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September 23 2016

Commentary by David Fuller

Email of the day 1

On what to do about debt:

David, I feel that looming large and completely absent from the self-congratulatory stance of the Fed yesterday was the question of what to do with debt, private, public and corporate. We always talk about the USA because their economy is so large, and GDP consumer component has grown to 69%.. amazing, but this is probably true for the rest of the world.

I just read an article which gave (in my opinion) a clear view of the debt situation and what eventually to do about it.:

All this is far from new and Greece the 7th century BC was witnessing the same environment.

Go to Solon on Wikipedia and then scroll down to "Moral reform" to see their solving of the debt situation. 

I would be very appreciative if you could give your opinion on the potential of future destructive forces of the overall debt situation in the world today

Many thanks, and all the best,

David Fuller's view -

Thanks for providing us with some interesting research, which persuades me that you know more about this subject than I do.  What I will add is that if governments hold most of their own debt, having gradually bought it back and/or often replaced it at advantageous times with very low interest rates, it is not too much of a problem.  For instance, I believe the Japanese government now holds over a third of all JGBs, and they can issue new bonds at extremely favourable rates, so it is not really a problem.  Similarly, former UK Chancellor George Osborne redeemed War Loan and some other even earlier debt at historically low interest rates.  

Many corporations have done the same.  However, there will be some less financially sound firms which have issued bonds at very favourable rates in recent years.  They may have problems if/when a normalisation of interest rates occurs.  Similarly, household borrowers will also be under pressure as interest rates rise and we can expect an increase in defaults. 



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September 23 2016

Commentary by David Fuller

Hollande to Be Ousted in First Round of 2017 Vote, Poll Shows

French President Francois Hollande won’t be able to make it past the first round in next year’s election regardless of the competitors he faces, a poll showed.

Both former President Nicolas Sarkozy and former Prime Minister Alain Juppe would make it to the run-off vote against National Front leader Marine Le Pen if they win the nomination for France’s Republican party, according to the Elabe poll for Les Echos and Radio Classique.

The findings show that Hollande is failing to gain traction with voters as Sarkozy and Juppe battle each other for their own camp’s nomination. With seven months to go until the first round of voting, the Socialist president wouldn’t even beat his former Economy Minister Emmanuel Macron, the survey showed.

“Marine Le Pen will qualify for the second round no matter who runs,” Elabe pollster Yves-Marie Cann said in a note accompanying the poll. Macron “is showing himself a serious contender at this early stage of the campaign at a time when the electoral line up is very uncertain,” he added.

The survey also showed Left Front candidate Jean-Luc Melenchon as making “significant” gains, Cann said. Melenchon would tie Hollande with a score of 15 percent in the first round if Juppe is the candidate on the right, according to the poll.

The survey also shows that French voters see Le Pen as the candidate most able to reform France and ensure that it preserves its social security system. About 20 percent see her as the best-qualified on that issue, compared with 16 percent for Juppe and 13 percent for Sarkozy. Hollande scored 7 percent on that question.

Elabe surveyed 922 voters on Sept. 20 and 21.

David Fuller's view -

I see no reason why Holland should suddenly reinspire confidence.  From a British perspective, it is too soon to accurately forecast the eventual winner of France’s presidential race and how that might affect any ongoing Brexit negotiations.  However, it may drag out the negotiation process, assuming PM May does not go a quick, full Brexit, which has already become the more controversial option. 

Germany’s 2017 elections represent an even more important wildcard in terms of Brexit negotiations.   



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September 23 2016

Commentary by David Fuller

Email of the day 2

On whether the USD (DXY) will provide some strength for commodities:

David and Eoin, do you think the Fed announcement will change the trajectory for the USD (DXY) heading into year end? and in turn potential provide some strength to the commodities?

David Fuller's view -

That is an interesting question.  My view is that DXY will continue to range with the help of the Fed announcement – maintaining a neutral environment - but eventually move higher in anticipation of rate increases.  A stronger DXY will reintroduce a headwind for industrial commodities, although that may be offset by reduced supply for some commodities and somewhat higher demand as/when the global economy next strengthens.   



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September 23 2016

Commentary by David Fuller

Britain Has the Edge Over EU Nations in Trade Talks, Says Civitas

Trade between Britain and the EU creates far more jobs on the continent than it creates in the UK, giving the remaining 27 nations a substantial incentive to strike a positive trade deal with Britain, according to researchers at the think tank Civitas.

The new analysis estimates that 3.6m jobs in the UK are linked to trade with the EU, while 5.8m EU jobs are linked to trade with the UK.

Every major EU economy is in the same position, according to Civitas, meaning that all of the biggest players have strong reasons to come to an open trading agreement with the UK rather than seeking to punish the leaving nation.

Even among the smaller countries, each one has a higher proportion of jobs linked to the UK than the other way around.

“Based on the potential impact on jobs, each EU country should be aware of the significant economic benefit in terms of jobs stemming from trade with the UK,” said Civitas.

“The EU does arguably have to negotiate as a bloc. However, each of the 27 remaining national governments, with between 1.5 and 9.5pc of employment linked to UK trade, should be negotiating in the interests of those that democratically elected them.”

The report, written by research fellow Justin Protts, also argues that the UK is in a sense in a stronger position that the other EU countries.

David Fuller's view -

The UK is definitely in a stronger position, at least in terms of jobs and exports at risk.  However, resentment, envy and growing dissatisfaction with the EU among 27 countries, plus the hazards of group think, are significant obstacles in the path to an economically logical result.

It is worth trying to get a good deal on Brexit, not least because that is also in the EU’s economic interests.  However, their official line, so far, is against preferential treatment for Britain.  While this is partly an emotional reaction by the rejected, the fear of further unravelling among the 27 countries is also a factor.  Bravado aside, it should be clear to Mrs May government where EU red lines really will not be withdrawn, well before the end of 2017.  If the EU still refuses to return full control of our borders and fishing rights, and if it block free access to the single market, then our best alternative, in my opinion, is the so called Hard Brexit, without further delay.  



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September 23 2016

Commentary by David Fuller

Fitch Reveals the $2Trillion Black Hole In China Economy That Heralds A Lost Decade

Bad debts in the Chinese banking system are ten times higher than officially admitted, and rescue costs could reach a third of GDP within two years if the authorities let the crisis fester, Fitch Ratings has warned.

The agency said the rate of non-performing loans (NPLs) has reached between 15pc and 21pc and is rising fast as the country delays serious reform, relying instead on a fresh burst of credit to put off the day of reckoning.

It would cost up to $2.1 trillion to clean up this toxic legacy even if the state acted today, and much of this would inevitably land in the lap of the government.

“There are already signs of stress that point to NPLs being much higher than official estimates (1.8pc), most obviously the increased frequency with which the banks are writing off or offloading loans,” it said.

The banks have been shuffling losses off their balance sheets through wealth management vehicles or by classifying them as interbank credit, seemingly with the collusion of the regulators. Loans are past 90 days overdue are not always deemed bad debts.

“The longer debt grows, the greater the risk of asset quality and liquidity shocks to the banking system,” said Fitch. Capital shortfalls are currently 11pc to 20pc of GDP, but this threatens to hit 33pc in a worst case scenario by the end of 2018.

David Fuller's view -

I think it is well worth reading the rest of this article, posted in the Subscriber’s Area, and if you are able access The Telegraph’s website, or just use the headline to pick the article up on the www, as is sometimes possible, you would be able to see the informative graphs which I am unable to reproduce.

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



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September 23 2016

Commentary by David Fuller

The Markets Now

Here is the new brochure for our next meeting at The Caledonian Club on Monday evening, 10th October 2016.  

David Fuller's view -

I look forward to seeing another lively group of subscribers, at this event.  Anyone else who is interested in the markets and this service is also welcome.  These are unusual times so we should also have some interesting discussions, not least over refreshments following the three presentations.  Fellow subscriber Tim Price is a popular guest speaker.  



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September 22 2016

Commentary by David Fuller

UN Fears Third Leg of Global Financial Crisis With Prospect of Epic Debt Defaults

Here is the opening of this mischievous report by Ambrose Evans-Pritchard for The Telegraph, perhaps best not read if standing near a ledge, busy traffic or other obvious hazards: 

The third leg of the world's intractable depression is yet to come. If trade economists at the United Nations are right, the next traumatic episode may entail the greatest debt jubilee in history.

It may also prove to be the definitive crisis of globalized capitalism, the demise of the liberal free-market orthodoxies promoted for almost forty years by the Bretton Woods institutions, the OECD, and the Davos fraternity.

"Alarm bells have been ringing over the explosion of corporate debt levels in emerging economies, which now exceed $25 trillion. Damaging deflationary spirals cannot be ruled out," said the annual report of the UN Conference on Trade and Development (UNCTAD).

We know already that the poisonous side-effect of zero rates and quantitative easing in the US, Europe, and Japan was to flood developing nations with cheap credit, upsetting their internal chemistry and drawing them into a snare. What is less understood is just how destructive this has been.

Much of the money was wasted, skewed towards "highly cyclical and rent-based sectors of limited strategic importance for catching up," it said.

Worse yet, these countries have imported the deformities of western finance before they are ready to cope with the consequences. This has undermined what UNCTAD calls the "profit-investment nexus" that ultimately drives growth and prosperity.

The extraordinary result is that some countries are slipping backwards, victims of "premature deindustrialisation". Many of them have fallen further behind the rich world than they were in 1980 despite opening up their economies and following the global policy script diligently.

The middle income trap closed in on Latin America and the non-oil states of the Middle East a long time ago, but now it is beginning to close in such countries as Malaysia and Thailand, and in some respects China. "The benefits of a rushed integration into international financial markets post-2008 are fast evaporating," it said.

Yet the suffocating liabilities built up over the QE years remain. UNCTAD says corporate debt in emerging markets has risen from 57pc to 104pc of GDP since the end of 2008, and much of this may have to written off unless there is a world policy revolution.

"If the global economy were to slow down more sharply, a significant share of developing-country debt incurred since 2008 could become unpayable and exert considerable pressure on the financial system," it said.

"There remains a risk of deflationary spirals in which capital flight, currency devaluations and collapsing asset prices would stymie growth and shrink government revenues. As capital begins to flow out, there is now a real danger of entering a third phase of the financial crisis which began in the US housing market in late 2007 before spreading to the European bond market," it said. 

David Fuller's view -

I am not a fan of acronyms, especially the long ones, beloved by nerdy backroom types.  To lessen readers’ possible frustration, UNCTAD, stands for United Nations (that’s the easy part) Conference on Trade and Development (the cumbersome part). 

I am not sure why AEP, one of the best financial journalists in the business, decided to share parts of this UNCTAD with us.  Perhaps it is an indirect caution against overconfidence regarding Brexit.  He did warn us shortly after the referendum result, as I recall, that the Brexit process would be challenging over the medium term, before the advantages were realised. That was a sensible comment, I felt.  Brits need to stay focussed and work hard, in order to redevelop a fully independent and internationally oriented UK. 

What about the UNCTAD report?

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



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September 22 2016

Commentary by David Fuller

Email of the day

On Brexit articles, from a pre-subscriber:

I am not currently a subscriber but I always glance at the introductions to articles that you e-mail to me.  I must say that I agree with all of David's comments regarding the EU and am glad that he is helping publicise intelligent articles in favour of Brexit.  Unfortunately, it seems at times that most of these articles are from the Telegraph.  I was disappointed at the very negative response in the Financial Times and it does seem to me that somehow these more positive articles need to appear more frequently in other publications and were they to do so they may calm people’s fears on the subject.

David Fuller's view -

I am glad to hear that you enjoy the Brexit articles, and don’t be afraid to subscribe, it’s an investment.

I am aware of how emotive the Brexit issue is for many of us in the UK.  If I am testing the patience of some subscribers on this subject, I apologise but I do think not only Brexit but overall developments in Europe are hugely important, and they certainly affect markets. 

Re the FT, I assume its ambition is to be the most informative and successful financial paper in Europe.  It may have achieved this but the EU has overly influenced its political and even economic views, in my opinion.    



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September 22 2016

Commentary by David Fuller

America Is Not the Greatest Country on Earth. It is No. 28

Here is the opening of this interesting report from Bloomberg:

Every study ranking nations by health or living standards invariably offers Scandinavian social democracies a chance to show their quiet dominance. A new analysis published this week—perhaps the most comprehensive ever—is no different. But what it does reveal are the broad shortcomings of sustainable development efforts, the new shorthand for not killing ourselves or the planet, as well as the specific afflictions of a certain North American country. 

Iceland and Sweden share the top slot with Singapore as world leaders when it comes to health goals set by the United Nations, according to a report published in the Lancet. Using the UN’s sustainable development goals as guideposts, which measure the obvious (poverty, clean water, education) and less obvious (societal inequality, industry innovation), more than 1,870 researchers in 124 countries compiled data on 33 different indicators of progress toward the UN goals related to health.

The massive study emerged from a decadelong collaboration focused on the worldwide distribution of disease. About a year and a half ago, the researchers involved decided their data might help measure progress on what may be the single most ambitious undertaking humans have ever committed themselves to: survival. In doing so, they came up with some disturbing findings, including that the country with the biggest economy (not to mention, if we’re talking about health, multibillion-dollar health-food and fitness industries) ranks No. 28 overall, between Japan and Estonia.

Eradicating disease and raising living standards are lofty goals that have attracted some of the biggest names to philanthropy. Facebook Inc. founder Mark Zuckerberg and Priscilla Chan, his wife and a pediatrician, on Wednesday pledged $3 billion toward the effort. The new study itself was funded by (but received no input from) the Bill & Melinda Gates Foundation. The 17 UN Sustainable Development Goals (SDGs) themselves are a successor to the Millennium Development Goals, a UN initiative that from 2000 to 2015 lifted a billion people out of extreme poverty, halved the mortality of children younger than five years old, and raised by about 60 percent the number of births attended to by a skilled health worker

The research team scrubbed data obtained on dozens of topics from all over the world. For example, to make sure they had adequate data on vaccine coverage for each region, they looked at public surveys, records of pharmaceutical manufacturers, and administrative records of inoculations. “We don’t necessarily believe what everybody says,” says Christopher Murray, global heath professor at the University of Washington and a lead author of the study. “There are so many ways they can miss people or be biased.” 

The U.S. scores its highest marks in water, sanitation, and child development. That’s the upside. Unsurprisingly, interpersonal violence (think gun crime) takes a heavy toll on America’s overall ranking. Response to natural disasters, HIV, suicide, obesity, and alcohol abuse all require attention in the U.S. 

David Fuller's view -

Interesting but incredibly subjective, in my opinion.  However, size of population seems to be a key factor, if you look at the table at the end of this article which shows The Top 30.  Among the first 23, only the United Kingdom at number 5 and Germany at 15 clearly have larger populations than the other highly ranked countries. 

I am surprised to see the UK so highly rated, not least given all the diesel fumes, especially in London.  Smoking and obesity are also UK problems. Having visited most of these countries, I am baffled to see New Zealand no higher than 30.  The USA does have big problems with violence, alcoholism and obesity, as mentioned, but it also has by far the largest population among the top 30 listed.  



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September 22 2016

Commentary by David Fuller

The Markets Now

Here is the new brochure for our next meeting at The Caledonian Club on Monday evening, 10th October 2016.  

David Fuller's view -

I look forward to seeing another lively group of subscribers, at this event.  Former subscribers and newcomers are also welcome.  These are unusual times in the markets so we should also have some interesting discussions, not least over refreshments following the three presentations.  Fellow subscriber Tim Price is a popular guest speaker.  



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September 22 2016

Commentary by David Fuller

September 22 2016

Commentary by Eoin Treacy

Email of the day on Japan's stimulus program

Hello I read your analysis about the Topix bank index, for the first time I don't really agree with you. The bank of Japan is doing something new and it could push the Topix banks index up. I cannot attach graphs here to this message, but if on Bloomberg you compare the Topix bank index (or any bank index) to the difference in 30 year and 10 year JGB yields the correlation in the last 2 years is almost perfect. I believe they intend targeting yields to keep the curve ripid to help the banks. The same thing will probably happen in the Eurozone as they soften some capital rules as well, so I think the bank indexes should be watched even if only on a relative basis (bank indexes should outperform general indexes like sp500 and DAX and the yield curve become more ripid in Eurozone Japan and US), sorry I can't attach my Bloomberg graph. I hope at the chart seminar in London you can let me understand why you do not consider correlations such as these. They are not long term correlations, but are valid in a zero bound environment.

Eoin Treacy's view -

Thank you for this email highlighting some key measures of how the financial sector has reacted to the Bank of Japan’s stimulus policies. I look forward to covering these topics with you in person in London this November. It’s looking like an interesting group of delegates will be in attendance. 



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September 22 2016

Commentary by Eoin Treacy

EU Banks May Need Rescue Funds Equaling Twice ECB Capital

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

The Brussels-based SRB, the resolution authority for 142 banks including Deutsche Bank AG and BNP Paribas SA, will use the minimum capital requirement set by the European Central Bank as a proxy for capital that would be needed to absorb losses in a crisis, Koenig said in an interview this month. The ECB last year set an average requirement for the highest-quality capital of 9.9 percent of risk-weighted assets.

Requiring banks to have at least that same amount again in loss-absorbing liabilities will ensure that they can recapitalize themselves quickly after restructuring, Koenig said. This minimum requirement of own funds and eligible liabilities, or MREL, is calculated at the “30,000-foot level,” and more precise levels tailored to each bank will follow after the ECB sets new capital requirements and changes are made to capital, bank-failure and insolvency rules, she said.

“We want to avoid confusing the markets by saying, this is our decision this year, knowing that it will be different next year,” Koenig said. “So we take an indicative step this year. For next year, we hope that some of the dust has settled.

Eoin Treacy's view -

When reading about the increasingly high obstacle of regulation, higher and higher capital requirements for banks and stricter requirements for what constitutes Tier 1 capital I am put in mind of the adage that “generals are always fighting the last war.” These are policies that would have been appropriate before the crisis in order to mitigate risks. They represent a barrier to lending activity today that deters banks from acting as liquidity providers, regardless of where short-term interest rates are set. 



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September 22 2016

Commentary by Eoin Treacy

Email of the day on the Dollar Index

Do you think the Fed announcement will change the trajectory for the USD (DXY) heading into year end? and in turn potential provide some strength to the commodities?

Eoin Treacy's view -

Thank you for this question which may also be of interest to other subscribers. The Fed’s announcement that the economic activity is moderating suggests that the interest rate differential between the US Dollar and other major currencies like the Euro is unlikely to expand rapidly. That would suggest the rangey environment overall for the Dollar Index may continue a while longer, subject to what happens in Europe and Japan. 



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September 22 2016

Commentary by Eoin Treacy

California's legal marijuana market is on the verge of exploding

This article by Ben Gilbert for Business insider may be of interest to subscribers. Here is a section:

We're not talking about de-criminalization, or police de-prioritization.

We're talking about alcohol-style regulation and sale of marijuana to adults, age 21 and up. We're talking about legally allowed personal cultivation, state/local taxation of retail sales/distribution, and re-evaluation of sentences/records for people charged with marijuana offenses.
We're talking about outright, full-on legalization of marijuana. And in the world's sixth largest economy, that means billions of dollars. 

If California's Proposition 64 passes on November 8, and sales begin by January 1, 2018, California's looking at an additional $1.5 billion flooding into the marijuana market. That number swells to just shy of $3 billion in 2019, and nearly $4 billion by 2020, based on the latest report from New Frontier Data and ArcView Market Research.

And to be clear, that's on top of the already booming medical marijuana market — the total size of the cannabis market would reach $4.27 billion in 2018, and would grow to $6.45 billion by 2020.
The ballot initiative has overwhelming support in California: Over 60% of respondents support Prop. 64, compared to just 34% opposed, according to Ballotpedia's average of polls.

 

Eoin Treacy's view -

Evidence from companies like GW pharmaceuticals and others means that the Drug Enforcement Agency’s (DEA) assertion cannabis is a Schedule 1 narcotic with no medical use and a high probability for misuse is looking increasingly outdated. Arguments for full legalisation go a step further and promote the view cannabis is no more dangerous for consenting adults than alcohol. Considering the damage abuse of alcohol is capable of that’s not a particularly high barrier. 



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September 21 2016

Commentary by David Fuller

Yellen Rebuffs Pressure to Hike as Fed Gives Economy Room to Run

“We had a rich, deep, serious, intellectual debate about the risks and the forecasts for the economy, and we struggled mightily with trying to understand one another’s points of view,” she said.

She played down concerns that the Fed’s easy monetary stance was fueling bubbles in the financial markets and the economy. “In general, I would not say that asset valuations are out of line with historical norms,” she said.

Michael Gapen, chief U.S. economist at Barclays Plc in New York, said Yellen may be too complacent. “Historically the Fed has had problems seeing financial instability in real time,” he said.

Weak Productivity

Yellen also argued that monetary policy was not exceptionally easy, in spite of the low level of interest rates. That’s partly because slow productivity growth and an aging workforce have reduced the economy’s potential growth rate and thus its long-run equilibrium interest rate.

“Monetary policy is only modestly accommodative,” she said.

Policy makers on Wednesday lowered their estimate of the economy’s long run cruising speed to 1.8 percent from 2 percent. They also trimmed their calculation of the long-run federal funds rate to 2.9 percent from 3 percent in June.

Former Fed official Jonathan Wright backed Yellen’s decision to give the economy more leash.

“There is little risk and considerable potential benefit from running the labor market somewhat hot for a while” because it could draw more discouraged workers off the sidelines, said Wright, who is now an economics professor at Johns Hopkins University in Baltimore.

Drew Matus, deputy U.S. chief economist at UBS Securities LLC in New York and himself a former Fed official, disagreed. Yellen “might find that room to run disappears pretty quickly,” he said.

David Fuller's view -

The opening sentence above is a memorable classic, but unlikely to inspire confidence much beyond today’s relief / panic rally, fuelled a combination of renewed purchases by momentum traders and short covering by bearish speculators.   

This item continues in the Subscriber’s Area and also contains a video.



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September 21 2016

Commentary by David Fuller

Email of the day 1

On markets:

Hello David

I hope that you are keeping well.

I am looking forward to your seminal or is it secular review of stock markets as it continues?

In this regard, I would be grateful for any comments on the attached articles on companies which seem to me to share many characteristics of the autonomies or are indeed part of that grouping. I know that you are blessed with uncanny intuition which might, just, enable you to guess which fund group sent them to me.

Having regard to your recent comments about value managers turning bearish too early, do you have any thoughts as to whether you continue to prefer autonomies & other ‘high quality’ shares or value plays (other than late cycle commodities/resources which you often mention)?

Wishing you all the very best

David Fuller's view -

Thanks for this interesting email and I look forward to seeing you at our next Markets Now on 10th October.

This item continues in the Subscriber’s Area.



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September 21 2016

Commentary by David Fuller

Email of the day 2

On fat, the American Medical Association and the Heart Association:

The good old American Medical Association and the Heart Association promoted fat as the culprit....

I guess there wasn't a fat industry to pay for the untainted research....whereas the sugar guys could pay for their "research.."

High-fat cheese: the secret to a healthy life?

David Fuller's view -

Well said, and thanks for this video: High-fat cheese: the secret to a healthy life? It is at least the secret to a happier life.  I regret the misleading diet information we received for so many years, including the 1970 & 1980s, when we were told to avoid fats.  The way food industries have funded misleading ‘research projects’ is also a disgrace, and not for the first time.  Similarly, I maintain that pharmaceutical companies have spent $billions funding ‘statins for everyone’ campaigns, and still are by some accounts.

Personally, I have enjoyed a mostly Mediterranean diet for at least the last five years and it includes plenty of healthy natural fats, but very few processed foods.  You are what you eat.  



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September 21 2016

Commentary by David Fuller

Science Says Silence Is Much More Important To Our Brains Than We Think

Here is the opening of this interesting article from Lifehack:

In 2011, the Finnish Tourist Board ran a campaign that used silence as a marketing ‘product’. They sought to entice people to visit Finland and experience the beauty of this silent land. They released a series of photographs of single figures in the nature and used the slogan “Silence, Please”. A tag line was added by Simon Anholt, an international country branding consultant, “No talking, but action.”

Eva Kiviranta the manager of the social media forVisitFinland.com said: “We decided, instead of saying that it’s really empty and really quiet and nobody is talking about anything here, let’s embrace it and make it a good thing”.

Finland may be on to something very big. You could be seeing the very beginnings of using silence as a selling point as silence may be becoming more and more attractive. As the world around becomes increasingly loud and cluttered you may find yourself seeking out the reprieve that silent places and silence have to offer. This may be a wise move as studies are showing that silence is much more important to your brains than you might think.

A 2013 study on mice published in the journal Brain, Structure and Function used differed types of noise and silence and monitored the effect the sound and silence had on the brains of the mice. The silence was intended to be the control in the study but what they found was surprising. The scientists discovered that when the mice were exposed to two hours of silence per day they developed new cells in the hippocampus. The hippocampus is a region of the brain associated with memory, emotion and learning.

The growth of new cells in the brain does not necessarily translate to tangible health benefits. However, in this instance, researcher Imke Kirste says that the cells appeared to become functioning neurons.

David Fuller's view -

Silence in an attractive rural setting is therapeutic.  We ignore this at our peril if we spend all our time in cities, however exciting and glamorous they may be. 



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September 21 2016

Commentary by David Fuller

The Markets Now

Here is the new brochure for our next meeting at The Caledonian Club on Monday evening, 10th October 2016.  

September 21 2016

Commentary by Eoin Treacy

Banks Emerge as Winners From BOJ With Bonds, Yen Erasing Losses

This article by James Regan and Kelly Gilblom for Bloomberg may be of interest to subscribers. Here is a section:

The BOJ plans to maintain 10-year yields in the nation at around the current level of close to zero, it said Wednesday, giving it scope to keep loosening policy to revive growth and inflation, while limiting the negative impact on financial companies’ earnings. The BOJ faced a backlash after first deploying negative rates in January, with Governor Haruhiko Kuroda acknowledging it cut into the profits of lenders and insurers by driving long-term yields lower. Next, investors will be looking to the U.S. for any signals regarding the timing and pace of future Fed hikes, with all but four of 102 economists surveyed by Bloomberg predicting policy makers will hold off from raising interest rates.
     
“Central banks are acknowledging that excessively negative rates are damaging to bank profitability,” said Michael Hewson, a market analyst at CMC Markets in London. “There is a perception that maybe what the Bank of Japan is looking to do could be a template for the European Central Bank and potentially the Bank of England.”

Monetary authorities will continue to command attention on Thursday with speeches due from the new governor of the Reserve Bank of Australia as well as the heads of the European Central Bank and the Bank of England. In addition, central banks in countries including New Zealand, Norway and South Africa have policy decisions due that day.

Eoin Treacy's view -

The Topix Banks Index collapsed in January following the announcement of negative rates. While we might look back in a few years and wonder what on earth central banks were thinking, it is now increasingly evident that they are beginning to accept it is a bad idea. Negative rates represent a major headwind for bank profitability and are inherently deflationary, which is the exact opposite of the long-term objectives of central bank policy 



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September 21 2016

Commentary by Eoin Treacy

Self-driving vehicles in China, Europe, Japan, Korea, and the United States

This report by Darrell M. West for the Brookings Institute may be of interest to subscribers. Here is a section:

Vehicles equipped with sensors and cameras navigate the streets of Mountain View, California; Austin, Texas; Kirkland, Washington; Dearborn, Michigan; Pittsburgh, Pennsylvania; Beijing, China; Wuhu, China; Gothenburg, Sweden; Rotterdam, Netherlands; Suzu, Japan; Fujisawa, Japan; and Seoul, South Korea, among other places. Sophisticated on-board software integrates data from dozens of sources, analyzes this information in real-time, and automatically guides the car using high definition maps around possible dangers. 

People are used to thinking about vehicles from a transportation standpoint, but increasingly they have become large mobile devices with tremendous processing power.2 Experts estimate that “more than 100,000 data points” are generated by technology in a contemporary automobile.3 Advances in artificial intelligence (software that applies advanced computing to problem-solving) and deep learning (software analytics that learn from past experience) allow on-board computers connected to cloud processing platforms to integrate data instantly and proceed to desired destinations. With the emergence of 5G networks and the Internet of Things, these trends will harbor a new era of vehicle development.

Between now and 2021, driverless cars will move into the marketplace and usher in a novel period.4 The World Economic Forum estimates that the digital transformation of the automotive industry will generate $67 billion in value for that sector and $3.1 trillion in societal benefits.5 That includes improvements from autonomous vehicles, connected travelers, and the transportation enterprise ecosystem as a whole.

 

Eoin Treacy's view -

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

There are two very big questions when it comes to the viability of self- driving cars. The first is whether it is technologically feasible to let a fleet of autonomous vehicles loose on the roads where the actions of unpredictable pedestrians, animals and weather will test an artificial intelligence to the limit. The second is the extent to which governments will successfully regulate for these vehicles so that insurance considerations can be ameliorated. 



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September 21 2016

Commentary by Eoin Treacy

Gold Seen Entering Long-Term Bull Cycle as Asset Bubbles Pop

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

Parrilla joins a slew of investors who are bullish on gold because of low borrowing costs and central-bank bond buying. Billionaire bond-fund manager Bill Gross has said there’s little choice but gold and real estate given current bond yields, while Paul Singer, David Einhorn and Stan Druckenmiller have all expressed reasons this year for owning the metal.

Some are not confident prices will rise. The probability of three rate hikes through end-2017 means there’s little room for rallies, according to Luc Luyet, a currencies strategist at Pictet Wealth Management. Cohen & Steers Capital Management, which oversees $61 billion, has pared its gold allocation, while investor Jim Rogers said after the Brexit vote in June that he’d rather seek a haven in the dollar than bullion.

While global bond yields are still very low, they’ve been rising. Yields have climbed to 1.21 percent from a record low 1.07 percent in July, according to the Bloomberg Barclays Global Aggregate Index in data going back to 1990. The odds of the Fed hiking in December have risen to 58 percent after the U.S. reported higher-than-expected inflation in August, from just below 50 percent on Thursday.

 

Eoin Treacy's view -

Despite the fact precious metal prices have been in a reaction and consolidation for the last few months, the biggest bulls are unabashed because they don’t see a solution to how central banks can support growth while simultaneously reducing the debt mountain without the assistance of inflation which could involve helicopter money. 



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September 21 2016

Commentary by Eoin Treacy

September 20 2016

Commentary by David Fuller

How Women Won a Leading Role in China Venture Capital Industry

My thanks to a subscriber for this fascinating article by Shai Oster and Selina Wang for Bloomberg.  Here is the opening:

The largest venture capital fund ever raised by a woman isn’t in Silicon Valley or even the U.S. It's in Beijing and is run by a former librarian who keeps such a low profile that she’s a mystery in her native China. Chen Xiaohong rarely attends industry conferences or events. She hadn’t given a media interview in more than a decade until agreeing to break her silence this summer. “I don’t like being part of a club,” said Chen during a four-hour discussion at her firm's headquarters. “I believe in staying independent, making your own decisions.”

Chen, 46, is part of an unusual group of female investors who have risen to the top of the venture business in China and helped fuel the country’s technology boom. They’ve backed some of China's most successful startups and their influence is growing as they raise more money, recruit other women and seed the next generation of technology companies.

Chen and her peers have become part of the mainstream in China in a way that's proven elusive in the U.S. American venture firms have faced accusations of sexism and discrimination for years, including in an unsuccessful lawsuit filed by a female partner against storied Kleiner Perkins Caufield & Byers. Despite the criticism, the firms have made little progress in promoting women. Among the top U.S. venture firms, women make up about 10 percent of the investing partners and only half of the firms have any women of that rank. China is already more balanced: About 17 percent of investing partners are female and 80 percent have at least one woman.

An increasing number, like Chen, lead their firms. Kathy Xu is founder of Shanghai's Capital Today Group, which has $1.2 billion under management and was an early backer of the e-commerce company JD.com Inc. Anna Fang is CEO of ZhenFund, one of the most influential angel investors in China. Ruby Lu, Chen’s partner at her firm H Capital until this month, previously co-founded the China business for DCM Ventures. 

Their success is bringing more women into China's technology industry. The Chinese government estimates females found 55 percent of new Internet companies and more than a quarter of all entrepreneurs are women. In the U.S., only 22 percent of startups have one or more women on their founding teams, according to research by Vivek Wadhwa and Farai Chideya for their book ‘Innovating Women: The Changing Face of Technology.’ 

Chen and her colleagues are building on a tradition of opportunity for women in China that dates back to before the days when Mao Zedong declared they held up “half the sky.” Women worked out of necessity in fields and factories when the country was poor, and fought alongside men during the country's civil war. By comparison, collaborating in an office is simple. Lu’s mother, who served in the People’s Liberation Army, laughed when she heard about her daughter’s diversity training at Goldman Sachs Group Inc. “She said ‘That’s ridiculous. What’s your job got to do with women or men?’ ”

The country is hardly free from discrimination. Men still hold most positions of power in politics and business, and there's plenty of crude sexism in technology. But China has quietly become one of the best places in the world for women venture capitalists and entrepreneurs. Chen raised a new $500 million fund, the biggest ever by a woman, according to Preqin, and increased her assets under management to about $1 billion. The largest women-led fund in the U.S. was about half that size, according to Preqin’s data.

“China is fundamentally different,” said Gary Rieschel, an American who founded the China-based Qiming Venture Partners, where four of the nine investing partners are female. “The venture capital industry in the U.S. has been a private men’s club. It has been much more of a meritocracy for women in China.” 

David Fuller's view -

This speaks well for China and its long-term economic potential – an important point given its current problems in the transition from a predominantly manufacturing based developing economy, to the developed economic model led by consumer industries. 

Veteran subscribers may recall my comments over the years that one could predict the long-term potential of economies by the emancipation of their women.  After all, they hold up “half the sky”, which is surely one of Chairman Mao’s more sensible quotes. 

Countries which subjugate their women, no matter how it is rationalised, are invariably hampering their economic and social development.  It should be an obvious point as women are half the population and educated women have the additional advantage of emotional intelligence. 

How will China resolve its current economic problems?

This item continues in the Subscriber’s Area.   



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September 20 2016

Commentary by David Fuller

Theresa May has Called a Wall Street Summit to Reassure US Banking Giants in the Aftermath of Brexit

Prime Minister Theresa May is to go on a charm offensive with US banks, holding a summit with some of the biggest institutions in a bid to reassure them over potential repercussions of Britain's vote to leave the EU.

Wall Street heavyweights invited to attend the special summit later today include JP Morgan Chase investment banking chief executive Daniel Pinto, Blackrock chief executive Larry Fink, Goldman Sachs chief financial officer Harvey Schwartz and Morgan Stanley president Colm Kelleher.

It is understood that the American executives want assurances that the rights of their employees based in Britain will be protected once the UK leaves the EU.

The prime minister, who is attending the United Nations General Assembly in New York, has sought to meet them amid concerns that they could be preparing to move their European headquarters out of the UK in the wake of the Brexit vote.

She has also invited the likes of technology behemoths Amazon and IBM, as well as bosses from engineering firms Aecom and United Technologies, and Sony Pictures. Several of these firms are currently engaged in large inward investment into the UK.

The meeting will represent the government's first major interaction with US investors since May came to office earlier this summer.

As well as seeking to reassure the Wall Street giants, May is holding a trade and investment event where she is hoping to encourage around 60 “current and expanding” firms to boost their investment in the UK.

Foreign secretary Boris Johnson is also expected to hold a meeting with business representatives on Wednesday.

Tonight, May also addressed the United Nations General Assembly, where she sought to build a global consensus on measures to tackle human trafficking, as well as entering talks on migration where she defended the right to limit the movement of people.

"We need to be clear that all countries have the right to control their borders and protect their citizens and be equally clear that countries have a duty to manage their borders to reduce onward flows of illegal and uncontrolled migration," May said.

David Fuller's view -

This is very positive, essential work by the PM, not least as only she can really speak for Britain today.  I am sure she will be effective. 

Theresa May also has the intelligence and strength of character to negotiate effectively with the EU.  Unlike her predecessor, the message will not be a version of: I want to stay in the EU but please give me some concessions so that I can gain support at home.    

Instead, I think she will make it very clear that Britain will accept nothing less than favourable terms for Brexit, which will also be in the EU’s interests.  This will only be considered if Angela Merkel understands that the UK is prepared to walk away from the European single market, without further negotiations or delay.  

Behind Europe’s angry bluster, the reality is that the EU needs the UK more than the UK needs the EU.  Mrs Merkel will lose further political support if German businesses find that they have to renegotiate trade terms with a UK that has already withdrawn from the EU.  Nevertheless, she may decide to accept this risk, if only for the sake of consistency, knowing that she is near the end of her career.

The biggest risk for the UK, including the Conservative Party, would be the unproductive masochism of a tortuous and expensive multi-year negotiation, with a destructive organisation determined to deter others from abandoning its sinking ship.  



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September 20 2016

Commentary by David Fuller

Email of the day

On the EU and Islam:

From your comment yesterday: “The EU is a club which European democracies can join, but apparently not leave of their own free will when the rules change, as they certainly have.” 

It just struck me that this is similar to Islam in that you are encouraged to join, required not to question and to subsume personal freedom to the will of the Almighty and woe be onto him who turns to apostasy. Little wonder they are welcoming in millions of Middle Eastern migrants with wide open arms. 

David Fuller's view -

Thanks for your original comparison, which is certain to amuse and appal subscribers, as it did for me.   



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September 20 2016

Commentary by David Fuller

The Markets Now

Here is the new brochure for our next meeting at The Caledonian Club on Monday evening, 10th October 2016.  

David Fuller's view -

I look forward to seeing another friendly and interesting group of subscribers, at this event, and bring along any spouses, relatives or colleagues who would enjoy an evening in the genteel Caledonian Club.  These are unusual times in the markets so we should also have some interesting discussions, not least over refreshments following the three presentations.  



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September 20 2016

Commentary by Eoin Treacy

Banks Are Now Too Scared to Even Make Money

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

In both cases, those shifting money across borders want to avoid foreign exchange risk, so they hedge using basis swaps. These involve swapping yen or euros in exchange for dollars, which will be swapped back at the end of the contract at the forward rate, typically a year or more later. Meanwhile they pay each other interest at the Libor rate for their currency, plus (or minus) the basis, which moves with demand.

Without banks willing to take the other side of the trade, the basis has blown out to levels usually only seen when the financial system is in meltdown, as in 2008-9 after Lehman or in 2011-2 as the euro seemed to be failing.

Most investors care as much about basis swaps as they do about cash-settled butter futures, but the shifts in the basis have already had highly visible effects. U.S. companies now have little reason to issue bonds in euros, because the basis cost has risen so much it almost entirely offsets the benefit of issuing at a lower yield in Europe. Japanese investors have no reason to buy U.S. Treasurys, as the extra yield they earn would all be eaten up by the basis when they hedge.

In short, the world’s banks aren't doing what they should be doing to grease the flows of money between countries. They’re too regulated and too scared of the risks, slight as those are.

We should welcome the fact that banks now try to price such risks, rather than the precrisis practice of simply ignoring them, but perhaps they are going too far the other way.

 

Eoin Treacy's view -

The reorientation of the money markets funds sector due to take place on October 14th has been a contributing factor in the uptick in LIBOR rates seen over the last couple of months. As the above article highlights it is not the only factor. 

Cross Currency Basis Swaps represent one of the most expedient ways of hedging currency exposure to interest rates and therefore are a hedged carry trade. LIBOR rates breaking out may be considered one of the unintended consequences of negative interest rates. 

 



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September 20 2016

Commentary by Eoin Treacy

Tesla Wins Massive Contract to Help Power the California Grid

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

Tesla Motors Inc. will supply 20 megawatts (80 megawatt-hours) of energy storage to Southern California Edison as part of a wider effort to prevent blackouts by replacing fossil-fuel electricity generation with lithium-ion batteries. Tesla's contribution is enough to power about 2,500 homes for a full day, the company said in a blog post on Thursday. But the real significance of the deal is the speed with which lithium-ion battery packs are being deployed. 

"The storage is being procured in a record time frame," months instead of years, said Yayoi Sekine, a battery analyst at Bloomberg New Energy Finance. "It highlights the maturity of advanced technologies like energy storage to be contracted as a reliable resource in an emergency situation."

 

Eoin Treacy's view -

Tesla is essentially a battery company which also happens to produce electric cars. It has been my argument for quite some time that the only way solar can achieve grid parity is if it is used in conjunction with batteries. As long as solar power is subject to intermittency which forces utilities to maintain excess capacity it will not be taken seriously as a viable alternative to fossil fuels. 



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September 20 2016

Commentary by Eoin Treacy

Performance and valuations of junior gold companies

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

As shown in Exhibit 1, the GDXJ index of smaller cap gold companies (up 129% YTD) is holding near highs of the year despite a recent pull back in the gold price, and since May has outperformed the GDX index of larger cap names, which has risen by 89% YTD. Similarly, junior gold companies we track are currently trading at an average EV/oz valuation of $64/oz versus the YTD high of $74/oz seen in mid- August, the highest level since the $70/oz observed in 2011 and well above the $20–30/oz range of the 2013–2015 trough (Exhibit 2). We believe these valuations are in part due to a scarcity of higher quality gold projects, and we would expect a pick-up in M&A activity and the junior gold companies to continue to post strong relative returns during the remainder of 2016.

Eoin Treacy's view -

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

Precious metal prices have been confined to a reaction and consolidation, of this year’s impressive early gains, for the last few months with many instruments having already completed reversions to the mean. With the Fed and BoJ meetings tomorrow it is reasonable that investors are not rushing to initiate long positions with so much debate about what exactly central banks have planned and the headwind higher rates would pose for precious metal related instruments. 



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September 20 2016

Commentary by Eoin Treacy

The Andalusian 2016 World Cup

Eoin Treacy's view -

This event showcasing the skill and grace of Lusitanos (Iberian horses) in a display of working equitation at South Point in Las Vegas takes place on the 23rd. If you would like to attend this event, as my  and Nevada Trust Company’s guest please RSVP to [email protected]



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September 19 2016

Commentary by David Fuller

Earnings Miracle Needed to Get S&P 500 Values Out of Clouds

The Federal Reserve is looking for any excuse to raise interest rates, global growth is slowing, and yet stock analysts are predicting the fastest earnings expansion since the bull market began. They better be right.

Hitting forecasts for next year would require S&P 500 Index companies to increase profits by 13 percent, something that hasn’t happened since 2011. Failing to do so would risk inflating equity valuations that at 20 times annual income are already the highest since the financial crisis.

While the confidence of analysts helps explain the stock market’s resilience, such profit growth is lately the one thing investors have been conditioned not to expect. They’ve just endured a five-quarter stretch where every prediction for higher earnings fell apart just as reporting season arrived.

“You’d have to have a lot of things working in unison to achieve that number, a lot of things would have to go correctly,” Peter Andersen, chief investment officer at Fiduciary Trust Co. in Boston, said by phone. His firm manages more than $11 billion. “You’ll have areas where growth will be quite strong, like certain technology areas, but other industries like financials will never have that kind of growth through 2017.”

While the U.S. equity market has sidestepped threats in the past ranging from Europe’s sovereign-debt crisis to the prospect of a government shutdown, it’s had much less success thriving in the absence of expanding earnings. Through 2014, both the price of the S&P 500 and the annual income of its members posted six consecutive years without a decline -- but that ended in 2015, when the index slipped 0.7 percent and profits dropped 3.1 percent.

The trend has worsened in 2016, with annual income earned by companies in the S&P 500 falling to $106 a share last quarter from a high of $113 in September 2014. Quarterly profits in the S&P 500 are headed for a sixth straight decline in the third quarter, matching the longest earnings recession on record, according to data compiled by Bloomberg.

Wall Street analysts have continued to push back the turning point. A survey of estimates as recently as July pointed to S&P 500 companies returning to profit growth in the third quarter of this year. Those same analysts now see a decline of 1.4 percent.

Hope springs eternal for the fourth quarter and analysts still predict annual income will increase 10 percent from now to $117 per share by the end of 2016. The projected expansion for the next 12 months is even loftier: to get to $124 a share at this point next year, profits would have to expand another 16 percent, a rate of growth that is twice the historical average.

David Fuller's view -

Well, they would say that wouldn’t they, to paraphrase Mandy Rice-Davies, if they and their clients are enjoying the benefits of a rising stock market. 

This item continues in the Subscriber’s Area and includes an informative video.



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September 19 2016

Commentary by David Fuller

The EU Still Has Not Understood That it is a Totalitarian Institution

Here is the opening and also the memorable final paragraph of this informative column from Janet Daley of the Sunday Telegraph:

There you have it: a perfect summary of the European Union philosophy. In comments which were presumably made without embarrassment, a clutch of senior EU officials last week provided the Telegraph with a concise summing up of how this thing works. The UK, they said, will be forced to give up on Brexit when faced with “the bureaucratic nightmare” in which it will be entrapped by the most vindictive (sorry, the toughest) negotiations that could be devised.

If I hadn’t long passed the point of being shocked, I would find this breathtaking. Here it is, laid out in the most blithe, confident terms: the shameless contempt for a clear expression of democratic will, and the blatant use of the power of an unelected bureaucracy to undermine the intentions of a national government. Not to mention the utter, imperturbable belief in their own righteousness which justifies what might seem to the benighted oiks who think there is some sort of virtue in self-government, like an outrage.

And:

When some future Gibbon comes to chronicle the decline and fall of this modern European empire, it will be clear enough what went wrong: they enforced uniformity instead of trying to understand difference, and in the end, they revived exactly the hateful forces they had hoped to extinguish.

David Fuller's view -

The EU is a club which European democracies can join, but apparently not leave of their own free will when the rules change, as they certainly have. 

This additional article: Elected, yet strangely unaccountable, from The Economist provides further insights.   

A PDF of Janet Daley’s article is in the Subscriber’s Area.



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September 19 2016

Commentary by David Fuller

Email of the day 1

On “Are Risks Increasing or Decreasing for Stock Markets”:

September 19 2016

Commentary by David Fuller

Email of the day 2

On the Hinkley Point decision:

I was shocked to read that Theresa May had agreed to go ahead with Hinkley Point. Electricity is highly likely be available at a small fraction of the cost from other clean sources for the lifetime of this white elephant. And reports of construction delays, massive cost increases, and safety concerns at EDFs other construction sites are troubling. We taxpayers are being lumbered with a big bill far into the future. And UK industry will be lumbered with high energy costs and reduced competitiveness. This is the kind of decision-making I had hoped we would escape on leaving the EU (if we do!)

David Fuller's view -

Well said, and thanks for your thoughts. This was obviously a political rather than an economic decision. I believe Ambrose Evans-Pritchard had said Mrs May had no choice. I do not know all the background facts so I do not want to be too critical but Mrs May found herself in an invidious position over Hinkley Point, which she had not created.



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September 19 2016

Commentary by David Fuller

The Markets Now

Here is the new brochure for our next meeting at The Caledonian Club on Monday evening, 10th October 2016.  

David Fuller's view -

I look forward to seeing another friendly and interesting group of subscribers, at this event, and bring along any spouses, relatives or colleagues who would enjoy an evening in the genteel Caledonian Club.  These are unusual times in the markets so we should also have some interesting discussions, not least over drinks following the three presentations.  



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September 19 2016

Commentary by Eoin Treacy

Long-Term Asset Return Study An Ever Changnig World

This report from Deutsche Bank adopting a Eurocentric approach to global growth may be of interest to subscribers. Here is a section: 

We don’t think it’s a coincidence that asset prices were historically very depressed in 1980 (see Figure 2) and arguably at all time lows in valuation terms. 35 years later and traditional asset valuations in major DM countries have never been higher due to the themes unique to the 1980-present day period.

Extraordinary central bank buying of assets post the global financial crisis has obviously contributed to high asset prices in recent years but the reasons they have had to intervene also stems from the trends originating around 1980 that will be further discussed in this report. 

Another related feature of the post 1980s landscape has been 'globalisation'. Economic activity across the planet has become more integrated as the heavy protectionism that started in the inter-war period and the heavy financial repression/regulation following WWII were swept away. Globalisation has also caused great upheaval in many of the largest developed countries on the planet with many of these themes coming to a head in recent years. 

Income inequality has been a big consequence of globalisation, not necessarily at a global scale but within individual countries as the gains have not been evenly distributed. The chart that perhaps reflects this better than any other is the so called 'elephant' graph (Figure 15) constructed by Lakner and Milanovic which has become a popular addition to the academic economic literature in recent times.

Eoin Treacy's view -

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

There are very obvious challenges faced by Europe that look increasingly likely to be resolved in a messy fashion as a result of a some political upheaval with the rise of populism in a number of Eurozone countries. The increasing activism of a significant cohort of disenfranchised voters who favour populist solutions represents a significant threat to the status quo. With elections in the USA, Germany, France and Italy all scheduled within the next 12 months there is ample potential for additional bouts of volatility. 



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September 19 2016

Commentary by Eoin Treacy

Taiwan Stocks Jump Most in a Year as Apple Suppliers Lead Surge

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

Taiwanese shares jumped the most in a year amid speculation Apple Inc.’s latest iPhone model will prove popular, boosting earnings for the island’s suppliers.

The Taiex index advanced 2.8 percent at the close, its biggest gain since September 2015. Taiwan Semiconductor Manufacturing Co., a major Apple supplier, posted its biggest gain in a year, while Hon Hai Precision Industry Co., the main assembler of iPhones, added 3.9 percent. Apple has jumped 6.5 percent since Taiwan’s markets last traded on Wednesday amid holidays. The island’s dollar strengthened by the most since Aug. 1 against the greenback.

“It’s the Apple story again,” said Michael On, president of Beyond Asset Management in Taipei. “There’s a revived optimism that Apple will increase orders for Taiwanese suppliers after better-than-expected sales of the iPhone 7.”

T-Mobile US Inc. and Sprint Corp. said they’d received almost four times as many orders for the iPhone 7 as previous models, fueling speculation that the new product is off to a faster start than usual. Expectations for the iPhone 7 line had been muted before it was unveiled in San Francisco this month amid slowing growth in global smartphone sales.

 

Eoin Treacy's view -

As the world’s largest company Apple outsources all of its manufacturing which means it has a vast ecosystem of suppliers that are responding favourably to the release of the company’s new products as well as to the relative difficulties being experienced by Samsung. 



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September 19 2016

Commentary by Eoin Treacy

SunEdison's TerraForm Units Both Say They're Seeking Buyers

This article by Tiffany Kary and Christopher Martin for Bloomberg may be of interest to subscribers. Here is a section:

Multiple companies have expressed interest in TerraForm Power. Golden Concord Holdings Ltd., a Chinese clean-energy group, is planning to bid for SunEdison’s controlling stake in the company, people familiar with the plans said in August. That would challenge a joint offer from Canada’s biggest alternative- asset manager, Brookfield Asset Management Inc., and billionaire David Tepper’s Appaloosa Management LP hedge fund.

TerraForm Power said in August that it was considering plans to set up an auction to sell itself, according to people familiar with the matter. SunEdison, which has been selling off assets in Chapter 11, said earlier this month that it had reached an agreement with the two non-bankrupt yieldcos over when and how they would bring claims as part of the bankruptcy.

The process may not lead to a deal, according to Swami Venkataraman, an analyst at Moody’s Investors Service.

If the bids “highly undervalue” TerraForm Power and its assets, “they may choose to operate as an independent company for some time,” Venkataraman said in an e-mail Monday.

The case is SunEdison Inc., 16-10992, U.S. Bankruptcy Court, Southern District of New York (Manhattan)  

 

Eoin Treacy's view -

SunEdison’s financial engineering resulted in the company’s bankruptcy with the yieldcos into which it poured all of its productive assets are now the subject of investor interest. For companies seeking to pick up clean energy assets at a discount in order to benefit from the cash flows they throw off and/or to bolster their green credentials Terraform Power and Terraform Global represent potentially attractive targets. 



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September 16 2016

Commentary by Eoin Treacy

How the sugar industry bought out scientists for decades, and how to stop it from happening again

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

According to a report just published in the Journal of the American Medical Association, a delegation from the Sugar Research Foundation paid off Harvard scientists to produce reports that falsely downplayed the role of sugar in coronary heart disease.

Yep. Sugar contributes to coronary artery disease, more than we have been led to believe.
Reports had linked both dietary sugar and dietary fat to heart disease as early as the mid-50s; by 1960 we knew that low-fat diets high in sugars still resulted in high cholesterol levels. So in 1964, the director of the SRF proposed that the group “embark on a major program” to dispute the data as well as any “negative attitudes toward sugar.” They found a group of Harvard nutrition scientists who would take their money, and started making plans.

Complete with a codename, Project 226 was designed to protect the interests of the sugar industry by “recapturing” the 20% of American calorie intake they expected to lose once this whole sugar-isn’t-great-for-your-heart thing percolated through into public awareness. It resulted in a two-part review published in the prestigious and influential New England Journal of Medicine, which hand-waved away huge swathes of research pointing out the risks of dietary sugar.

The authors went to absurd lengths to discount studies that didn’t tell the story the Sugar Research Foundation wanted to tell. For example, to get the results they wanted, they had to throw out all the studies done on animals, because not a single animal study supported the conclusion they wanted. But after they finished their work, they reported that epidemiological studies showed a positive association between high dietary sugar consumption and better heart disease outcomes. The review concluded that there was “no doubt” that the only way to avoid heart disease was to reduce saturated fat.

How did this get past the sanity check at NEJM? The authors were experts, respected in their fields, and they were at least consistent cherry-pickers. They also conveniently failed to report that the Sugar Research Foundation funded their “study.” NEJM didn’t start requiring authors to report conflicts of interest until 1984, and by then the sugar industry had floated comfortably on their 1964 precedent, funding study after study supporting their pro-sugar narrative “as a main prop of the industry’s defense.”

Nobody knows how many reviewers they paid to endorse the conclusions of their faux science.

 

Eoin Treacy's view -

The role of sugar in contributing to coronary heart disease is now being hotly investigated as consumers become progressively more involved in controlling their nutrition. Inflammation is the new buzz word and the fact that pursuing a diet where processed sugars are limited results in a trimmer figure and lower cholesterol is an additional incentive for many. The sugar lobby has been enormously successful in avoiding the kind of health warnings that have been imposed on the tobacco sector. However it is looking increasingly likely the tide is turning; in the West at least. 



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September 16 2016

Commentary by Eoin Treacy

Delivering Alpha Conference Notes 2016: Singer, Dalio, Chanos, Miller & More

Thanks to a subscriber for this list of quotes from the recent CNBC & Institutional Investor’s Delivering Alpha Conference. Here is a section:

Jim Chanos (Kynikos Associates):  Still short Alibaba (BABA), says they're "buying anything that's for sale, just burning cash."  He's also still short Tesla (TSLA) and SolarCity (SCTY).  Says the two companies combining basically puts TSLA on a path to potential bankruptcy.

And

Barry Sternlicht (Starwood):  Real estate in New York City is "a disaster" with rents at the high-end down 15%.  Noted the problem many investors face: "you have to invest in something, you can't just sit in cash."  On Tesla, says he loves the car but would probably be short the company.  Questioned Pinterest's valuation, arguing it seemed like a lot of money for a bulletin board.  Said Doppler Labs could be like the next Oculus Rift.

Mary Erdoes (JPMorgan):  "They're called crowded trades when they don't work and momentum trades when they do work."  Says it's time to weed out the stock pickers who aren't the best.  

 

Eoin Treacy's view -

Tesla produces cars many people aspire to own which is a major accomplishment for the USA’s first new car company in a century. However the company is under pressure to continue to accelerate the pace of innovation to help justify its aggressive valuation. 



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September 16 2016

Commentary by Eoin Treacy

Deutsche Bank to fight $14 billion demand from U.S. authorities

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

Deutsche Bank (DBKGn.DE) said it would fight a $14 billion demand from the U.S. Department of Justice to settle claims it missold mortgage-backed securities, a shock bill that raises questions about the future of Germany's largest lender.

The claim against Deutsche, which is likely to trigger several months of talks, far exceeds the bank's expectations that the DoJ would be looking for a figure of only up to 3 billion euros ($3.4 billion).
The demand adds to the problems facing Deutsche Bank's Chief Executive John Cryan, a Briton who has been in the job for a year.

The bank only scraped through European stress tests in July and has warned it may need deeper cost cuts to turn itself around after revenue fell sharply in the second quarter due to challenging markets and low interest rates.

 

Eoin Treacy's view -

The repercussions of the housing bubble that accompanied lax, or indeed no, lending standards in the USA which climaxed in the credit crisis continue to rattle through the courts. However I wonder does anyone else see a similarity in the fine handed down to Deutsche Bank with that handed down to Apple by the EC. Both are in the region of $14 billion and represent punitive reprisals from governments expressing frustrations against foreign rather than domestic owned companies. 



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September 16 2016

Commentary by Eoin Treacy

Essence of Decision

This article by Ben Hunt for Epsilon Theory may be of interest to subscribers. Here is a section:

It’s always really tough to predict one equilibrium over another as the outcome in a multi-equilibrium game, because the decision-making dynamic is solely driven by characteristics internal to the group, meaning that there is ZERO predictive value in our evaluations of external characteristics like Taylor Rule inputs in 2016 or US/Soviet nuclear arsenals in 1962. (I wrote about this at length in the context of games of Chicken, like Germany vs. Greece or the Fed vs. the PBOC, in the note “Inherent Vice”). But my sense — and it’s only a sense — is that the “Hike today and then delay” equilibrium is a more likely outcome of the September meeting than “No hike today and then no more delay”. Why? Because it’s the position both a hawk like Fischer and a dove like Bullard, both of whom are high-reputation members, would clearly prefer. If one of these guys stakes out this position early in the meeting, such that “Hike today and then delay” is the first mover in establishing a “gravitational pull” on other members, I think it sticks. Or at least that’s how I would play the game, if I were Fischer or Bullard.

Eoin Treacy's view -

This represents an interesting perspective on the bureaucratic and institutional psychology of the Fed. Considering how much political capital has been expended on pursuing extraordinary monetary policy the decision to hike rates is a major endeavour on all fronts. 



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September 15 2016

Commentary by David Fuller

Bond Yields Are Surging Despite Deflation, and that is Dangerous

The growth rate of nominal GDP in the US has fallen to 2.4pc, the lowest level outside recession since the Second World War.

It has been sliding relentlessly for almost two years, a warning signal that underlying deflationary forces may be tightening their grip on the US economy.

Given this extraordinary backdrop, the violent spike in US and global bonds yields over the last four trading days is extremely odd. It is rare for AAA-rated safe-haven debt to fall out of favour at the same time as stock markets, and few explanations on offer make sense.

We can all agree that oxygen is thinning as we enter the final phase of the economic cycle after 86 months of expansion. The MSCI world index of global equities has risen to a forward price-to-earnings ratio of 17, significantly higher than on the cusp of the Lehman crisis.

"We think that too much complacency has crept in," says Mislav Matejka, equity strategist for JP Morgan.

"After seven years of having a structural overweight stance on global equities, we believe the regime has fundamentally changed. We think that one should not be buying the dips any more, but use any rallies as selling opportunities," he said.

The correlation between bonds and equities has reached unprecedented levels, and that has the coiled the spring. The slightest rise in yields now has a potent magnifying effect across the spectrum of assets. Hence the angst over what is happening to US Treasuries.

Yields on 10-year Treasuries - the benchmark borrowing cost for international finance - have jumped 19 basis points to 1.72pc since the middle of last week. The amount of global government debt trading at rates below zero has suddenly fallen from $10 trillion to $8.3 trillion, with parallel effects for corporate bonds.

You would have thought that inflation was picking up in the US and that the Fed was about to slam on the brakes, but that is not the case. The markets are pricing in a mere 15pc chance of a rate rise next week, and the figure has been falling. 

If anything, the US inflation scare has subsided. There were grounds for worrying earlier this year that Fed would have to act. In February, core CPI inflation was steaming ahead at a rate of 2.9pc on a three-month annualized basis. This has since dropped back to 1.8pc. Other core measures are lower.

David Fuller's view -

The rise in 10-year government bond yields is definitely a warning short across the bows for investors (see also my review of these markets on Tuesday 13th September). 

However, while I would not minimise the risks, there are some reasons for the sharp rise in government bond yields, which subscribers may wish to consider.

This item continues in the Subscriber’s Area, where a PDF of AE-P's article is posted.



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September 15 2016

Commentary by David Fuller

Are Risks Increasing or Decreasing for Stock Markets?

David Fuller's view -

Perceptions will vary among investors but in terms of the overall crowd consensus, extreme optimism is a well-known contrary indicator.  It occurs when investors are fully long, making money and talking their book, and no one is more bullish than a converted bear.  Their heroes will be those who are long and leveraged, and making the most money while the market is still rising.  Value investors will be temporarily viewed as contrary indicators because they turn bearish too early during manias.  

Conversely, extreme pessimism is evident following a crash, and there is no one who is more bearish than a recently converted bull.  The last thing they want is the double humiliation of hanging on grimly before finally throwing in the towel and selling, only to see the market rally sharply.  Their heroes will be the super-bears forecasting Armageddon.  Value investors will be temporarily viewed as contrary indicators because they turned bullish too early during the panic.

Where are we today in terms of overall market sentiment?

This item continues in the Subscriber’s Area.     



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September 15 2016

Commentary by David Fuller

Hinkley Point C: Prioritising the Politically Sexy Over the Economically Rational is a Waste of Money

Here is the opening of this article by Tom Welsh for City A.M:

The new nuclear plant at Hinkley Point, which has finally been approved by EDF’s board, will be the most expensive power station anywhere in the world. Beset by delays (first proposed in 2006, it was meant to come online in 2017), it won’t be operational until 2025 and EDF will still receive its enormous £30bn subsidy even if Hinkley generates nothing until 2029.

Some were hoping the new government would junk the project and instead shore up UK energy security by incentivising a constellation of lower-cost, smaller schemes. But despite the unexpected delay in approving the scheme, the signs are that the energy secretary will persist with George Osborne’s nuclear folly, locking consumers into massively higher prices for decades.

Hinkley highlights a significant problem with Theresa May’s renewed focus on industrial strategy, essentially a greater role for the state in guiding the economy. Politicians will pursue schemes beyond the limits of reason, first, because they’re betting with other people’s money, but also because of a lack of imagination about the alternatives and a hope that the prestige of such grand projects will somehow rub off on them.

David Fuller's view -

I am disappointed with the Hinkley Point approval, not because of China’s involvement or the French EU connection, but because everything that we have seen so far with similar projects on Finland’s Olkiluoto Island and France’s own Flamanville project on the Cotentin Peninsula, has been woeful to date, including absurdly expensive. 

(See: Britain Should Leap-Frog Hinkley and Lead 21st Century Nuclear Revolution, plus my comments)



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September 15 2016

Commentary by David Fuller

September 15 2016

Commentary by David Fuller

The Markets Now

Here is the new brochure for our next meeting at The Caledonian Club on Monday evening, 10th October 2016.  

David Fuller's view -

I look forward to seeing another friendly and interesting group of subscribers, at this event, and bring along any spouses, relatives or colleagues who would enjoy an evening in the genteel Caledonian Club.  These are unusual times in the markets so we should have some interesting discussions, not least over drinks following the three presentations.  



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September 15 2016

Commentary by Eoin Treacy

U.S. Stocks Rise on Apple Rally as Oil Advances; Bonds Mixed

This article by Oliver Renick and Jeremy Herron for Bloomberg may be of interest to subscribers. Here is a section: 

U.S. stocks rose from a two-month low as Apple Inc. extended a rally, while a rebound in crude boosted shares of energy producers. The selloff in longer-dated bonds eased amid data showing the American economy is on uneven footing.

The S&P 500 Index jumped as Apple pushed its four-day gain past 11 percent. The index slipped toward its 100-day moving average before pushing higher as the level held for a fourth day. Industrial production contracted more than forecast and retail sales unexpectedly slid, sending the odds for a rate increase next week below 20 percent. The dollar was little changed after initially turning lower on the sales data.

Sterling slid after the Bank of England said another rate cut this year is possible. Oil erased gains to fall back below $44 a barrel. 

Equities continued to whipsaw investors after Friday’s rout jolted markets from a two-month torpor and wiped almost $2 trillion in value from stocks amid concern that central banks would deliver smaller doses of stimulus even as the global economy sputters along. Apple’s advance has buttressed U.S. equity indexes, as consumers snapped up the new iPhone model.

 

Eoin Treacy's view -

Apple still has the world’s largest market cap at $620 billion so its underperformance over the last year has represented a drag on the wider market. In fact the drag has been compounded by the impact Apple’s decline in sales growth has had on its suppliers. 



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September 15 2016

Commentary by Eoin Treacy

September 15 2016

Commentary by Eoin Treacy

Obama Lifts Myanmar Sanctions as Suu Kyi Visits White House

This article by Chris Blake and Toluse Olorunnipa for Bloomberg may be of interest to subscribers. Here is a section:

President Barack Obama said he would lift economic sanctions on Myanmar after meeting at the White House on Wednesday with the country’s de facto leader, Aung San Suu Kyi, a former political dissident whose government took power in March.

"The United States is now prepared to lift sanctions that we have imposed on Burma for quite some time. It’s the right thing to do," Obama said after the meeting, calling the country’s ongoing transition to democracy a "good news story."

U.S. companies have been watching closely for any sign they’ll get more access to the fast-growing Southeast Asian nation, known as Burma before its former military rulers changed the name to Myanmar in 1989. Business groups in the U.S. have complained that sanctions hinder them from competing with major rivals in an economy that the Asian Development Bank projects will expand 8.4 percent this year and 8.3 percent in 2017, making Myanmar Asia’s best performer.

"We are very interested in successful businesses" entering Burma, Suu Kyi said after the White House meeting. "We think our country is ready to take off."

She said that U.S. sanctions helped drive the country’s military junta to surrender power, but that the time had come to lift them.

 

Eoin Treacy's view -

Myanmar is a resource rich country with a number of unique attributes not least in jadeite, rubies and rosewood in additional to oil and gas. With a clear trend of improving governance the argument for dropping sanctions and internationalising the economy is a compelling one not least as the US needs as many allies in the region as it can get. 



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September 14 2016

Commentary by David Fuller

Sir James Dyson Exclusive: I Would Trigger Brexit Now, and Negotiate Trade Deals Over Time

Here is the opening of this fascinating interview with one of the contemporary world’s most successful inventors, conducted by Alan Tovey for The Telegraph:

Sir James Dyson leans back in his chair, places his hands behind his head and looks out through the glass wall of his office, out across the huge open-plan interior of his company’s Wiltshire headquarters.

He’s considering the referendum result, having campaigned for Britain to leave the European Union.

“I thought it would be very close,” he says, his voice languid. “But I had absolutely no idea. In a way, I thought I was supporting the losing side, but I thought our arguments were better – and ultimately I was proved right.”

It’s the first time he has spoken since the Brexit vote and, although not gloating over his side’s victory, he is confident about the UK’s future.

“Absolutely I’m delighted to be out and don’t think we have to negotiate anything,” he says, when asked what happens next on the road to Brexit. “I know exactly what I would do if I was running the country. I would leave and then, over a period of time, I would negotiate things.”

He’s all for a quick exit and blow the consequences, having previously said that, despite the free movement of labour, EU nations aren’t supplying the highly skilled engineers his company needs. Instead, the company has to negotiate laborious red tape to source the brainpower it needs from the rest of world.

And commercially, Sir James – who is best known for his range of vacuum cleaners – doesn’t expect Brexit to deliver much of an impact.

“They are going to want to have a free trade deal with us more than the other way round,” he says of European soon-to-be-ex-partners.

“The imbalance of trade is £100bn so, even if we have to pay an import duty, it’s not much and it’s far less than currency swings.”

He pours scorn on the idea that the EU is single market anyway. “It is not. There are different languages, boxes, plugs, marketing and so on, different psychology, different laws. There’s a lot of cost involved.”

He also reveals that, in the confused days following the referendum, he was approached by David Cameron’s office to take a role in helping shape Britain’s exit from the EU, which he turned down.

“I sort of think I’ve done my bit,” says Sir James. “I was on a Prime Minister’s advisory group for five years. I’ve got a business to run and a lot of other things to do. I’m a practising engineer, not just a company owner. I am with my engineers all the time. My time is enormously taken up doing that.”

But he’s no Little Englander. Sir James employs 7,000 staff, about half of them in the UK, mainly at the company’s technology centre in Malmesbury, Wiltshire. The bulk of the remainder are in the Far East where Dyson does its manufacturing, but also some R&D work.

The latest phase of the Malmesbury centre officially opens on Wednesday and Sir James is keen to talk about that, but there’s one more thing to discover about his support for Brexit. Why would the owner of a £3bn global business want to weaken, rather than strengthen, international links?

“Sovereignty is the most important reason,” he says. “And I would say that, wouldn’t I? I started my own business. I wanted to be independent as a business. I don’t want to be part of a conglomerate.

“I see huge strength in independence, making your own decisions and choosing the people who run your own enterprise. Being subservient to Europe, having to do what Europe says, is entirely not in this country’s interest.”

David Fuller's view -

Sir James Dyson’s reasons for not only favouring Brexit but also leaving quickly, in his own words: “I know exactly what I would do if I was running the country.  I would leave and then, over a period of time, I would negotiate things.”

That is fine for Dyson and no doubt many other UK businesses.  However, the UK is much more international than the EU.  The City has more overseas banks than any other financial centre in the world.  They like conducting business in London, which they also use as a gateway to Europe.  Many of these firms are not taking a longer-term view.  They want the convenience, immediate certainty and professionalism of London, with unrestricted access to the EU. 

Some other overseas firms, mostly non-financial, will feel similarly.  Notably, this includes Japanese automobile manufacturers as this service reported recently.  There is a good chance that the UK will be able to protect their access to EU markets, not least as German automobile manufacturers will not want any restrictions on their exports to the UK.  Moreover, as James Dyson also points out, the EU exports approximately £100bn more to the UK than we export to the EU. 

However, while there are many possibilities and even probabilities, there are few certainties today regarding future negotiations with the EU.  This is a challenge for Mrs May’s government.  It may also be an even bigger challenge for the EU. 

A PDF of this interview is posted in the Subscriber's Area.  

 

Please note: Due to a lengthy appointment today, my review of leading stock markets will commence on Thursday.  



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September 14 2016

Commentary by David Fuller

Civil Service Fills 80% of Key Brexit Jobs, Says Heywood

The two government departments created to take Britain out of the EU have filled 80 per cent of their senior posts, the head of the civil service said on Wednesday, calming fears that civil servants are reluctant to work on Brexit.

Sir Jeremy Heywood, the cabinet secretary, told MPs that some 65 senior jobs had been filled at the Department for Exiting the EU led by David Davis and the ministry for International Trade led by Liam Fox.

He said the speed with which the posts had been filled showed that the civil service was “mobilising very quickly” to face what many see as its biggest challenge since the second world war.

Theresa May has been criticised for setting up the two new departments by some mandarins and Whitehall experts, who argue that it would have been better to implement a more modest reshuffling of the Whitehall furniture.

Some civil servants would have preferred an expansion of the Cabinet Office and the Foreign Office to deal with Brexit.

But Sir Jeremy said that the enthusiasm with which civil servants were queueing up to join the two new ministries was encouraging.

“We have so many people who want to work in these departments that we have to make sure that all the other important policy priorities of the new prime minister can be properly staffed,” he told MPs on the public administration and constitutional affairs committee.

Sir Jeremy also said the civil service was being inundated by applications from “many, many hundreds” of external consultancies, accountancy firms and project management specialists who want to work with the government on the Brexit agenda.

At a time of public spending restraint, he said the civil service needs to think carefully about when was the right time to hire external expertise. He said there was no point hiring expensive talent in areas like trade negotiations “until we are starting that process.” He added: “Having lots of expensive and capable people on our books in advance of need is something to be avoided.”

Pressed over whether the civil service could have done more contingency planning for Brexit before the referendum, Sir Jeremy said he and his colleagues had done “a significant amount of thinking and all that work is extremely valuable now.”

He said the main difference from the preparation that Whitehall does before a general election was that David Cameron had prevented civil servants from talking to the Leave campaign. But he said that discussions with the leading Leave campaigners would not have made much difference to the civil service’s preparations, given the absence of a clear blueprint for Brexit.

David Fuller's view -

There are two interesting points here.  1) The Dickensian fantasy of innumerable legal experts pouring over the endless minutiae of intertwined regulations was created by the EU to deter any country from attempting to leave its clutches.  2) From the penultimate sentence above: “… David Cameron had prevented civil servants from talking to the Leave Campaign.”

Was David Cameron planning to succeed the unsteady Jean-Claude Junker as President of the European Commission?  We know that George Osborne was planning to become Prime Minister after Cameron left the office well before the next general election in 2020.

“There is no gambling like politics. Nothing in which the power of circumstance is more evident.”  Benjamin Disraeli (1804 – 1881) 



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September 14 2016

Commentary by David Fuller

Why Did the UK Enter the EU in the First Place?

My thanks to a subscriber for this link to Mish Talk, from Mike Shedlock's interesting summary which is partly quoted below.  No further comment is required from me, other than don’t miss the hilarious video.

Today the EU primarily serves a tone-deaf bureaucratic and political class, which lives a high life on the back of people it nothing but aggravates. But surely not everything is bad? Indeed, the EU is looking after us….one might well ask, what would we do without it? I give you a few random examples of the great things the EU does for us citizens:

1. We sleep like babies:

There are 109 EU regulations concerning pillows, 5 EU regulations concerning pillow cases, and 50 EU laws regulating duvets and sheets.

2. You shall have shiny teeth, citizen!

Our toothbrushes are regulated by 31 EU laws.

3. Best apples in the world, man – the Class 1 EU regulated apple – no-one will ever manage to deceive you again about the color of the apple he’s trying to sell you:

In order to class a “Red Variety” apple as “class 1”, 50% of its surface must be red. To class a “Mixed red coloring variety” of apple as a “class 1” apple, 33% of its surface must be red, and so it goes for the 3 quality classes and 287 individually named apple varieties. The only slight drawback: due to the protectionist agricultural policies of the “free market supporting” EU, that class 1 apple costs at least 40% more than it otherwise would. The same goes for every other fruit and vegetable you buy.

David Fuller's view -

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September 14 2016

Commentary by David Fuller

September 14 2016

Commentary by Eoin Treacy

There's a $300 Billion Exodus From Money Markets Ahead

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

The transformation of the money-fund industry, where investors turn to park cash, is a result of regulators’ efforts to make the financial system safer in the aftermath of the credit crisis. The key date is Oct. 14, when rules take effect mandating that institutional prime and tax-exempt funds end an over-30-year tradition of fixing shares at $1. Funds that hold only government debt will be able to maintain that level. Companies such as Federated Investors Inc. and Fidelity Investments, which have already reduced or altered prime offerings, are preparing in case investors yank more money as the new era approaches.

And

A major repercussion of the flight from prime funds is that there’s less money flowing into commercial paper and certificates of deposit, which banks depend on for funding. As a result, banks’ unsecured lending rates, such as the dollar London interbank offered rate, have soared. Three-month Libor was about 0.85 percent Wednesday, close to the highest since 2009.

Libor may stabilize after mid-October because prime funds may begin to increase purchases of bank IOUs, although the risk of a Federal Reserve interest-rate hike by year-end will keep it elevated, said Seth Roman, who helps oversee five funds with a combined $3.2 billion at Pioneer Investments in Boston.

“You could picture a scenario where Libor ticks down a bit,” Roman said. But “you have to keep in mind that the Fed is in play still.”

 

Eoin Treacy's view -

The transition from fixed NAVs to floating NAVs in the money market fund sector, where only government paper will be eligible to be supported at $1, is a major contributing factor in the surge that has taken place in LIBOR rates this year. With so much uncertainty about how the new system will function investors are understandably skittish about leaving money in the system ahead of the implementation. 



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September 14 2016

Commentary by Eoin Treacy

Gloom Descends on Luxury-Goods Industry

This article by Corinne Gretler and Thomas Buckley for Bloomberg may be of interest to subscribers. Here is a section:

Shares of both companies slid, dragging other luxury stocks down with them. The industry is grappling with another year of waning demand as China’s campaign against extravagant spending is compounded by a drop in tourism after terrorist attacks in France and Belgium, a situation Rupert characterized as a “fiasco.” Richemont’s revenue slid 13 percent, excluding currency shifts, in the five months through August, missing analysts’ estimates.

“The warnings show that macro and geopolitical uncertainties put near-term volume growth in question,” said Zuzanna Pusz, an analyst at Berenberg. “The challenges facing the luxury industry are not over yet.”

 

Eoin Treacy's view -

While in Hong Kong for a day earlier this year I was surprised by the willingness of luxury brands to bargain on price with discounts of over 10% readily available. At least part of the reason for this was because despite the fact there were large numbers of mainland Chinese tour groups milling around few appeared to be carrying shopping bags. The continued “anti-corruption” drive coupled with slowing economic activity have acted to curtail conspicuous consumption at home but terrorist attacks all over Europe are an additional headwind. 



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September 14 2016

Commentary by Eoin Treacy

Copper Rises Most in 3 Months on Signs of Better Chinese Growth

This article by Yuliya Fedorinova and Joe Deaux for Bloomberg may be of interest to subscribers. Here it is in full:

Copper posted the biggest gain in almost three months as strong economic data from China fueled speculation that demand will strengthen in the Asian nation, the world’s largest metals consumer. An index of global mining stocks advanced for the first time in six days.

China’s broadest measure of new credit exceeded estimates in August, rebounding from a month earlier and bolstering evidence that growth is stabilizing. Chinese reports this week on factory output, investment and retail sales all exceeded economist estimates.

“The Chinese data is improved,” Michael Turek, the head of base metals at BGC Partners Inc. in New York, said in an e-mail.

“Credit has been easier. That enables manufacturing to operate more smoothly and profitably and reduces bankruptcies.”

Copper for delivery in three months rose 2.6 percent to $4,771.50 a metric ton ($2.16 a pound) at 5:50 p.m. on the London Metal Exchange, the biggest increase since June 15.

The Bloomberg World Mining index of producers added 0.4 percent, heading for its first gain since Sept. 6.

Users, including power-wiring companies, are stepping up purchases of copper ahead of China’s autumn festival after prices fell, Xu Maili, an analyst with Everbright Futures Ltd., said by phone from Shanghai. The three-day Chinese holiday starts Thursday.

 

Eoin Treacy's view -

The Chinese market is closed tomorrow and Friday for the Mid-Autumn Festival and the annual golden week holiday will be between October 2nd and 7th inclusive. Therefore there is some merit to the argument that stockpiling ahead of the holidays may have contributed to recent firming in copper prices. 



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September 14 2016

Commentary by Eoin Treacy

September 13 2016

Commentary by David Fuller

Mario Draghi of the ECB Has Run Out of Magic as Deflation Closes in

Large parts of the eurozone are slipping deeper into a deflationary trap despite negative interest rates and one trillion euros of quantitative easing by the European Central Bank, leaving the currency bloc with no safety buffer when the next global recession hits.

The ECB is close to exhausting its ammunition and appears increasingly powerless to do more under the legal constraints of its mandate. It has downgraded its growth forecast for the next two years, citing the uncertainties of Brexit, and admitted that it has little chance of meeting its 2pc inflation target this decade, insisting that it is now up to governments to break out of the vicious circle.

Mario Draghi, the ECB’s president, said there are limits to monetary policy and called on the rest of the eurozone to act “much more decisively” to lift growth, with targeted spending on infrastructure. “It is abundantly clear that Draghi is played out and we’re in the terminal phase of QE. The eurozone needs a quantum leap in the nature of policy and it has to come from fiscal policy,” said sovereign bond strategist Nicholas Spiro.

Mr Draghi dashed hopes for an expansion of the ECB’s monthly €80bn (£60bn) programme of bond purchases, and offered no guidance on whether the scheme would be extended after it expires in March 2017. There was not a discussion on the subject. 

“The bar to further ECB action is higher than widely assumed,” said Ben May from Oxford Economics.

The March deadline threatens to become a neuralgic issue for markets given the experience of the US Federal Reserve, which suggests that an abrupt stop in QE stimulus amounts to monetary tightening and can be highly disruptive.

David Fuller's view -

Panic and anger grip the EU and the ECB is in the firing line.  The article above observes: “Public trust in the ECB has collapsed in several countries and the mood in Germany has turned toxic.” 

No doubt but in fairness to Draghi, he saved the EU from an earlier collapse, while repeatedly calling for fiscal spending and investment.  Unfortunately, Herbert Hoovers in the Bundesbank were having none of it.  Meanwhile, Brussel’s contribution was the creation of more regulations.  This is the burning barn that disappointed UK Remain voters wish to run back into.  Some of them like the EU’s unions, employment laws and the 30 to 35-hour week.

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



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September 13 2016

Commentary by David Fuller

Bond Markets Hit Another Ukrainian Chicken Moment

Two European companies -- French drugmaker Sanofi and German household products maker Henkel -- last week became the first firms to persuade investors to pay them to borrow euros. By selling bonds yielding minus 0.05 of a percentage point, they may well have signaled the bond market's peak, delivering this decade's equivalent of the "Ukrainian Chicken Farm Moment."


It was massively oversubscribed. A few weeks later, bird flu broke out in Hong Kong. The chicken farm was uninsured. The market immediately discounted the notes and the price crashed 30 percent or more. That moment of supreme belief when anything is possible in the new issues market will always be remembered as "The Ukrainian Chicken Farm Moment."

An investor who buys some of Sanofi's 1 billion euros ($1.12 billion) of bonds and holds them until they're repaid in three years is guaranteed to lose money. The same goes for owners of Henkel's 500 million euros of two-year notes. It's the equivalent of lending a dollar and five cents to your neighbor, knowing that you'll only be repaid a dollar. It's further evidence, if it were needed, that the negative interest-rate policies being pursued by policy makers, including the European Central Bank, are making areas of the financial markets look increasingly similar to conditions prior to the financial crisis of almost a decade ago. Then, as now, investors trying to boost returns in a low-yield environment loaded up on risk. Today's negative-yielding bonds are the equivalent of the highly-leveraged derivatives that were all the rage in the middle of the last decade.

David Fuller's view -

These are moments which we can all look back on some time later and see that investors’ behaviour was totally irrational. 

This item continues in the Subscriber’s Area.



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September 13 2016

Commentary by David Fuller

Draghi: EU Must Redistribute Wealth and Strengthen Borders to Save the Union

 

The European Union will grind to a halt in a mire of ever-worsening unpopularity if it fails to tackle inequality, tighten external borders and co-ordinate defence policies,according to European Central Bank President Mario Draghi.

Anti-globalisation forces are closing borders and reversing progress made in recent years, he said, with policies which “have at times been reminiscent of the interwar period: isolationism, protectionism, nationalism”.

The message is a stark warning from the ECB’s chief, who has taken a new tack to push politicians to act. He has spent several years telling governments that they should use the breathing room granted by low interest rates to reform their economies to boost employment, productivity and growth.

But little of that has happened, forcing Mr Draghi to resort to stronger language to describe economic problems as a threat to the political project’s viability.

“The more recent years of the European project have been characterised by growing dissatisfaction,” Mr Draghi said, noting the Brexit vote.

“For some EU countries, these years have entailed the most serious economic crisis since the war, with unemployment, especially among the young, reaching unprecedented levels and welfare states constrained by low growth and stretched public finances.”

Combined with the fall of the Soviet Union, terrorism, climate change, new technologies and mass migration, “these factors have, in a short period of time, interacted with the economic consequences of globalisation and intensified feelings of insecurity, especially in a world that was inattentive to how the extraordinary benefits of that globalisation were being distributed”.

If the EU wants to serve its citizens and continue to bring its members closer together, he said, then politicians should listen to voters and address their concerns.

“The integration process needs to be guided towards outcomes that are more efficient and more directly aimed at the people, their needs and their fears,” he said in a speech as he received the De Gasperi award – a prize named for one of the EU’s founders and given to leaders who promote a more united Europe.

David Fuller's view -

Well said Mario Draghi, although too many arrogant leaders may not listen.  



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September 13 2016

Commentary by Eoin Treacy

Gold Sags in Longest Slump Since June as Demand Ebbs on Dollar

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

“You have rising expectations that there is the possibility of a rate increase this year,” Mike Dragosits, a senior commodity strategist at TD Securities in Toronto, said in a telephone interview. “A December rate hike is a distinct possibility that’s hurting the gold market.”

Gold futures for December delivery fell 0.1 percent to settle at $1,323.70 an ounce at 1:44 p.m. on the Comex in New York. The losing streak is the longest since June 23.

Precious-metals traders have been in thrall to contrasting comments from Fed officials before the Fed’s policy meeting next week. Boston Fed President Eric Rosengren said Friday that the economy may overheat if the bank waits too long.

Eoin Treacy's view -

Gold does best when people are most worried about the integrity of their respective currency; when it is being eroded by negative interest rates in response to deflation or purchasing power is being destroyed by inflation. However between those extremes gold needs an additional catalyst to rally and if the Fed is going to gradually raise interest rates that represents a headwind. 



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September 13 2016

Commentary by Eoin Treacy

Dairy Farmers Think Almond Milk Is Bogus But Americans Love It

This article by Leslie Patton and Lydia Mulvany for Bloomberg may be of interest to subscribers. Here is a section:

Almond milk is boosting the nut’s popularity, too. Last year, Americans bought $890 million of the stuff, three times the amount of soy milk’s $286 million, according to IRI. By contrast, consumers bought $9.2 billion of lowfat and skim milk. Retailers have caught on to the trend. Starbucks Corp. is adding almond milk to its lineup of non-milk alternatives, which already includes coconut and soy milk. And as of last month, Dunkin’ Donuts offers it in all its stores.

Milk alternatives have faced scrutiny for not containing very many nuts or natural ingredients. WhiteWave Foods Co.’s Silk brand of almond milk, for example, also contains sugar, salt, gellan gum and sunflower lecithin.

A lawsuit filed last year against Blue Diamond Growers, which supplies Dunkin’ Donuts, said its almond milk contained just 2 percent almonds. Blue Diamond’s U.K. website confirms the product’s almond content. Water and sugar are listed as ingredients before almonds. Alicia Rockwell, a company spokeswoman, declined to comment.

Among the biggest almond-milk sellers are WhiteWave and Blue Diamond, along with retailers like Target Corp. and Aldi Inc. that have private-label brands. Niche companies are also riding the wave, like NüMoo Nut-Milks, which makes an organic, cold-milled chocolate almond milk.

 

Eoin Treacy's view -

Almond milk with its low fat / high protein / low glycemic index credentials tends to tick a lot of boxes for the current trend of health conscious diets. As a result it is boosting demand for the nut amidst what has already been a growth trend in Asian consumption. In a battle of marketing against regular milk it is winning and gaining market share. A clear health scare or drop in Asian demand would likely be required to check that trend. 



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September 13 2016

Commentary by Eoin Treacy

Libor's Reaching Point of Pain for Companies With Big Debt Loads

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

Companies that took out floating-rate loans knew they would have to pay more to borrow once rates started rising, but they haven’t experienced real increases for years. Even when the Federal Reserve started hiking rates in December, many companies did not have to pay higher rates on their loans until Libor breached key levels, because of the way their floating rates are calculated. Rising interest payments would only add to pain for U.S. borrowers that are already suffering from falling profits and higher default rates. And Libor could rise further-- JPMorgan Chase & Co. strategists recently forecast it could reach 0.95 percentage point by the end of this month.

There will be some companies “for which it might become an issue," said Neha Khoda, a high-yield credit strategist at Bank of America Corp. With Libor having risen above key levels like 0.75 percentage point, many issuers have to think about how they will pay the extra interest, she said. Three-month Libor now stands at 0.86 percentage point, and has been rising as new money market fund rules curb investor demand for companies’ short-term debt. 

Interest rates on loans in the leveraged loan market are calculated by starting with a benchmark borrowing rate like three-month Libor and adding a margin known as a "spread." About $230 billion of the loans in the market have a minimum benchmark level, or "floor," equal to 0.75 percentage point, meaning that even if Libor has fallen below that level, the borrower must pay the minimum plus the spread. Most of the debt in the $900 billion leveraged loan market has Libor floors, which is often set around 1 percent.  

 

Eoin Treacy's view -

High yield issuers of floating rate notes are at an obvious disadvantage as the prospect of short-term rates rising is priced in. That represents an important consideration because floaters are one of the primary destinations for bond investors seeking to hedge their exposure to rising interest rates since they would avail of higher yields.



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September 13 2016

Commentary by Eoin Treacy

Bugs on Screen

This article by Ekaterina Pesheva for the Harvard Medical School may be of interest to subscribers. Here is a section:

Over two weeks, a camera mounted on the ceiling above the dish took periodic snapshots that the researchers spliced into a time-lapsed montage. The result? A powerful, unvarnished visualization of bacterial movement, death and survival; evolution at work, visible to the naked eye.

The device, dubbed the Microbial Evolution and Growth Arena (MEGA) plate, represents a simple, and more realistic, platform to explore the interplay between space and evolutionary challenges that force organisms to change and adapt or die, the researchers said.

“We know quite a bit about the internal defense mechanisms bacteria use to evade antibiotics but we don’t really know much about their physical movements across space as they adapt to survive in different environments,” said study first author Michael Baym, a research fellow in systems biology at HMS.

The researchers caution that their giant petri dish is not intended to perfectly mirror how bacteria adapt and thrive in the real world and in hospital settings, but it does mimic more closely the real-world environments bacteria encounter than traditional lab cultures. This is because, the researchers say, in bacterial evolution, space, size and geography matter. Moving across environments with varying antibiotic strengths poses a different challenge for organisms than they face in traditional lab experiments that involve tiny plates with homogeneously mixed doses of drugs.

 

Eoin Treacy's view -

There are encouraging advances occurring in the development of antibacterial medicines using new kinds of antibiotics, phages and genetics. Considering the rates at which bacteria can mutate we are going to need them all. 

 



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September 12 2016

Commentary by David Fuller

Six Reasons Why Post-Brexit Britain Can be Like Others That Thrive Outside the Single Market

So much of the current discussion about our future relationship with the EU is about access to the single market. If we could have all the benefits of belonging to the single market without being obliged to obey its rules, be able to make our own laws, control our own borders, abolish the EU’s tariffs on our imports, make no contributions to the EU budget and make our own trade deals around the world, then I would support being a member. But such a package is unobtainable.

Of the realistic options, some people have argued that we should seek a deal like Norway’s or Switzerland’s. We should want neither of these. Rather, we should seek to be like all other countries in the world, that is to say, outside the single market but trading extensively with it. In realising this vision, our officials and ministers need to bear in mind six key points.

Single market membership is not the be-all and end-all

First, contrary to the propaganda, membership of the single market is not of overwhelming importance. If it were, how would it be possible for non-member countries from all around the world to sell to it so successfully, and why would its members be doing so badly? Why haven’t single market member countries been carried forward on a wave of prosperity created by the mutual recognition of standards and the absence of border checks?

The benefits of the single market have been sufficiently small that they have been outweighed by other factors: the macroeconomic disaster that is the euro and the micro-economic disaster that is the web of regulations, laws and interferences that reduce market efficiency across the union.

Tariffs might be a price worth paying 

Second, tariffs are not a big issue. By all means, let’s try to get a deal under which our exports to the EU face no tariffs. But this is not worth paying much for – or enduring much of a delay for. If our exporters end up having to pay the EU’s common external tariff this would not be a killer blow. The average tariff on manufactured goods is about 4pc.

If it comes to it, even the 10pc tariff on cars would be more than compensated by the lower exchange rate for the pound. And if the City loses passporting rights, that isn’t a killer blow either. The key requirement is to be outside the EU’s icy regulatory embrace. In the long term, securing this would be well worth enduring some short-term loss.

David Fuller's view -

Roger Bootle’s analysis make sense to me.  However, we can expect international banks and many other City firms to take a somewhat different view.  They may only be lobbying in their perceived best interests, but we hear plenty of talk about partial moves to various regions of the EU.  Some of that may be inevitable but Mrs May’s Government will need to remain diplomatic and in close contact with these firms, while also holding its line on a reasonably swift and complete exit from the EU. 

A PDF of this article is posted in the Subscriber's Area.



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September 12 2016

Commentary by David Fuller

Parliament Calls for Carbon Capture to Revive British Industry and Slash Climate Costs

A high-level Parliamentary inquiry has called for a massive national investment in carbon capture to revive depressed regions of the North and exploit Britain's perfectly-placed network of offshore pipelines and depleted wells.

Lord Oxburgh's cross-party report to the Government has concluded that the cheapest way to lower CO2 emissions from heavy industries and heating is to extract the carbon with filters and store it in the North Sea oil.

The advisory group said the technology for carbon capture and storage (CCS) is ready to go immediately and should cut costs below £85 per megawatt hour by the late 2020s if launched with sufficient conviction and on a large scale, below the strike price for the Hinkley Point nuclear project. 

It could be fitted on to existing gas plants or be purpose-built in new projects, and could ultimately save up £5bn a year compared to other strategies. Unlike other renewables CCS does not alter with the weather or suffer from intermittency. It can be “dispatched” at any time, helping to balance peaks and troughs in power demand. 

“I have been surprised myself at the absolutely central role that CCS has to play across the UK economy,” said Lord Oxburgh, a former chairman of Shell Transport and Trading.

“We can dramatically reduce our CO2 emissions, create tens of thousands of jobs, and give our domestic industry a great stimulus by making use of technologies which are now well understood and fully proved,” he said.

No other country is likely to take the plunge first since few have the magic mix of industrial hubs, teams of offshore service specialists, and cheap, well-mapped, sea storage sites all so close together. “CCS technology and its supply chain are fit for purpose. There is no justification for delay,” says the report, to be released today.

Lord Oxburgh said the state must take the lead and establish the basic infrastructure in the early years.

The report called for a government delivery company modelled on Crossrail, or the Olympics Authority, taking advantage of rock-bottom borrowing costs. It could be privatised later once the CCS has come of age.

The captured CO2 is potentially valuable. Some could be used for market gardening in greenhouses, to produce biofuels, or for industrial needs.

Most CCS in North America is commercially exploited to extract crude through enhanced oil recovery by pumping CO2 into old wells, a technology that could give a new lease of life to Britain’s depleted offshore fields. “We could keep North Sea production going for another hundred years,” said Prof Jon Gibbins from Sheffield University.

David Fuller's view -

In this exciting new, varied and fast changing era of energy, tech-savvy nations should way outperform over the longer term.  What energy systems will they have?

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



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September 12 2016

Commentary by David Fuller

An Allocation Only a Mother Could Love

GMO’s Jeremy Grantham and Lucas White came out with a report entitled An Investment Only a Mother Could Love this past week laying out the prospects for natural resource equities. Here’s the executive summary of their findings and thoughts:

  • We believe the prices of many commodities will rise in the decades to come due to growing demand and the finite supply of cheap resources.
  • Public equities are a great way to invest in commodities and allow investors to:
    • Gain commodity exposure in a cheap, liquid manner
    • Harvest the equity risk premium
    • Avoid negative yields associated with rolling some futures contracts
  • Resource equities provide diversification relative to the broad equity market, and the diversification benefits increase over longer time horizons.
  • Resource equities have not only protected against inflation historically, but have actually significantly increased purchasing power in most inflationary periods.
  • Due to the uncertainty surrounding, and the volatility of, commodity prices, many investors avoid resource equities. Hence, commodity producers tend to trade at a discount, and they have outperformed the broad market historically.

The team from GMO makes some good points here. If you’re looking to gain long-term exposure to commodities, it rarely makes sense to invest directly in the commodities themselves. You’ll get cash-like returns with stock-like volatility.

I wanted to look back at the performance history of these stocks to check out their other claims. The longest running fund I could find is the Vanguard Precious Metals & Mining Fund (VGPMX). It may not be a perfect match with what GMO is doing but it has a performance history going back to 1985.

David Fuller's view -

I have long held Jeremy Grantham in high regard and I maintain that we have only seen this year’s initial recovery for industrial commodities and precious metals.  However, I question this opening bullet point:

We believe the prices of many commodities will rise in the decades to come due to growing demand and the finite supply of cheap resources.

This item continues in the Subscriber’s Area.



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September 12 2016

Commentary by Eoin Treacy

What Samsung's Disastrous Galaxy Note 7 Recall Means for Apple

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

The announcement of the iPhone 7 and 7 Plus was "lackluster," in the view of Gartner analyst Tuong Nguyen, who expressed skepticism that the problems with Samsung's flagship smart phone will lead to an outflowing of customers to Apple.

"We've chosen our battlegrounds already," Nguyen said, suggesting that U.S. users are mostly either in the Android an iOS camps. Shifting from one to the other is "at the least annoying" and involves relearning the quirks of a new platform and accounting for apps that have been bought or downloaded.

"I feel it's more likely that the Samsung incident will push people towards other Android makers like LG more so than towards Apple," Nguyen said. Shifts to a new platform could be more pronounced in emerging markets with burgeoning middle classes who may not have been able to afford iPhones before.

 

Eoin Treacy's view -

The app ecosystem of various platforms represents a significant hurdle to moving from an iOS based phone to Android. That represents a major incentive for companies like Apple and Google to encourage as many programmers as possible to develop apps for their respective languages. Google’s announcement in July that it plans to fund education for up to 2 million programmers in India is a direct reflection of that theme.



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September 12 2016

Commentary by Eoin Treacy

Thailand

Eoin Treacy's view -

The majority of ASEAN markets have benefitted from increasing international investor flows over the last few months and Thailand is no exception. It has received net inflows of nearly $16 billion year-to-date but this has done little to support the stock market in currency adjusted terms. Just about every Asian market pulled back today but Thailand has been leading on the downside. 
 

 



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September 12 2016

Commentary by Eoin Treacy

N.Z.â's Key Says Don't Break Out Champagne for Parity Party Yet

This note by Matthew Brockett for Bloomberg may be of interest to subscribers. Here it is in full:

New Zealand Prime Minister John Key speaks at post-cabinet press conference in Wellington on Monday.

Says NZ dollar’s recent gains generally reflect economic fundamentals of New Zealand
On prospect of NZD reaching parity with Australian dollar,     says “just before people break out the champagne for a parity party, we’ve been there many times before and not quite got over the finishing line”

Most New Zealanders would prefer NZD “was a little bit lower”

“With dairy prices recovering, that’s the thing I think that’s actually underpinning the exchange rate now”: Key says his view on currency intervention is it’s “not a terribly effective tool”

 

Eoin Treacy's view -

The New Zealand Dollar has not traded above parity against the Australian Dollar in at least 30 years so it represents a psychological Rubicon for investors and a potent threat to the competitiveness of Kiwi exports to its largest neighbour. The rate has contracted steadily over the last month and a break in the short-term progression of lower rally highs, currently near NZ$1.04, will be required to signal Australian Dollar demand is returning to dominance. 



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September 12 2016

Commentary by Eoin Treacy

September 09 2016

Commentary by Eoin Treacy

Global Economics and Strategy Day

Thanks to a subscriber for this report from Morgan Stanley covering a number of macro topics. Here is an important slide highlighting how economists compute productivity figures:

Eoin Treacy's view -

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

I’m sure I’m not the only one to puzzle over how our opinion of future productivity growth and that of many economists can differ so widely and thought the above chart was highly instructive.

To my mind technological innovation is sharply deflationary but it also contributes to productivity gains by ensuring that every worker can produce more. However the decline in Multifactor Productivity questions that hypothesis. Therefore we have to ask the question whether the deflationary impact of technology on the velocity money, which is a symptom of the wider disintermediation of the internet, is reducing the multifactor contribution to how productivity in measured. 

 



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September 09 2016

Commentary by Eoin Treacy

Turning Points

Thanks to a subscriber for this link to Jeff Gundlach’s most recent presentation. Here is one of the more interesting slides:

Eoin Treacy's view -

More than any other chart this gives us a graphic illustration for why Wall Street continues to trade close to historic highs. If earnings do in fact rebound then valuations will retreat and investors will have some rational justification for paying all-time high prices. 

Of course the flip side is that if earnings do not rebound in nearly the same fashion as expected. That would contribute to a great deal of navel gazing mong investors and would lead to less appetite for shares at these prices. 
 

 

 



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September 09 2016

Commentary by Eoin Treacy

September 09 2016

Commentary by Eoin Treacy

Gold Investors Brace for Lower Prices on Interest-Rate Outlook

This article by Luzi Ann Javier for Bloomberg may be of interest to subscribers. Here is a section:

More than 2,500 lots exchanged hands Friday for a put option giving owners the right to sell October futures at $1,300 an ounce, making it the most-traded option for the second straight day. The most active contract on the Comex slipped as much as 0.6 percent to $1,334.10. Holdings in exchange-traded funds backed by gold fell for a second day on Thursday.

There’s reason to be worried. Federal Reserve Bank of Boston President Eric Rosengren, who shifted his stance in recent months in favor of monetary tightening, warned Friday that waiting too long to raise interest rates risks overheating the economy. Higher rates make bullion less competitive against interest-bearing assets. The comments come a day after the European Central Bank played down the prospect of an increase in asset purchases.

“The markets are quite nervous that an interest-rate hike might actually happen this month,” Phil Streible, a senior market strategist at RJO Futures in Chicago, said by telephone.

“Investors and traders know that gold futures have held above $1,300 and this looks like a key level of support. It’s rational for investors to be looking at protective put options at $1,300 in the event a surprise interest rate increase occurs.”

 

Eoin Treacy's view -

Total Known ETF Holdings of Gold have not been affected by the pullback witnessed in precious metals markets this week suggesting the action is more driven by traders than investors. 



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September 08 2016

Commentary by David Fuller

US Recession Jitters Stoke Fears of Impotent Fed and Fiscal Paralysis

Here is the opening and a latter section from this interesting column by Ambrose Evans-Pritchard for The Telegraph:

An ominous paper by the US Federal Reserve has become the hottest document in high finance.

It was intended to reassure us that the world's hegemonic central bank still has ample firepower to overcome the next downturn. But the author was too honest. He has instead set off an agitated debate, and rattled a lot of nerves.

David Reifschneider's analysis - 'Gauging the Ability of the FOMC to Respond to Future Recessions' - more or less concedes that the Fed has run out of heavy ammunition.

The Federal Open Market Committee had to cut interest rates by an average of 550 basis points over the last nine recessions in order to break the fall and stabilize the economy. It could not possibly do so right now, or next year, or the year after. Quantitative easing (QE) in its current form cannot compensate, and nor can forward guidance. They are largely exhausted in any case.

"One cannot rule out the possibility that there could be circumstances in the future in which the ability of the FOMC to provide the desired degree of accommodation using these tools would be strained," he wrote.

This admission is painfully topical as a plethora of data suggest that the US economy may have hit a brick wall in August. The ISM gauge of manufacturing plunged below the boom-bust line to 49.4, and the services index dropped to a six-year low, with new orders crashing nine points.

My own tentative view is that these ISM readings are rogue surveys. The Atlanta Fed's 'GDPNow' tracker points to robust US growth of 3.6pc in the third quarter. The New York Fed version is coming in at 2.8pc. 

Yet the US expansion is already long in the tooth after 87 months, and late-cycle chemistry is notoriously unpredictable. Warning signs certainly abound. Corporate profits have been slipping for six quarters, the typical precursor to an abrupt slump in business spending. "The only thing keeping the US out of recession is the US consumer. If consumption stalls then we really are in trouble," says Albert Edwards from Societe Generale.

I am willing to bet against him for now. The M1 money supply - often a good leading indicator - has picked up after a weak patch earlier this year and is now surging at a rate of 10.1pc. This pace would normally signal a burst of torrid growth a few months later. It is in stark contrast to the monetary contraction before the Lehman crisis.

My presumption is that the day of reckoning has been pushed well into 2017, but in the dead of the night I have a horrible sweaty feeling that Mr Edwards may be right. It is not a time to be chasing stock markets already at vertiginous levels.

And:

History will judge that those nations best able to weather the next global downturn are those that grasp the essential character of our desperate deflationary age, and can cast aside deeply-ingrained and totemic beliefs about debt. The losers will be those spooked by shadows on the wall.

The winners - or survivors - will be those most willing to seize on the cheapest borrowing costs in history to fight back, preferably combining fiscal and monetary in a radical fashion. Call it helicopter money if you want, or 'overt monetary financing' of deficits. The accounting terminology is irrelevant.

Since no country can risk watching its precious national stimulus leak away to free riders in the austerity camp - at least in a crisis - this may imply some degree of calibrated protectionism. The twin liberal pieties of progressive public policy and global free trade may ultimately come into conflict. That is tomorrow's battle.

David Fuller's view -

Yes, the Fed would like a cushion in terms of higher interest rates as a defence for limiting the next recession.  However, we do not live in an economic environment which would make that possible at this time.  Moreover, we can only guess as to when and to what extent circumstances are likely to change in future.  So far, the Fed has wisely held off on raising rates, which could make a soft economy even weaker, particularly if the Dollar Index rose, as it most likely would.

However, it would be mistaken to think that the Fed is in charge of the economy, beyond its role as the regulator of US monetary policy.  The traditional three engines of economic growth are consumer, corporate and government spending. 

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



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September 08 2016

Commentary by David Fuller

EU Retreat From US Trade Deal Leaves the Field to Britain

They’ve managed it. The naysayers have succeeded in killing off what would have been the first trade deal signed between the world’s two biggest economic blocs.

“TTIP”, or the Transatlantic Trading and Investment Partnership between the EU and the US, was meant to be part of the plan for a renewed, competitive Europe, helping its indebted economies to carry the deadening weight of the euro. Instead, it is becoming a potent symbol of EU dysfunction.

After years of protests, petitions and successful peddling of terrifying myths about the deadly threat this deal posed to rights, democracy, safety and the environment, European politicians are capitulating. EU mandarins are trying to keep it together in the face of a tough US stance and competing demands by 27 countries but, in the crystal clear estimation of French trade minister Matthias Fekl, the deal is “dead”.   

The Eurocrats will continue to insist that, like a convalescent dictator, it is very much alive and well. But to be sure, it is simply resting! Taking the air! But they know as well as anyone else that TTIP - and the useful €120 billion boost they said it would bring the EU economy - is at best being put into a long, deep freeze.

The good news, of course, is that this clears that enormous “queue” for trade deals with the US that Barack Obama was warning us about when he visited Britain before the EU referendum. A post-Brexit UK, he said, would be “at the back” of this queue, and at the G20 last week, he again declared that a UK-US deal won’t be a priority. With TTIP dead, however, there is no queue. Saying that Britain is at the back of it is rather like saying that Mr Obama is at the back of the queue of lame duck US presidents leaving office: he’s also at the front of it.

Any decision on trading terms between the US and its allies will be down to Mr Obama’s successor. Pessimists argue that the anti-globalisation mood taking hold across the pond will preclude any deal making. Donald Trump has demonised trade and even Hillary Clinton has gone lukewarm. But although there is a worrying rise in such hostility, there are reasons to think that Brexit Britain can slip around this roadblock.

The multilateral, sprawling agreements currently running into problems, like TTIP and its Pacific equivalent, are totemic, regional pacts with explicitly geopolitical aims. They are agreed only after torturous negotiations between dozens of countries with different cultures and priorities. They establish remote – and therefore scary-sounding – new regulatory and legal systems and the backlash against them feeds on the idea of a faceless, nationless technocratic class taking over the levers of power at the expense of citizens.

By contrast, a single-country deal with a reliable ally, whose legal system and economy already have much in common with the US, is a less threatening prospect and is unlikely to worry former car workers in Detroit. That is one of the reasons that Mr Trump can insouciantly declare that Britain would certainly not be “at the back of the queue” for a deal, as he did in May.

Mr Trump might not be the most reliable ally. But there are geopolitical reasons why it would make sense for the US to consider a deal, especially if Mrs Clinton wins. It would signal that the UK, a useful US ally in Europe, is not out in the cold. It would help, in a less ostentatious way than TTIP, to expand the sway of economic relations based on the rule of law and regulations, rather than the rule of might favoured by Russia and China. It would also establish a framework to which the EU would hopefully be added in future decades.

David Fuller's view -

The global region of greatest uncertainty right now is in the EU.  It gives me no satisfaction to point this out but the EU’s leaders have brought it on themselves, although the real cost is borne by the citizens of their countries, particularly in the Mediterranean nations.

Today, we can forget all about forecasts of tortuous Brexit negotiations over several years, designed to ensure that the EU was an alliance which countries could join but never leave.  The EU’s political programme to create ‘a United States of Europe’ has been derailed because it had no popular support.  The absence of border controls in Europe seems like a nice idea but makes no sense in a world where traffickers will swamp countries by bring the world’s poor from different cultures to richer democratic nations.  A political backlash is underway, not least within Germany and France.

This item continues in the Subscriber’s Area, where a PDF of Juliet Samuel’s article is posted.



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September 08 2016

Commentary by David Fuller

The Weekly View: The Danger of Looking Back: Lessons From Lost Decades

My thanks to Rod Smyth for his ever-interesting letter, published by RiverFront Investment Group.  Here is the opening paragraph:

Our industry’s most ubiquitous disclaimer, “Past performance is no guarantee of future results,” is good advice.  Despite this advice, many investors make decisions based on the emotional journey of past performance – money follows performance.  US investors are now pulling money out of international stocks following a decade of flat returns and 6 years of underperformance relative to US stocks; meanwhile, at RiverFront, we are adding to our international holdings.  

David Fuller's view -

Rod Smyth is a very good contrarian thinker.  This is a fascinating issue – a collector’s item for students of stock markets. 

The Weekly View is posted in the Subscriber’s Area.

 

Please note: I will be away on Friday.



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September 08 2016

Commentary by Eoin Treacy

Draghi Dialing Down the Drama May Mark Wane of Monetary Activism

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

Take European Central Bank President Mario Draghi, who on Thursday talked up the effectiveness of his institution’s stimulus policies to date, but damped expectations that he’ll load up with fresh asset-buying soon. His only new announcement after again downgrading euro-area growth forecasts was that officials will look into how to ensure the current program overcomes a worsening scarcity of bonds.

Even with the scheduled end of the 1.7 trillion-euro ($1.9 trillion) plan just six months away, Draghi said policy makers meeting in Frankfurt haven’t yet discussed what they’ll do when that day comes. If a new laissez-faire tone is creeping in to replace years of hyperactivity, it may be a signal that the division of labor between central banks and governments in providing economic support is shifting.

“Draghi doesn’t sound like a central banker who’s in any hurry to ease further,” said Tim Graf, head of European macro strategy at State Street in London. His stance “fits in with the G-20 statements about using all actors to support growth, including the fiscal side. Taking ever-easier monetary policy for granted is becoming less valid.”

 

Eoin Treacy's view -

The ECB faces a number of obstacles to employing a US style quantitative easing program within its jurisdiction. Among these are the relative depths of the respective markets. The ECB has self-imposed rules about how much of any particular issue it can own and how much debt of any one country it can purchase. Additionally, the EU’s corporate bond and asset backed markets are not nearly as liquid as their US equivalents, which represent a challenge for the size of purchases the ECB needs to make to have an influence on the market.



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September 08 2016

Commentary by Eoin Treacy

Duterte Outbursts Taking Toll as Philippine Stock Losses Mount

This article by Ian C Sayson for Bloomberg may be of interest to subscribers. Here is a section:

“The latest incident raises concern that President Duterte’s unpredictable behavior in politics will be disruptive and could eventually spill into economics and business,” said Jonathan Ravelas, chief market strategist at BDO Unibank Inc., the Philippines’ biggest lender. It’s “further weakened a market that’s already been made vulnerable by uncertainty over U.S. interest rates, elevated valuations and overseas fund withdrawals,” he said.

The Philippine index is trading at 18.3 times 12-month estimated earnings. While that’s down from 19.6 in July, it’s still the highest in Asia and at a 32 percent premium to the MSCI Asia Pacific Index. The country’s economy expanded 7 percent last quarter from a year earlier, after 6.8 percent growth in the first three months of 2016.

Investors may be better off holding cash in the near term as the index could test its 7,500 support level, said BDO Unibank’s Ravelas. The gauge could fall as low as 7,330 in the next two months over concerns the budget deficit will rise when taxes are cut and spending raised, April Lee-Tan, head of research at COL Financial Group Inc. in Manila, said Monday.

“Smart investors should take advantage of the weakness and accumulate because this is all sentiment-driven," said Rizal’s Palma Gil. “Other than incendiary statements and killings related to the drug war, investors like Duterte’s economic and fiscal policies or at least what has been communicated so far,” he said, adding that he expected the index would go back up to 8,000.

 

Eoin Treacy's view -

Duterte was elected on a law and order and anti-corruption ticket and admitted in his inaugural address that his methods were unorthodox and would not be approved of by many observers. Here is a link to a video of that address. 



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September 08 2016

Commentary by Eoin Treacy

Email of the day on bitcoin prices

Regarding Bitcoin, after a summer lull it looks like it is coming into form once again - would welcome another update on the charts/ medium term view which hopefully is of interest to other subscribers. I must say it does have elements that remind me of the 90's tech bubble (volatile, illiquid, devoted followers etc) and I have been following it closely. Many thanks

Eoin Treacy's view -

Thank you for this reminder that Bitcoin is a market where fully committed advocates contrast sharply with those who doubt it will ever become a viable medium of exchange. The blockchain foundation on which the market for bitcoin rests has significant potential in recording transactions and reducing the cost and inefficiency of banking, accounting and record keeping over the next few years before it is eventually superseded by quantum computing. 



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September 08 2016

Commentary by Eoin Treacy

GW Pharmaceuticals Jumps on Report It May Be Acquisition Target

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

GW Pharmaceuticals Plc jumped after Reuters reported that the company had hired Morgan Stanley as an adviser after being approached by several drugmakers interested in an acquisition.

GW gained 20 percent to $101.47 at 3:31 p.m. in New York trading, its biggest intraday gain since March. Reuters cited people familiar with the matter in its report.

The U.K. company, with a market value of $2.56 billion, develops drugs derived from cannabis. Its leading asset is an experimental treatment for epilepsy, and it’s also working on candidates for cancer, type 2 diabetes and schizophrenia. GW has one approved drug, Sativex, which is used to control involuntary muscle spasms from multiple sclerosis.

Insys Therapeutics Inc., which develops drugs based on synthetic cannabis, rose 5 percent to $15.67.

GW, based in Cambridge, England, isn’t currently interested in a sale, Reuters reported, citing people familiar with the matter. A representative for GW declined to comment.

 

Eoin Treacy's view -

Cannabis is increasingly being recognised for its uses as a pain reliever and mood stabiliser; confirming what millions of users in the illicit market have testified to for decades. With the tide of public opinion turning there is a race on to secure interests in the sector as companies bet on the potential for further legalisation to be approved in the USA, not least during the November ballot. 



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September 07 2016

Commentary by David Fuller

Apple Introduces iPhone 7: Water Resistant, Faster, New Camera

Apple Inc. unveiled new iPhone models Wednesday, featuring a water-resistant design, upgraded camera system and faster processor, betting that after six annual iterations it can still make improvements enticing enough to lure buyers to their next upgrade.

First Look at the New iPhone 7 and iPhone 7 Plus

The iPhone’s main improvement revolves around the new camera. Past models have had only one lens on the back, but the new version features a dual-lens system on the larger iPhone 7 Plus. The technology allows for sharper, brighter photos with better ability to zoom without degrading quality. Apple released a few details about the new phone on its Twitter account while Chief Executive Officer Tim Cook was giving a presentation at an event at San Francisco’s Bill Graham Civic Auditorium. 

Even as iPhone demand has waned in recent quarters, partly due to the lull between product launches, the device continues to be the biggest source of Apple’s revenue. The iPhone is at the center of an ecosystem of products from Apple TV to the Apple Watch that are designed to function in connection with it. The new models will be critical to the holiday quarter, and the world’s most valuable company is counting on them to prop up sales ahead of an expected overhaul of the line in 2017, the iPhone’s 10th anniversary.

David Fuller's view -

There are clearly a number of improvements but will it be enough to top Samsung? Many of us will be interested in the reviews, not least from Which Magazine as far as I am concerned.  It definitely preferred Samsung’s phone a few months ago but Apple clearly has some significant improvements. 

This item continues in the Subscriber’s Area and includes a discussion of Apple’s stock market prospects relative to Samsung.



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September 07 2016

Commentary by David Fuller

EU Fiscal Stimulus Is Just a Rule Change Away

Here is the opening of this topical article from Bloomberg:

The European Central Bank is expected to extend its quantitative easing program further during the meeting of its governing council this week. The irony is that while the ECB has various options for continuing a program that isn't working, national governments have relatively few options for embarking on one that most agree is sorely needed. As Mario Draghi and others have said on multiple occasions, the ECB cannot deliver on its own. It needs governments to use fiscal levers to help stimulate spending and growth.

What prevents European governments from doing that right now is ostensibly the Maastricht deficit and debt limits (3 percent and 60 percent of gross domestic product respectively). While the European Commission has said that it would not count some investment spending in those limits, the rules are unclear and make it difficult for countries in breach to invest. What is needed is a change that brings national accounting more in line with reality and the sound principles used in the private sector.

Infrastructure investment in Europe is currently counted as an expense that gets added to (already bloated) national budgets. That fails to account for any multiplier effect the measures might have or the increase in productivity that is unleashed when, say, digital infrastructure is expanded or new transport links are created.

An investment, rather, should be amortized over the period it will be used for, just as it is in the private sector. A company that invests in new machinery, for example, amortizes it over many years. The same could even be true for R&D spending, which can deliver many gains in a knowledge economy. 

David Fuller's view -

The EU’s political leadership, mainly self-appointed by Germany and France, has tried to align what were 28 separate nations before Brexit occurred.  They sought to do this with one-shoe-fits-all rules.  These have not worked very well and any attempt to enforce them had been the equivalent of trying to herd 28 cats. 

Europe may have more success with fiscal spending, which many financial observers have long said was overdue, including Mario Draghi, president of the European Central Bank.

If GDP growth is weak and monetary policy near zero percent is harming savers and banks, while benefiting only stock markets, fiscal spending to assist economies looks like a logical and necessary response.  To the extent that it helps GDP growth, it may also cushion the next stock market downturn.       



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September 07 2016

Commentary by David Fuller

Japan Demand for Seamless Brexit is a Timely Warning Against Hubris

It [Japan] wants continuation of the ‘single passport’ system for financial services, and clearing of euro transactions in London. “If Japanese financial institutions are unable to maintain the single passport obtained in the UK … they might have to relocate their operations from the UK to existing establishments in the EU,” it said.

The task force insists on mutual recognition of ‘Authorized Economic Operators’, which could not occur if Britain fell back to the minimalist terms of the World Trade Organisation. If the UK fails to retain the European Medicines Agency, Japanese pharmaceutical companies might shift research and investment to mainland Europe.

It wants guaranteed “access” for EU and UK nationals to work in each other’s country, which is not the same thing as free movement of labour or benefit rights. While the paper stresses that Japan “respects the will of the British people”, it cleaves to the status quo. “The message is essentially that nothing should really change,” said Raoul Ruparel from Open Europe.

The wish-list could perhaps be achieved through a halfway house such as entry into the European Economic Area, the ‘Norwegian model’. It is totally incompatible with the hardline demands of the Brexit triumvirate.

The task force paper is probably music to the ears of 10 and 11 Downing Street, and its release during the G20 summit may have been co-ordinated. It strengthens Theresa May’s hand as she tries to steer through treacherous waters, and pushes within the cabinet for a compromise soft Brexit - or a “seamless Brexit” as Tokyo calls it.

Japan’s demarche should not be read as a threat to Britain. The document is equally addressed to the EU, making it clear that the EU’s own credibility is on the line and that any attempt to ‘punish’ Britain would be intolerable.

It urges the EU to recognize that Britain cannot on its own deliver these terms, and that EU officials must “heed the voices of Japanese businesses to the fullest extent and to do their utmost to cooperate in taking the necessary measures to advance the Brexit negotiations,” it said.

David Fuller's view -

AEP’s article is more cautious than The Telegraph’s other article regarding Japan which I posted on Tuesday.  A lot is in play right now and the EU is likely to change radically over the lengthy medium term, as I have said before.  However, the more immediate question is - might it actually concede to the UK a separate deal in terms of autonomy and sovereign rights, including control over its own borders?  There is currently no precedent for this, although it would be in the sensible interests of European trade with the rest of the world.  Alternatively, the UK may have no other option but to go for full Brexit, in its best long-term interests.  In other words, leave the EU, lock, stock and barrel. 

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



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September 07 2016

Commentary by David Fuller

Why London will be an economic powerhouse after Brexit

London has retained its crown as the leading global city of opportunity and will remain a top destination for years to come despite the UK’s decision to leave the EU, according to PwC.

The Big Four accounting firm said the capital’s status as an economic powerhouse and magnet for innovation had helped it to “pull away” from global rivals this year.

Its report, which ranks the world’s 30 leading cities via a series of measures including ease of doing business, economic clout and liveability, put London at the top for the second straight year, ahead of cities including Singapore and Toronto.

PwC said London’s dynamism meant it would remain “agile and resilient” in the face of the Brexit vote, helping it to take advantage of “opportunities” and overcome challenges in the years ahead.

PwC’s research was conducted well before UK’s decision to leave the EU on June 23. However, it said the prospects for London remained bright.

“We cannot predict what Brexit may mean to the future of London as a pre-eminent world city, we do know it is today one of the world’s most cosmopolitan and well balanced cities, as shown by our research.

"Any effects Brexit may have on London will take place in a process that will evolve over time and not overnight,” it said in a report.

Sadiq Khan, the Mayor of London, said he was confident that London would continue to be “the best place in the world to do business”.

David Fuller's view -

PwC is certainly an influential firm but surely this is a very subjective article and rating.  The important assessments of Britain post Brexit will come several years from now.  Personally, I am very optimistic about the UK’s prospects but they will require good governance and hard work, just like any other important achievements in the histories of countries. 

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



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September 07 2016

Commentary by David Fuller

Email of the day

On the post Brexit future for Britain:

David, I have the impression that City AM is running a series of articles to raise spirits in the City in this first week back from the holidays. Well, not a bad thing to do in comparison with the post-Brexit stuck-in-the-mud approach of some other papers I won't name. I particularly like this article in today's edition of city AM.

This is a truly uplifting article. It makes so may good points it is hard to choose one or two (though I know you will agree that London is the coolest place to live on the planet). Its main point is that wages in China have increased 5 fold in 3 years and at the same time, after one region in the USA, "the next most competitive location is the British Midlands from Birmingham to Manchester and beyond, plus the High Tech triangle that runs between King’s Cross, Cambridge and Oxford." I travel the world a lot and my impression is exactly as recorded in this article. I am very excited about the post Brexit future for Britain.

 

David Fuller's view -

Thanks for a very interesting and enthusiastic email of general interest.  (Note for subscribers: I have attached the two links which came with this email so that you can access them without leaving the Fuller Treacy Money site.)

There is certainly no harm in raising spirits in the City or anywhere else, with genuine good will and realistic optimism. What those of us who favour Brexit need to avoid is hubris – a repellent and destructive state of mind.  There are big, exciting challenges ahead, requiring a realistic can-do spirit. We also need to encourage rather than alienate disheartened Remain voters.  The UK needs their energy and constructive input.  Personally, I remain very optimistic about Brexit, but I do not underestimate the challenges. 

Incidentally, Pippa Malmgren, who wrote the article for City A.M. above is an interesting contributor.  An American and successful businesswoman, she was a financial advisor to President George W Bush, before moving to London where she now lives and works.  Similarly, the author of this email is a key participant in the High Tech triangle which runs between King’s Cross, Cambridge and Oxford.   



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September 07 2016

Commentary by Eoin Treacy

Flows vs. Fundamentals the upside risk to EM EPS

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

The EM equity rally continued in July and August (+8%), albeit at a slower pace than the furious January-March rally (+20%), with MSCI EM sitting at 898 currently, or 2% off the cycle highs from two weeks ago. EM FX has corrected a bit more sharply in recent days, and our EM FX index currently sits just 0.5% above its March 31 close. Although sovereign credit spreads remain near cycle-tight levels, EM credit and local bonds have softened their rally as well in recent days (USD debt +4%, local debt +1% since end-June). As we discussed earlier this summer, an EM-friendly environment with equity being the strongest performer tends to occur during a ‘growth up, rates up’ phase of the cycle, and this has indeed been the macro backdrop (see EM Cross-Asset Strategy Part 1: Identifying ‘EM Risk’).

Much of the discussion surrounding the EM rally has focused on flows and positioning, but EM fundamentals have shown signs of a tepid improvement. EM GDP growth accelerated sequentially in the first quarter of 2016, and monthly data (such as Industrial Production) continued to improve in 2Q (see Exhibit 1). This is not the first time that EM growth has picked up since the global financial crisis – we have seen a few oscillations in sequential growth momentum and the bounce came off a low base in 4Q 2015. However, perhaps more importantly, the differential of EM vs. DM growth has improved in the past two quarters, a development we have not seen since early 2012 (see Exhibit 2).

We have long argued that an improvement in the EM growth outlook is the essential  ingredient in adopting a positive outlook on EM equity – both in absolute and relative terms. Consequently, while we are unsurprised that the EM rally coincided with improving growth earlier this year, we have remained sceptical on the rally for two mains reasons: (1) the GDP acceleration did not drive EM EPS higher, and (2) EM growth picked up off a very low base and amid a sharp rise in commodity prices (oil and metals) in late Q1 and Q2, something we do not expect to continue in 2H. Below, we discuss the upside risk

 

Eoin Treacy's view -

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

Negative yields in some of the world’s largest developed markets has set off a global search for yield which has burnished the allure of many emerging markets. Meanwhile the rebound in commodity prices may have provided the bullish catalyst required to stoke interest in the asset class and is likely to remain a tailwind for the sector as long as prices are rallying. 



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September 07 2016

Commentary by Eoin Treacy

Enbridge May Have Just Touched Off a 'Supermajor' Race for Pipes

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

With Enbridge Inc. planning a $28 billion takeover of Spectra Energy Corp., some investors say the industry’s in store for more deals as pressure mounts on the likes of Enterprise Products Partners LP and Kinder Morgan Inc. to follow suit. The biggest pipeline deal of the year foreshadows a feeding frenzy as those companies that survived the collapse in oil and natural gas prices step up the hunt for bargains. TransCanada Corp. got the ball rolling with the $10.2 billion purchase of Columbia Pipeline Group Inc. earlier in the year.

“We’ve just come through a very tumultuous period,” said Libby Toudouze, a partner and portfolio manager at Cushing Asset Management in Dallas. “Being able to survive the trough in the energy cycle, especially one like this last one that was so long, means you have to be bigger, faster, stronger.”

Enbridge’s deal would vault the Calgary-based company into North America’s largest energy pipeline and storage player. It could also mark the beginning of the "supermajor" era for the industry, according to Rebecca Followill, head of research at U.S. Capital Advisors, since it might “light a fire in the bellies” of the larger pipeline players, setting off a wave of consolidation that could accelerate through the end of 2016.

“Enterprise Products Partners is the other big 800-pound gorilla out there,” Toudouze said. “This puts a little more pressure on them to try to do something in the space.”

 

Eoin Treacy's view -

The MLP sector, which is heavily weighted by pipelines, crashed lower with oil prices. The high leverage employed in the business models of pipeline companies was a major contributing factor in this underperformance. However with increased evidence that oil prices have hit medium-term lows, the relative resilience of North American economic growth and continued low interest rates, it is a natural time for companies to think about acquisitions. 



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September 07 2016

Commentary by Eoin Treacy

Bond Traders Pare Fed Wagers as Goldman Reverses September Shift

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

"With slightly softer data and less ‘time on the clock,’ a rate increase this year now looks a bit less certain," Jan Hatzius, chief economist at Goldman, wrote in a note to clients Tuesday. "While this is just one indicator, the surprise was meaningful, and there may have been some Fed officials feeling lukewarm on a September hike to begin with."

The central bank meets Sept. 20-21 after officials have stood pat on rates this year and twice pared projections for the path of increases. San Francisco Fed President John Williams on Tuesday said the U.S. economy is “in good shape and headed in the right direction” without indicating whether he was leaning one way or another regarding a rate increase.

 

Eoin Treacy's view -

With a wall of debt that needs to be either retired or refinanced coming due in the next few years the Fed is understandably cautious about raising rates without robust economic growth to swell government coffers. In fact since monetary easing has not quite achieved the growth rates envisioned by central bankers, the case for fiscal stimulus is growing, regardless of the potential for it to create a bigger problem later. 



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September 07 2016

Commentary by Eoin Treacy

September 06 2016

Commentary by David Fuller

Japan Threat to Cut Investments in the UK Would Hurt but is Unlikely to Come True

Japan’s companies could flee the UK post-Brexit, the country’s government has warned, if Britain is cut off from Europe and the world.

The bold statement does not reflect the public aims of Britain’s leaders nor those of the EU, but Japan’s warning reflects worries over the potential shock to global trade if ties with other nations are severed altogether.

“Japanese businesses with their European headquarters in the UK may decide to transfer their head-office function to continental Europe if EU laws cease to be applicable in the UK after its withdrawal,” the government said in a statement at the G20.

The document handed a list of demands to the UK and EU, warning that tariffs on international trade “could suppress the revenues of businesses” while burdensome red tape on trade between the UK and EU would “increase the costs of logistics operations, which would have a significant impact on business operations”, and that retaining and banking passport is vital.

In plain English, it is a threat of less investment and fewer jobs.

Japan is certainly a major investor in the UK. Almost 1,000 UK firms are owned by Japanese investors, with a combined turnover of £72bn last year and gross value added to the economy of £14.5bn, according to the Office for National Statistics.

Foreign direct investment into the UK from Japan totalled a net £2.2bn in 2014, with the UK receiving half of the country’s investment into the EU, seeing Britain as a gateway to Europe.

The Japanese ambassador estimates 10,000 Japanese firms operate in the UK, employing 140,000 people.

The impact of a wholesale shift away from the UK by any large firm could be significant, particularly when companies focus in one particular region.

Nissan and Hitachi are both big Japanese manufacturers with major operations in the North East of England – Nissan’s car plant in Sunderland employs 6,100 staff, and claims that more than 24,000 jobs are created in the wider supply chain supporting the factory.

David Fuller's view -

This is an informative article, well worth reading.  I hope the headline above is correct, but am concerned that it may be overly optimistic.  Japan will not want to move any of its expensive plant and it already has good, reliable labour in the north of England and elsewhere within the UK. 

However, some EU countries have long hoped that they could attract business away from the UK.  Brexit reopens covetous instincts.  Nevertheless, is the insistence that the UK maintain open borders (an increasingly unrealistic and unpopular policy within the EU) more important than mutually beneficial free two-way trade with the UK?  I don’t think so but more importantly Mrs Merkel still does.  She may also be in the twilight of her political career, apparently determined to tell her public which way to vote rather than listen to their concerns.

Is there a hint of hypocrisy in all this?  See also: Germany braces itself for invasion of Polish workers as it follows EU immigration rules.  Published by The Telegraph in May 2011, you may find it interesting.  My thanks to Eoin for providing it.

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



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September 06 2016

Commentary by David Fuller

Quantum Computers Are Coming. The World Might Not Be Ready.

Quantum mechanics, Carl Sagan once observed, is so strange that "common sense is almost useless in approaching it." Scientists still don't understand exactly why matter behaves as it does at the quantum level. Yet they're getting better at exploiting its peculiar dynamics -- in ways that may soon upend the technology business.

One of the most interesting applications is in computing. In theory, quantum computers could take advantage of odd subatomic interactions to solve certain problems far faster than a conventional machine could. Although a full-scale quantum computer is still years off, scientists have lately made a lot of progress on the materialsdesigns and methods needed to make one.

And that could have some striking benefits. Quantum computers could simulate how atoms and molecules behave, to the great advantage of chemists and drug designers. They could solve optimization problems -- say, how to efficiently route airplane traffic -- far faster than current technology can. They could speed advances in artificial intelligence, improve sensors, and lead to the design of stronger and lighter industrial materials.

Unsurprisingly, then, investment in the field is surging. IBM,Microsoft and Google are all building quantum research labs. Startups are gearing up. Banks are very interested indeed. Governments see applications for space explorationmedical research and intelligence-gathering. America's National Security Agency, in fact, has been quietly trying to build a quantum computer for years, in the hope that it would make an unstoppable code-breaker.

And that suggests a looming problem. To simplify a bit, the cryptographic tools commonly used to protect information online rely on very hard math problems, such as factoring large integers, that normal computers can't solve in a reasonable time frame. Quantum computers, though, could probably make quick work of such equations.

As a result, they could undermine the security of everything from mobile phones to e-commerce to cloud computing. Within two decades, by some estimates, quantum computers may be able to break all public-key encryption now in use. "The impact on the world economy," says the nonprofit Cloud Security Alliance, "could be devastating."

David Fuller's view -

For computer security specialists, this is the equivalent of: ‘… and just when you thought it was safe to go back into the water.’

For instance, quantum computers should have no problem in outsmarting the latest, albeit not fully developed, blockchain security system.  And how will quantum computers hold up against self-programming artificial intelligence?

We live in increasingly interesting times. 

This item continues in the Subscriber’s Area and includes charts.



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September 06 2016

Commentary by David Fuller

Can More Bad Times Be Ahead for EM?

My thanks to Bernard Tan for his ever interesting and original research, illustrated with lots of graphs which you may not have seen.  Here is the opening:

 

It has become increasingly popular to turn bullish on Emerging Markets (EM). I am not a believer.

The biggest EM market is China. But the most important driver of China’s economy, the M2 monetary aggregate, has turned down again.

Already with each passing quarter, the Chinese economy is generating less GDP for every dollar of M2. And now, M2 growth is decelerating sharply.

There’s no big recovery ahead for China. Just more drift and struggle.

Meanwhile after rising relentlessly since 2010, the US inventory to sales ratio for various sectors like retail, wholesale and manufacturing have begun to fall, starting from Apr 2016.

David Fuller's view -

This is further evidence that stock markets are borrowing from the future by floating higher on a cushion of liquidity, which the current economic data and corporate profits do not support.  Stock markets can be lead indicators but if the fundamentals do not catch up reasonably soon, investors will start to wonder if they have run off a cliff.  We can expect more anxious calls for fiscal spending. 

 Bernard Tan’s report is posted in the Subscriber’s Area.



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September 06 2016

Commentary by Eoin Treacy

China's Productivity Growth is the Worst Since the Asia Crisis

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

Labor productivity in the world's second-largest economy increased 6.6 percent last year to $7,318 per person, National Bureau of Statistics and International Labour Organization data show. The level, calculated as average inflation-adjusted gross domestic product per employed person per year, measures the efficiency of workers economy-wide.

China kicked off a big surge in efficiency in the early 2000s after entering the World Trade Organization, implementing aggressive reforms to streamline state corporations and allowing more of a private real estate market. But even after those gains it still lags far behind more productive economies in Europe, Japan and the U.S.

 With a shrinking working-age population already hurting economic growth, China must boost the value created by each worker if it is to join the ranks of the world's wealthy economies.  The hope is that upgraded machinery, services sector advances and a shift up the value chain will help make workers more efficient--and maybe even shorten the  badminton lunches.

 

Eoin Treacy's view -

At over $7000 per person China is squarely in the middle income bracket of global economies. However that figure is distorted by the inequality evident within a population of over 1 billion where extraordinary wealth contrasts with profound poverty in the hinterland. If China is going to march towards continued standard of living improvements then productivity growth will need to continue and that will be contingent on government appetite for economic reform. 



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September 06 2016

Commentary by Eoin Treacy

Rupee Jumps to 4-Month High as Patel Begins Innings as RBI Chief

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

Indian sovereign bonds also advanced on Tuesday. Urjit Patel assumed charge as the Reserve Bank of India’s 24th governor on Sept. 4, succeeding Raghuram Rajan. Patel’s first test will come Oct. 4 -- a scheduled monetary policy review -- where investors will gauge if governorship reduces his traditional reticence.

“An interest-rate increase by the Fed is unlikely,” said Rohan Lasrado, Mumbai-based head of foreign-exchange trading at RBL Bank Ltd. “Inflows into stocks remain strong and that’s supporting the rupee.”

The rupee climbed 0.5 percent to 66.5250 a dollar at the close in Mumbai, according to prices from local banks compiled by Bloomberg. It rose to 66.49 earlier, the strongest level since May 9. Tuesday’s gain reduced the currency’s 2016 loss to 0.6 percent, Asia’s worst performance after China’s yuan. RBL Bank expects the rupee to appreciate to 66.40 a dollar in the near term should equity flows sustain their momentum, Lasrado said.

“We don’t expect a change in the RBI’s foreign-exchange management under the new leadership,” he said. “They will love to buy dollars at dips and refrain from intervening should the rupee weaken in line with Asian fundamentals.”

 

Eoin Treacy's view -

The RBI engaged in a reserve accumulation policy which put pressure on the Rupee between mid-2014 and early this year when the currency tested its spike lows against the US Dollar. However it has stabilised over the last six months with the 6.5% base rate looking increasingly attractive in an environment where so many government bonds are trading on negative yields. 



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September 06 2016

Commentary by Eoin Treacy

Brent Oil Declines as Saudi-Russia Deal Falls Short of a Freeze

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

"The failure of Russia and Saudi Arabia to take any steps to support the market is sending us lower," said Bob Yawger, director of the futures division at Mizuho Securities USA Inc. in New York. "The Saudi oil minister actually talked the market lower, which is going to cost his country billions." 

Brent rose the most in three weeks on Friday after President Vladimir Putin said he’d like OPEC and Russia to agree to an output freeze, speaking before he traveled to China to meet Saudi Deputy Crown Prince Mohammed bin Salman. Oil had rallied in August on speculation that members of the Organization of Petroleum Exporting Countries and other producers would agree to cap output when they meet informally in Algiers later this month. A similar proposal was derailed in April over Saudi Arabia’s insistence that Iran participate. 

 

Eoin Treacy's view -

Russia, more than most countries, must want to see oil trading at higher prices. It’s by far their most important export and is responsible for funding not only public services but the country’s adventurism in Eastern Europe and The Levant. Saudi Arabia on the other hand has deliberately used oil as a policy tool in its attempt to deprive Iran, against whom it is engaged in open conflict in Syria, Yemen and Iraq, from deriving any advantage from the loosening of sanctions. If Saudi Arabia were to agree to Russia’s terms without a commensurate move from Iran it would be an admittance of failure which would be hard to countenance at this stage. 



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