treacy

Email of the day on Chart Library bugs with a Mac

FTM charts regularly fail to populate when first opening on an Apple device (mine anyway), but if you change the time line the chart will immediately populate.

So, if you open a chart and it's on 5 years but does not populate, change it to 1 year or whatever you want and all will be well from then on for that chart.

Obviously, if it happens on the next chart you open, repeat the process. 

Bit of a faff but once you know how it works it quickly becomes automatic and seamless.

Very much enjoying your balanced wide ranging and often very illuminating commentaries.

Good man,

Eoin Treacy's view -

Thanks for your kind words and for alerting me to this bug. Last night was the first time I have ever used a Mac so I found it surprising that charts were having difficulty loading. I have forwarded on this issue to our IT chaps who will be taking a look at it.



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June 26 2019

Commentary by Eoin Treacy

Video commentary for June 26th 2019

June 26 2019

Commentary by Eoin Treacy

Google's Quantum Processor May Achieve Quantum Supremacy in Months

Thanks to a subscriber for this article from Interesting Engineering. Here is a section:

After the list goes above 6, the numbers start becoming so large and abstracted you lose the sense of the gulf between where Google is and where it will be at the next step.

In the case of Moore's Law, it started out in the 1970s as doubling every year, before being revised up to about every two years. According to Neven, Google is exponentially increasing the power of its processors on a monthly to semi-monthly basis. If December 2018 is the 1 on this list, when Neven first began his calculations, then we are already between 5 and 7.

In December 2019, only six months from now, the power of Google's quantum computing processor might be anywhere from 24096 times to 28192 times as powerful as it was at the start of the year. According to Neven's telling, by February--only three months after they began their tests, so 3 on our list--, there were no longer any classical computers in the building that could recreate the results of Google's quantum computer's calculations, which a laptop had been doing just two months earlier.

Neven said that as a result, Google is preparing to reach quantum supremacy--the point where quantum computers start to outperform supercomputers simulating quantum algorithms--in a only a matter of months, not years: “We often say we think we will achieve it in 2019. The writing is on the wall.”

Eoin Treacy's view -

Double exponential growth takes the doubling we have been accustomed to and turns it into powers. Therefore, instead of 2, 4, 8, 16 improvements we get 4, 16, 256, 65,536. With that kind of growth rate, the pace of innovation becomes so rapid that new chips become instantly obsolete. It makes a nonsense of ever owning a quantum computer and means provision of cloud services will likely be the primary way in which this kind of computing power is accessed. IBM has already been trialling that kind of access with its Watson artificial intelligence and nascent quantum service.



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June 26 2019

Commentary by Eoin Treacy

Putin's Big Bet on Gold Is Paying Off Nicely

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

The U.S. dollar’s dominance as a global reserve currency is commonly thought to result from the dearth of safe assets. Russia, however, recently has provided an example of how a sizable economy with the world’s fifth biggest international reserves can minimize dollar assets ad still do well. So far, it doesn’t have many followers, but gold buying by central banks is going up.

Since being hit by sanctions for its aggression against Ukraine in 2014, Russia has had good reasons to rethink the composition of its international reserve. While the European Union hasn’t toughened its sanctions for almost five years, the U.S. has been doing it all the time. The Kremlin and the Bank of Russia consider the risk of further restrictions unpredictable and dependent more on U.S. domestic politics than on anything Russia does. In the 12 months since the end of September 2017, the central bank has more than halved the dollar’s share in its international assets and sharply increased the shares of the euro and the renminbi.

Eoin Treacy's view -

Net central bank accumulation of gold is as much about sourcing a hedge against geopolitical trouble as it is a response to the clear threat to the Dollar from the adoption of Modern Monetary Theory by the US government.

Central banks buying dipped in 2017 but started to trend higher in 2018 and hit new decade highs this year. That represents a potent source of demand which is helping to support prices.



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June 26 2019

Commentary by Eoin Treacy

So Close Yet So Far Apart: Inside the Italy-EU Budget Tussle

This article by Marco Bertacche and Lorenzo Totaro may be of interest to subscribers. Here is a section:

For 2019, the EU could grant Italy flexibility available for unexpected events like last summer’s bridge collapse in Genoa. That would bring the adjustment required down to 0.42% of GDP.

Italy meanwhile says that a series of one-time revenues plus lower-than-expected spending for the populists’ flagship programs are worth about 5.3 billion euros. That’s enough to improve the structural deficit by 0.1 percentage point, the Treasury says -- the commission is forecasting a deterioration of 0.2 points.

If Italy’s numbers are right, then the two sides are just 0.3% of GDP or about 5 billion euros apart. That in itself might be close enough for the commission to give Rome a pass again.

But that may be overshadowed by the prospect of another battle when discussions on the 2020 budget start in September.

Eoin Treacy's view -

Fiscal austerity is the price the Eurozone’s creditors demanded for extraordinary monetary policy. However, it presupposes that the near 20-year process of debt to GDP alignment it represents, will be swallowed by populations faced with a generation of declining living standards and subpar growth. The rise of populism is a message people are unwilling to take that kind of hit to their personal wellbeing particularly when it falls disproportionately on the most heavily indebted and in need of support.



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June 25 2019

Commentary by Eoin Treacy

June 25 2019

Commentary by Eoin Treacy

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

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

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

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

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

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

Eoin Treacy's view -

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



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June 25 2019

Commentary by Eoin Treacy

Swiss Spat With EU Prompts London Curbs on Country's Shares

This article by Alexander Weber, Silla Brush and Viren Vaghela for Bloomberg may be of interest to subscribers. Here is a section:

The political agreement at the heart of the issue -- which seeks to replace treaties on everything from agriculture to immigration and civil aviation -- was finalized in November last year. It hasn’t been endorsed by the Swiss government because it’s unpopular at home, in part because of fears it’ll erode high local wages.

Earlier this month, while saying it was still “broadly positive,” Switzerland asked for some clarifications.” That was seen in Brussels as an attempt by the country to renegotiate the accord, which the EU has ruled out.

The commission has also complained about “foot-dragging” by the government in Bern, and unless the commission decides otherwise, regulatory equivalence of the Swiss stock exchange will expire at the end of the week.

Eoin Treacy's view -

The UK is not the only country which has had difficulty getting a deal negotiated with the EU approved at home. The interesting point about this process, from an outsider’s perspective, is the similarity in the EU’s response to both Switzerland and the UK. The refusal to reopen negotiations, the threat of disavowing regulatory equivalence and imposition of deadlines are being used as tactics in both sets of negotiations.



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June 25 2019

Commentary by Eoin Treacy

A Dark Alley in China's Credit Market Suddenly Getting Rough

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

For firms that obtained funding via unorthodox methods, conditions may become particularly challenging. One of those practices is known as structured issuance, where a company will transfer cash to an asset manager to buy a slice of the bonds the company is itself selling. The manoeuvre helps give the appearance of greater demand for its securities and stronger ability to obtain funding. What could make the practice untenable is if asset managers can no longer use those securities held in custody as collateral for repos.

“Since some repo transactions have defaulted recently, it is unclear whether companies can continue to borrow money from the structured issuance method, said Meng Xiangjuan, chief fixed-income analyst at SWS Research Co. in Shanghai. “If it stops, some issuers will certainly face difficulties operating their business normally, and their debt-repayment pressure will rise,” she said.

Eoin Treacy's view -

The main headline today was the fact some Chinese banks have been breaking the sanction prohibitions on North Korea. However, the fact it is possible for companies to partially fund their own bond issuance by promising to buy it themselves with the funds received is garnering a lot less interest.



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June 24 2019

Commentary by Eoin Treacy

June 24 2019

Commentary by Eoin Treacy

Don't tell me WHAT to buy, tell me WHEN to buy

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

Well, as stated on June 3rd, we said a bottom was formed with the SPX at ~2729 and that the SPX was going to trade to new all-time highs.  Three sessions later, with the SPX at 2852, we wrote the stock market was probably going to stall into mid/late-June, but that new all-time highs were still coming.  The stock market did indeed stall, but only for about 5 sessions followed by a breakout to new all-time highs.  Indeed, “Don’t tell me what to buy, tell me when to buy!”

Meanwhile, some Wall Street pundits suggest the SPX has already tagged their year end price target, stocks are expensive, and a recession is on the horizon.  They obviously are NOT listening to the message of the market that is predicting no recession.  Speaking to their other points, while earnings estimates for the S&P 500 have come down from roughly $173 to $168 for 2019, and $188 for 2020, stocks are not all that expensive on forward earnings.  If those estimates are correct, it implies the SPX is trading at 17.5x this year’s estimate, which granted is a tad on the expensive side, but only at 15.7x earnings for next year.  However, our models tell us under the current interest rate environment the right price earnings multiple (PE) should be 19.  Therefore, 19x this year’s estimate yields a price target of 3192 for the SPX.  If 2020’s estimate is anywhere near the mark, the SPX’s price target becomes 3572 (19 X $188 = 3572).  To wit, the average PE multiple at the end of just about every bull market is 18.89x earnings (Chart 1).  As a sidebar, the SPX’s PE ratio at the end of the late-1990’s bull market was over 30.

Eoin Treacy's view -

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

I was in UPS on Saturday returning something to Amazon and I asked the guys working in the store how business was. They said it was busier than normal for the time of year. That’s what I see in Mrs. Treacy Amazon business too. If that’s the case where is the evidence of the recession?



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June 24 2019

Commentary by Eoin Treacy

The Future of Hydrogen

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

The time is right to tap into hydrogen’s potential to play a key role in a clean, secure and affordable energy future. At the request of the government of Japan under its G20 presidency, the International Energy Agency (IEA) has produced this landmark report to analyse the current state of play for hydrogen and to offer guidance on its future development. The report finds that clean hydrogen is currently enjoying unprecedented political and business momentum, with the number of policies and projects around the world expanding rapidly. It concludes that now is the time to scale up technologies and bring down costs to allow hydrogen to become widely used. The pragmatic and actionable recommendations to governments and industry that are provided will make it possible to take full advantage of this increasing momentum.

Hydrogen can help tackle various critical energy challenges. It offers ways to decarbonise a range of sectors – including long-haul transport, chemicals, and iron and steel – where it is proving difficult to meaningfully reduce emissions. It can also help improve air quality and strengthen energy security. Despite very ambitious international climate goals, global energy-related CO2 emissions reached an all-time high in 2018. Outdoor air pollution also remains a pressing problem, with around 3 million people dying prematurely each year.

Hydrogen is versatile. Technologies already available today enable hydrogen to produce, store, move and use energy in different ways. A wide variety of fuels are able to produce hydrogen, including renewables, nuclear, natural gas, coal and oil. It can be transported as a gas by pipelines or in liquid form by ships, much like liquefied natural gas (LNG). It can be transformed into electricity and methane to power homes and feed industry, and into fuels for cars, trucks, ships and planes.

Eoin Treacy's view -

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

The dramatic decline in natural gas prices and the abundant quantities being produced and in reserve mean that it is inevitable that new sources of demand will appear to take advantage. Since natural gas is one of the primary sources of hydrogen, it makes sense to promote fuel cell vehicles or range extenders for electric vehicles. How long it will take for this evolution to have an effect on the market is questionable, but it will probably be the catalytic event necessary to boost prices out of the long-term base. 



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June 24 2019

Commentary by Eoin Treacy

Bitcoin Surpasses $11,000 as Memories of Popped Bubble Fade

This article by Eric Lam, Vildana Hajric and Joanna Ossinger for Bloomberg may be of interest to subscribers. Here is a section:

Bitcoin traded above $11,000 for the first time in 15 months, recouping more than half of the parabolic

increase that captured the attention of mainstream investors before the cryptocurrency bubble burst last year.

“The bounce-back of Bitcoin has been fairly extraordinary,” said George McDonaugh, chief executive and co-founder of London-based blockchain and cryptocurrency investment firm KR1 Plc. “Money didn’t leave the asset behind, it just sat on the sidelines waiting to get back in.”

Eoin Treacy's view -

When I got on the plane yesterday Bitcoin was trading at around $10,000. When I landed in London it was at $11,000. That’s a big move even for bitcoin. So, what’s going on?



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June 21 2019

Commentary by Eoin Treacy

June 21 2019

Commentary by Eoin Treacy

Stocks Whipsawed as Quadruple Witching Spurs Bursts of Volume

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

One scenario on how Friday’s event may have boosted share prices was laid out by Charlie McElligott, a cross-asset strategist at Nomura. In a note earlier this week, he attributed buying to traders who sold bullish options on the S&P 500 at strike prices of 2,950.

The muddling effect from quadruple witching may not be over this week, according to McElligott. As the market loses the buying “impulse” from options traders, stocks may fall next week, prompting a narrative that investors are starting to doubt the Fed and setting the stage for the S&P 500 to rally to 3,000, he said.

“The market then risks ‘mis-reads’ this potential flow-centric weakness in equities next week as some sort of ‘fading the Fed’—when in fact it’s almost entirely mechanical in nature,” McElligott wrote. “This type of head-fake could in fact see more shorts added and sentiment purge, which then perversely is the fodder for a melt-up.”

Eoin Treacy's view -

Quadruple witching is usually a storm in a teacup and seldom corresponds with major tops or bottoms. The one thing we do know is when a market makes a new high after a period of ranging, the headline level puts shorts on notice. 



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June 21 2019

Commentary by Eoin Treacy

Maldives Holidays and SUVs Are Badges of Shame Now: Chris Bryant

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

The windshields of large cars parked in my Berlin neighborhood were plastered this week with angry
messages on lurid orange stickers. The owners were told that: “Driving an SUV causes serious climate damage,” “SUVs harm your unborn child,” and “Driving an SUV causes impotence.” That last one may have been a joke.

Sports utility vehicles have long been hated by the more civic-minded among us. They tend to consume more fuel, spew out more pollution and take up more parking space. It’s been suggested that their size and weight are also partly to blame for the rising number of pedestrian road deaths.

Eoin Treacy's view -

Angela Merkel has been Germany’s Chancellor for longer than anyone before her and her chosen successor has been deemed no longer fit for purpose. That leaves the competition to replace her wide open and it is increasingly likely that the next government will be heavily dominated by the Green Party. This will represent the latest iteration of the populist wave which in this case will see leftwing populists gain sway over a major economy.



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June 21 2019

Commentary by Eoin Treacy

Solar Cycle Science

The subject of solar minimums is starting to arise once more in popular media and this site, from a former NASA scientist, contains all of the relevant information. Here is a section:

In the 1800s astronomers realized that the appearance of sunspots was cyclic, with a period averaging about 11 years. As new features of the Sun (solar flares, filaments, prominences, coronal loops and coronal mass ejections) were discovered, it was found that they too varied along with the frequency of sunspots. The sunspot number is now commonly accepted as a measure of solar activity. Solar activity itself has been linked to satellite failures, electrical power outages, and variations in Earth’s climate. The impact of solar activity on Earth and our technology has created a need for a better understanding of, and the ability to predict, solar activity.

Sunspot activity over the last four hundred years has shown that the amplitude of the sunspot cycle varies from one cycle to the next. The average cycle has a peak sunspot number of about 150. At times, as in the period known as the Maunder Minimum between 1645 and 1715, solar activity can become so weak that it seems to disappear for several decades at a time.

Eoin Treacy's view -

The Maunder Minimum persisted for about 50 years between 1650 and 1700 but rigorous recording of sunspot activity did not really start until 1750. I see a lot of misreporting of data by lobby groups arguing both for and against anthropomorphic climate change with each bending the data to fit their own narrative. I did some cycle analysis of solar cycles a decade ago predicted the lower high of the current cycle so I thought would refresh that now.



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June 20 2019

Commentary by Eoin Treacy

Video commentary for June 20th 2019

June 20 2019

Commentary by Eoin Treacy

Gold Achieves Liftoff as Prices Rocket Toward $1,400 an Ounce

This article by Elena Mazneva and Ranjeetha Pakiam for Bloomberg may be of interest to subscribers. Here is a section:

Investors are pouring money into gold-backed ETFs again, following four months of outflows. Holdings tracked by Bloomberg have already seen the biggest monthly increase since January.

Bullion producers are also catching an uplift. The $10 billion VanEck Vectors Gold Miners ETF, which tracks shares of gold mining companies, jumped to the highest in more than a year on Thursday. And a separate gauge of senior gold producers including Yamana Gold Inc. and Barrick Gold Corp. rallied to the highest since November 2016.

Central Bank Buying
In another bullish signal for gold, central banks are continuing to buy the metal as countries diversify their assets away from the U.S. dollar. China increased its reserves for a sixth straight month in May.

Other countries have also been buying -- first-quarter purchases were the highest in six years, with Russia and China the largest buyers, according to the World Gold Council.
 

Eoin Treacy's view -

The money flowing into gold ETFs is positive but it is nothing compared to the volume that flowed into the asset class during the gold bull market. What is positive, however, is the trend has continued higher since the initial surge in 2016 which suggests net investor demand has remained in place despite the range which has persisted for the last few years.



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June 20 2019

Commentary by Eoin Treacy

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

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

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

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

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

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

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

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

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

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

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

Eoin Treacy's view -

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



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June 20 2019

Commentary by Eoin Treacy

Thucydides Trap and gold

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

His main focus is to outline where the US and China are with respect to realpolitik, or practical considerations, and how to avoid war. The signs are not good.

Writing in The Atlantic, Allison states that “Based on the current trajectory, war between the United States and China in the decades ahead is not just possible, but much more likely than recognized at the moment.” That was written in 2015, before the trade war started, so the case for war is even stronger now.

According to Allison, events that could make two nations fall into the trap may be small, “business as usual” conflicts that, if they occurred in a different dynamic, would lead to nothing. For example, the assassination of archduke Ferdinand, a relatively obscure and minor figure, was the spark that lit a whole conflagration of events that plunged Germany, an ascendant maritime power, into war with Britain, whose Royal Navy ruled the seas for decades. Consider the current conflicts between the Chinese and US navies in the South China Sea and the Taiwan Strait. It would not take much - say a collision between two warships - to ignite the powder keg of war.

However, for the threat to be taken seriously, the rising power must have the capability to take on the incumbent power. Henry Kissinger, the US former secretary of state, wrote that “once Germany achieved naval supremacy … this in itself - regardless of German intentions - would be an objective threat to Britain, and incompatible with the existence of the British Empire.”

Eoin Treacy's view -

Technological innovation is a doubled edged sword. It opens up new markets and provides greater efficiencies. It helps to boost economic growth but it also displaces military technology and upsets the status quo. That allows new entrants a chance to gain comparative advantage.



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