Even consumer companies are trying to make businesses foot at least some of their bills. Instacart is figuring out ways to make money from large food brands such as Red Bull, and not only from consumers reluctant to pay delivery fees. Airbnb and Uber want more bookings from people traveling on the corporate dime.

Some of this strategy is about squeezing revenue from as many sources as possible. But it also highlights the limits of tech products and services just for individuals. We the people are penny-pinching jerks. Businesses watch their bottom lines, too, but they are often willing to pay for software and gadgets that give them an edge.

That's why Intel, Oracle, International Business Machines and the early internet were built on sales to governments, spies, big corporations and others that wanted cutting-edge stuff and had the budgets to support its development. It feels a little like that again now. I think I'll stream some Pink Floyd.

 

One area where there is an urgent need for additional corporate investment is in the delivery of 5G networks. That is if the full potential of the internet of things, connected devices, software as a service and especially autonomous vehicles are to be fulfilled. There is a great deal of media commentary about all of these sectors but the cold hard reality is that they cannot run on close to their potential on current networks. 

A link to this week's Big Picture Long-Term video is posted in the Subscriber's Area. 

We see increasing evidence of economic synchronization across both advanced and emerging markets. Global growth data suggests the expansion could continue for another couple of years.

 

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

It has been quite some time since the wider investment community has dared to hope that a new period of synchronised global economic expansion is underway but it is looking increasingly likely as Europe emerges from years of contraction, China’s and India’s growth surprises on the upside and the recovery in commodity prices, outside of oil, boosts the fortunes of producers. However, the increasing commonality of global stock markets has been evidence of this trend for much of the last year. 

SegWit2x is essentially a compromise between two main competing camps. One proposed a direct approach, seeking to increase the block size. The other, a group of developers known collectively as Core, pushed for a long-term solution by moving some data outside of the main network, a scheme called SegWit that had been resisted by miners because it also could diminish their influence. In the end, the miners agreed to adopt SegWit, but also increase the block size to 2 megabytes.

The upgrade isn’t final. The BIP91 lock-in has a grace period of about two days, during which miners will prepare to activate the software. It will then take about two weeks for SegWit to be fully adopted. Developers still warn about potential hacker attacks that could disrupt the process.

Then, three months from now, the community will face another challenge when some of the world’s biggest miners move to adopt the second phase of the proposal, the doubling of the block size. Still, many in the community agrees that the hard part is over, with prices seen stabilizing and strengthening.

“We do believe it will continue, now that we’ve gotten over this hump,” said Ryan Rabaglia, head trader at digital-trading company Octagon Strategy in Hong Kong.

 

For a globally traded asset the inability to ever mint more than 21 million coins seems like an arbitrarily tight constraint. Among the factors that represented medium-term challenges for bitcoin include the fact more than 16 million have already minted. The difficulty of minting each new coin becomes progressively more difficult so the supply issue was an inhibiting factor growth. Alternative coins such as Ethereum already possess a built-in ability to expand supply in an orderly manner. All of these factors were putting pressure on the bitcoin community to react. Their response appears measured and looks like they will succeed in avoiding a hard fork event. 

“After Rapid Growth, Rooftop Solar Programs Dim Under Pressure From Utility Lobbyists” (news article, July 9) got it right that traditional utilities are fighting to undercut competition and customer choice by targeting state solar policies, “particularly net metering, which credits solar customers for the electricity they generate but do not use and send back to the grid.”

Rooftop solar growth, however, is inevitable. More than one million consumers across the country are already powering their homes with rooftop solar. By 2022, residential solar capacity will more than triple, according to GTM Research estimates.

The utility lobby is intentionally distracting regulators from focusing on the real threat to affordable energy: billions of dollars of grid expansion proposals with virtually guaranteed profits and requests to subsidize nuclear plants. Rooftop solar competition forces utilities to control their costs.

Policy leaders who dig into the facts know that rooftop solar, plus home batteries for solar storage, will modernize our grid, provide more affordable clean power to everyone and create more American jobs.

 

The combative tone of this letter to the editors highlights the fact that the battle between utilities and solar companies is far from over. If we distil the arguments down to their core. Utilities have a vested interest in preserving their near monopoly on supply of electricity and the grid on which it travels. Solar companies want to create as large a market for their products as possible and rooftops are an important part of their growth strategy. To that end they have developed innovative pricing models and relied on sharing the grid so electricity can be sold. 

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

The common currency broke through $1.16 after Draghi said at a press conference that the euro’s recent re-pricing has received “some attention” without specifically saying he was concerned about its strength. Bonds rose, led by Italy, which has been a key beneficiary of the bank’s asset-buying.
“Draghi had a chance to talk the euro down and he didn’t,”

Athanasios Vamvakidis, a strategist at Bank of America Merrill Lynch, said in emailed comments.
The euro advanced 1 percent to $1.1635 as of 4:00 p.m. in London, after reaching $1.1658, the highest since August 2015.

The currency has advanced more than 10 percent this year, partly on speculation that a tapering of bond purchases is drawing closer.

The euro earlier declined as the Governing Council repeated that it expects borrowing costs to stay at present levels for an extended period of time and that it is prepared to increase the size or duration of the asset-purchase program should the economy take a turn for the worse.

Spanish and Italian bonds outperformed, with yields falling around seven basis points, as they won a summer respite from any ECB discussion on curbing bond-buying. The ECB has favored buying Italian securities in recent months as it combats a shortage in the euro region’s sovereign debt.
“Draghi seemed to try and downplay the anticipation for September and suggested they may try to drag this decision out,”

Richard Kelly, Toronto-Dominion’s head of global strategy in London, said in emailed comments. “He also made pretty clear that there is little appetite for any significant tapering at this stage.”

 

Mario Draghi may have attempted to leave his options open but the market is increasingly of the opinion the ECB is closer to tapering than it might like to admit. That has contributed to the Euro’s strength over the last month. 

An estimated 2.7 million adults over the age of 26 were misusing painkillers as of 2015, while another 236,000 currently used heroin, based on test Substance Abuse and Mental Health Administration data. While opioid abusers account for a tiny sliver in a workforce of 160 million, they probably make up a great share of the 7 million who are unemployed.

“Our district is the epicenter of this crisis,” said Kyle Fee, regional community development advisor at the Cleveland Fed, which hosted a policy conference in June that included a panel specifically dedicated to opioids. “It was a good way for us to dip our toe into this topic,” he said.

Most economic research on the effects of the opioid crisis comes from academia, rather than Fed researchers, and it shows a two-way relationship between the drugs and the U.S. economy.
Labor Opportunities

Poor labor market opportunities for America’s working and middle class seem to have helped fuel opioid addiction. In turn, pill and heroin use can worsen employment chances for addicts, and can lead to criminal records that dim applicants’ prospects for years to come.

“I do think it is related to declining labor force participation among prime-age workers,” Yellen told Senators last week, when asked about the crisis. “I don’t know if it’s causal or if it’s a symptom of long-running economic maladies that have affected these communities and particularly affected workers who have seen their job opportunities decline.”

 

This chart showing the diverging paths of male and female prime-age labour force participation should give just about everyone pause. It raises a much bigger question. What are people who are not academically predisposed supposed to do as the jobs they previously depended on are automated away?

Hope you’re hale and hearty.

You will recall we had a brief chat on GMO foods at lunch during the recent Chart Seminar in Singapore. 

I recall you disagreed with my views on GMO science.

Here is a video on the subject. It is very much science based. Hope you can spare some time off your busy schedule to watch it. I think you will appreciate it.

 

Thank you for this email and I have been ruminating on that conversation since April. Few topics get people more riled up than politics, religion, abortion, climate change and genetically modified foods. There are strong beliefs held by protagonists on both sides of the argument and I reached out to David Brown who I thought might have a scientist’s perspective on the question: 

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

The latest topic of interest in the oil and gas business is the lack of new discoveries given the cutback in capital investment in keeping with Mr. Dudley’s “capital diet.”  What does this mean for the industry’s future?  The International Energy Agency (IEA) has sounded the alarm over sharply higher oil prices in the 2020-2022 time frame due to a lack of industry capital spending.  With capital spending cut by 25% in 2015 and by another 26% in 2016, prospects are increasing for a growing gap in the future output trajectory for oil.  Current expectations call for a modest increase in capital spending during 2017, but that increase could prove overly optimistic should oil prices fail to recover in the second half.   

The IEA warned in its Oil 2017 report of a possible imbalance between demand and supply growth, leading to the smallest global spare production capacity surplus in 14 years by 2022.  That conclusion is based on demand growth for 2016-2022 of 7.3 million barrels per day (mmb/d), which exceeds the projected supply growth of under 6 mmb/d.  A possible relief valve might be the growth in U.S. shale output.  As Dr. Fatih Birol, the IEA’s executive director put it: “We are witnessing the start of a second wave of U.S. supply growth, and its size will depend on where prices go.”  He went on to say, “But this is no time for complacency.  We don’t see a peak in oil demand any time soon.  And unless investments globally rebound sharply, a new period of price volatility looms on the horizon.”

The supply shortage view seems to be gaining traction among oil and gas industry professionals.  Halliburton Company’s (HAL-NYSE) Mark Richard, senior vice president of global business development and marketing, told the World Petroleum Congress that “You’ll see some kind of spike in the price of oil, maybe somewhere around 2020, 2021."  This fits with Bernstein Research’s latest oil price downgrade.  The firm now sees oil prices exhibiting a U-shape cyclical pattern: after having declined from over $80 a barrel in 2014, they traded in the $40s for 2015-2016, and will now be flat at $50 for 2017-2018 before slowly climbing back to $70 by 2021.   

 

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

Synchronised global economic expansion is generally positive for energy consumption and most particularly in emerging markets where the bulk of energy demand growth is expected to originate. How quickly battery technology advances to quell range and charging time questions is likely to represent a significant a key arbiter for whether bullish forecasts come to fruition over the next five years. 

One major draw for the won is a strengthening in global trade that’s benefited South Korean exporters, along with regional neighbor Taiwan, which has also seen its currency appreciate this year. South Korea’s current-account surplus is projected by the International Monetary Fund to exceed 6 percent of its gross domestic product this year and the next two years.

“Ironically, the ones that are appreciating are the low yielders,” Soon said. South Korean 10-year government bonds yield 2.26 percent, a little less than that of U.S. Treasuries. By contrast, Malaysian debt yields 3.96 percent and India’s notes 6.45 percent.

Rapprochement Policy
President Moon Jae-in has spurred foreign investor interest after taking office in May on a platform of reducing the influence of the chaebol and seeking a diplomatic rapprochement with its belligerent, missile-firing neighbor to the north. South Korea’s stocks and bonds attracted a net $4.6 billion so far in July, reversing the outflows seen earlier this month.

The won hardly blinked after North Korea said on July 4 it fired an intercontinental ballistic missile for the first time. Moon is currently following on campaign pledges to pursue dialogue with Kim Jong Un by proposing some military and humanitarian exchanges.

Export-oriented economies like South Korea as well as Taiwan are benefiting from an upturn in the global technology sector that’s still “has got some legs to it,” Jonathan Cavenagh, head of emerging Asia currency strategy at JPMorgan Chase & Co. in Singapore, said in a Bloomberg Television interview with Betty Liu and Yvonne Man, last week.

 

The original Asian Tigers, Taiwan, South Korea, Singapore and Hong Kong has been largely somnambulant for the last few years but have been exhibiting renewed signs of investor interest this year. From a chartist’s perspective, when indices complete lengthy ranges, not least when those ranges are decades long, it is time to pay closer attention. 

Chart 13, below, provides an indication of the price risks involved in a commodity such as Wheat. Using a log scale visual, we can see that Wheat is remarkably cheap when compared to its longer-term inflation-adjusted price history. We understand the reasons for today’s lower price range: the far higher productivity that comes from mechanisation, agronomy, the use of pesticides etc.; but to an impartially-minded statistician, and using the data that supports Chart 13, a five-fold increase in Wheat prices would represent no more than a mean reversion event.

Although a spike in the price of Wheat on such a scale may seem unlikely, the risk of it happening is real and the potential consequences are severe.

The following is a list of potential outcomes that would accompany a broader range of commodity price rises (Ref. Department of Agricultural and Resource Economics, University of California, U.S. Department of Agriculture, Goldman Sachs):

Unequivocally negative consequences for urban dwellers
Lower real incomes
Rising wage pressures
Lower income groups will be more negatively effected
Lower consumer confidence
Higher risk of stagflation
Social and political instability

Understandably, the secondary effect of these outcomes on overbought and over-leveraged  financial markets would be significant. So too would the flow of investments from financial assets to real assets.

With the continued backdrop of low interest rates and the current high levels of money supply, the risk of significant flows of investment from large financial markets, such as fixed income, to the far smaller, inflation-sensitive, commodity complex is substantial. If such an event were to happen, the recent 30% move higher in Wheat prices will prove to have been an early indicator of a broader trend.

 

Quantitative easing was designed to inflate asset prices and it has been highly successful. Central bank balance sheets are at unprecedented high levels while stock and bond markets have surged. Against that background it is difficult to find objectively cheap assets. 

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

The currency staged a remarkable rally following the release of the RBA's minutes in which the board stuck with its "glass half-full" view of the local economy, repeatedly underlining the "positives" in the outlook. But it also surprised by discussing the level of an appropriate neutral interest rate, which could be seen as a sign the central bank is mulling a rate rise.

Officials revealed that they now believe a cash rate of 3.5 per cent - well above today's 1.5 per cent - would be a rate level that neither stimulates the economy nor holds it back.

In reaction, the Aussie dollar jumped more than 1 US cent to as high as US79.04¢, its highest level since May 2015, after rallying 3 per cent last week.

 

The RBA is unlikely to be in a hurry to raise rates but the recent bout of strength in the Australian Dollar raises questions for Australian investors. Are they better staying at home or investing abroad? During the commodity boom, and up to the Australian dollar’s peak in 2011, it paid to stay at home. The strength of the currency meant achieving a favourable return overseas was challenging to say the least. 

Copper futures trading on the Comex market in New York jumped on Monday on renewed optimism about economic strength in top commodity consumer China.

Copper for delivery in September jumped to a high of 2.7375 a pound (just over $6,000 a tonne) in lunchtime trade, up 1.7% on the day to the highest level since end-March. LME copper's 2017 year to date gains in percentage terms are now within shouting distance of 10%.

Commodity-intensive sectors continue to expand at a faster rate than the broader measure of industrial production

The economy of China, responsible for nearly half the world's consumption of copper, expanded at an annual rate of 6.9% in the second quarter against expectations of a slight decline and at a quicker pace than Beijing's own target of 6.5% growth for 2017.

In seasonally-adjusted quarter on quarter terms, growth was even more significant, picking up from 1.3% to 1.7%. If the trend continues, this year would be the first time since 2010 that the Chinese economy grew faster than the year before.

Industrial production data for June released today also pointed to a significant improvement. Growth in industrial output picked up from 6.5% year on year to 7.6% led by greater electricity and steel production. Bloomberg consensus forecasts pointed to no acceleration for Chinese industrial output.

 

China has a major political transition coming up in September or October. Xi Jinping has not yet anointed a new successor probably because so many positions are opening up in the Standing Committee and the Politburo, and he has a vested interest in stacking them with his own appointees. 
The ousting of Sun Zhengcai, a current Politburo member, from Chongqing over the weekend supports the view Xi is angling towards the kind of control Zhang Zemin had over the political apparatus which persisted long after he was in the top position. 

Talk of containing “grey rhinos” or in Donald Rumsfeld speak “known knowns” can also be viewed as an attempt to ensure Xi’s legacy. Here is a section from an article discussing the issue from Bloomberg: 

"The message from the leadership last weekend was very clear -- financial stability is now regarded as an important element of national security," said Raymond Yeung, the Hong Kong-based chief economist at Australia & New Zealand Banking Group Ltd.

An editorial in the Communist Party’s People Daily newspaper on Monday pointed to the seriousness of the campaign, warning of potential "grey rhinos" -- a variation on the black swan events popularized during the global financial crisis, with the difference that the danger from a charging rhino is more immediate and the animals are less rare.

Driving the shift has been a sharp decline in the cost of building new renewable power –- which, unlike generating electricity from coal or gas, is almost free to run after the initial capital investment has been made.

“Wind and solar are just getting too cheap, too fast" for gas to play a transitional role, said Seb Henbest, lead author of the BNEF report.

The consultant estimates that onshore wind and solar power are already competitive with coal and gas in Germany, and that within five years they will be cheaper to build than new coal and gas plants in China, the U.S. and India. By the late 2020s, it will start to even be cheaper to build new onshore wind and solar power than run existing coal and gas plants.

The trends that are undercutting optimism about the global gas outlook are already playing out in Europe. Natural gas demand remains well below a 2010 peak, as greater energy efficiency, rapid adoption of renewables and resilient coal consumption cut into its market share.

The IEA does not see European gas demand returning to its 2010 high. In its base case scenario, European gas demand would be at the same level in 2040 as in 2020.

 

Since the majority of globally traded natural gas is tied to long-term contracts producers have some security in the investments they made. However, a decade of high oil prices created the perception of long-term outsized profits and the reality is likely to be more modest. The extent to which coal will survive as a fuel stock against increasingly high regulatory barriers as well as innovation in storage solutions are likely to be key determinants in the success of what have been massive investments in natural gas which has contributed significantly to global supply. 

Details of this trade are posted in the Subscriber's Area. 

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

Since meeting him, Leon and I have exchanged many letters, reports, thoughts, conversations, etc. I received this one from him last week:

Hi, Jeffrey,
I calculate a three week moving average of the Bullish sentiment. Currently, it is abnormally low and [that’s] very bullish. Although long retired, many fund managers in Europe, Asia, and North America still call me and seek my view of the market. I can report to you that worldwide, investors are skeptical and fearful. Most are sitting on a mountain of cash. As you know, that is very bullish. My view remains that this great bull market is only in the early stages of the second leg. The first leg was from October 10, 2008 and ended in May, 2015 which was driven by an easy/accommodative monetary policy. The second leg started in February, 2016 which is always the longest and strongest as it is driven by improving economic conditions (due to the monetary stimulation of the past eight years) and accelerating earnings momentum which is what investors are seeing. As you know, since early last year, I’ve been of the view that investors are witnessing the biggest bull market on record and the end is nowhere near in sight. Also, I felt that when this bull market ends, it will be the wildest and wooliest speculative “blow-off” in history. There has never been so much liquidity created as in this cycle. Also, in my 55 years in this business, from a chart standpoint, I have never seen so many humongous bottoms in so many different industries as in this cycle. Many are 15 years and longer. In the 50s, it was mostly in anything electric/electronic and in the 90s, it was mostly high tech. In this cycle, except for the resource sectors, big bottoms are found everywhere. One of technical prerequisites for a long, sustained bull market is that many stocks must trace and break out of long bases. Putting my money where my mouth is, I own a few of the small and micro caps in the Biotech/Health Care area.

 

The news headlines are awash today with news that the best performing ETF this year is the short VIX Index XIV. This is one of the least volatile periods in the market since the 1990s and has delivered a very consistent chart pattern for the S&P500 which has been trending in a step sequence staircase manner since early January. 

It is a measure of the prime minister’s weakness that the Davis-Johnson rivalry is not even the most serious row tearing the government apart. Last Tuesday’s cabinet meeting — and a second “political cabinet” that followed it — were the most fractious gathering of May’s top team since she took power a year ago last week.

In both meetings ministers became enraged by the behaviour of Philip Hammond, the chancellor, and what his colleagues regard as his “tin-eared” approach to the election result.

Since June 8 cabinet ministers have been lobbying for the government to end the 1% cap on increases in public sector pay to placate voters sick of austerity who flocked to Jeremy Corbyn’s Labour Party. His insistence on financial discipline despite a fresh onslaught on Tuesday drew a “collective intake of breath” from other cabinet ministers. He singled out train drivers as “ludicrously overpaid”.

The chancellor, who has a reputation for condescending to his colleagues, got into hot water when he sought to suggest that newly automated trains would help stamp out strikes because the overpaid men could be replaced by women.

 

In calling an election Theresa May was perceived by the UK’s astute voters to be attempting a power grab rather than serving the country’s best interests. What does not appear to have gotten much air time is that the results of the election closely mirror the results of the Brexit referendum; with the government securing a narrow majority but not a conclusive landslide victory. 

As such, we are likely to have at least two bitcoins on August the 1st, but there may be even more. Bitcoiners, therefore, are strongly advised to not transact on that day until the situation becomes more clear.

Once the chain does split, BitcoinABC will probably be listed in at least one exchange, thus a period of high volatility and perhaps even trading frenzy should be expected as the market passes judgment on the value of the bitcoins.

Eventually, the dust will likely settle with one coin probably gaining some 80% or so of the current bitcoin value, while the minority coin can continue operating in their own network, free to follow their own roadmap and vision.

Which one will be which only the free market can tell us sometime next month as bitcoin finally makes a monumental and probably highly historical decision, at least for this space.

 

Bitcoin was set up so that no more than 21 million coins could ever be mined. More than 16 million have already been created, with the complexity of each successive block growing progressively more expensive to solve.  With bitcoins already priced out to 6 decimal places that limitation has asked legitimate questions about the sustainability of the global market when supply is so limited. That has led to a debate between monetary purists and miners who want to support the value by withholding supply and others who wish to see dynamic supply to allow the market to grow. 

Sweeping wildfires across Canada’s British Columbia are threatening timber supplies and sending lumber prices surging.

More than 375 fires have swept across the province, burning forests and forcing sawmills to shut down or evacuate. While the impact on supplies is minimal so far, there are concerns that the blazes will continue to spread amid hot, dry conditions, according to Paul Quinn, an analyst at RBC Capital Markets in Vancouver. Lumber futures on Monday jumped by the exchange limit in Chicago to the highest in more than two months.

“Forests are getting burnt, so that has a supply impact,” Quinn said by telephone. “The worry is they’ll continue to grow and get bigger,” he said, referring to the fires.

Last week, West Fraser Timber Co. suspended operations at three lumber mills that represent annual production capacity of 800 million board feet of lumber and 270 million square feet of plywood. Norbord Inc., the largest North American producer of oriented strand board used in residential construction, has also suspended production at its mill in 100 Mile House in central B.C.

On the Chicago Mercantile Exchange, lumber futures for September delivery rose by the $10 trading limit to $387.30 per 1,000 board feet at 11:37 a.m. local time. That’s the highest price for a most-active contract since May 9. Aggregate trading for this time is 44 percent above the 100-day average, according to data compiled by Bloomberg.

Cash prices for some grades of lumber rose 7 percent last week, Quinn of RBC said. “We’re at the seasonal peak in construction activity, so anything that reduces supply will create some pricing tension,” Mark Wilde, an analyst at BMO Capital Markets in New York, said in an email.

 

According to this article British Columbia has spent about $80 million in the first few weeks of the fire season compared with $100 million in all of last year. That gives us an idea of how large the issue is and firefighters expect to be fighting conflagrations for the next few months. 

A link to this week's Big Picture Long-Term video is posted in the Subscriber's Area. 

Health: My thanks to subscribers for your thoughtful emails of support and best wishes for a speedy recovery.  I wish I had better news to share with you but here is a brief description of the reality.

My operation on 7th July was considerably more debilitating than I had expected.  Unfortunately my atrial fibrillation returned after a few days and I still have some fluid in my lungs. Consequently my mobility remains extremely limited. Therefore I do not have either the energy or concentration to resume my career at this time. I will focus on rest, recovery and a more holistic treatment of my condition, mainly from a healthier environment in North Devon.

Stock markets: In my opinion stock markets are even more fascinating than ever. A period of uncertainty and fear persists but that is far less dangerous than euphoria. As always there are many medium-term hurdles to be cleared, not least the eventual normalisation of interest rates. The longer-term outlook remains extremely promising, not least for successful technology companies.

Your Fuller, Treacy Money Global Strategy Service: We are very fortunate to have Eoin Treacy with his calm, experienced and forensic study of global stock markets, best observed on price charts. These seldom move in isolation so Eoin also monitors global bonds, currencies and commodities on a similar basis, knowing that sharp moves in these instruments can affect sentiment. Consequently he can see potentially significant changes in relative strength or weakness more quickly than most other observers. This perspective is invaluable, ensuring that Eoin is less distracted by market noise.

Kind regards,

David

“We will work with the EU to determine a fair settlement of the U.K.’s rights and obligations as a departing member state,” Brexit Secretary David Davis said in a statement to Parliament that referred explicitly to the “financial settlement” with the EU. “The government recognizes that the U.K. has obligations to the EU, and the EU obligations to the U.K., that will survive the U.K.’s withdrawal -- and that these need to be resolved.”

The Brexit negotiations have so far been about what the EU demands before they are willing to talk about trade. In agreeing to that format, the UK was already in a weaker position. Agreeing to the demand that there is a bill to pay highlights how the current administration does not wish to risk its trade with the EU but anyone with even a modicum of bargaining acumen knows you have to at least affect the look of someone willing to walk away if you want to achieve the price you want. 

Related to Your comment regarding electric vehicles and batteries: I've been thinking about that same area, and how to invest. I ended up with the conclusion that instead of going for some hyped and bubbly valuations (such as Tesla), try to find something reasonably priced that benefits from the same disruption. A "in a gold rush, best money is made by selling shovels" type of strategy. So, after some digging, I bumped into SGL Carbon in Germany. They have had a tough couple of years, refocusing the group and a rights issue recently. Now the company is largely focused on carbon based (graphite, graphene) parts that go into Lithium batteries. The chart looks like it has bottomed, at least to me. Just something that I wanted to highlight for the collective, perhaps you have found other (and better) shares around this theme? As a disclaimer: I'm already long SGL.

Thank you for this thoughtful email. Carbon fibre companies are increasingly transitioning toward producing graphite with the aim of entering the emerging graphene market. This is a niche market but I agree it has ample scope for growth as the battery sector evolves. 

Hospitals are likely to cry bloody murder over this proposal and argue it will lead to service cuts. You likely won't hear a peep from drugmakers, though. These are very low-margin sales, and pharma firms have complained for years about what they say is abuse of the program and the extension of 340B discounts to patients and hospitals they don't think should be eligible. If the CMS change means more sales go to higher-margin areas of the market, then pharma will profit. This move suggests any future 340B and CMS reforms may be pharma-friendly. And any approach that favors drugmakers over hospitals that serve the poor says a lot about the administration's priorities.  The president's last public attack on drug prices was months ago. Pricing has apparently faded as a policy priority since the campaign. His administration's actions make that even more clear. Changes to 340B were just one reported aspect of a draft executive order on drug pricing that reads more like a pharma wish list than a plan to restrain price growth. 

The election campaign played havoc with emerging biotech stocks in particular as they were singled out by politicians for their high pricing. However, what was lost in the debate is that developing drugs for small numbers of patients is expensive. It is not quite the same thing as hiking prices for long established drugs that are designed to treat common ailments. 

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

Finally we come to the least valued US large bank, Citigroup (NYSE:C), which currently trades at 0.80x book on a beta of 1.6.  C has an “A” bank stress index rating from Total Bank Solutions.  Like JPM, C’s business model puts equal emphasis on lending, trading and investing activities, resulting in a lower RAROC at 1% vs a nominal equity return of a bit shy of 7%. 

Keep in mind that C has lower asset returns and higher credit costs than other large banks, begging the question as to whether the Fed should really be allowing the bank to increase payouts to equity investors.  If you look at Page 3 of C’s Y-9 performance report, you’ll see that C’s yield on loans is 2% higher than the large bank peer group, yet the bank has a spread on earning assets half a point lower than other large banks. The Street has C’s revenue down in Q2 2017 but magically up 1.5% for the full year.  Earnings are also expected to be down this quarter, but then will rise an astounding 9.5% for the full year.  Despite the market bump following the release of the stress test results, which will result in returning more capital to investors than C actually earns in profits, like BAC the C common still trades at a discount to book.

Unlike names like JPM, C does not have a significant asset management business and also announced an exit from residential mortgage origination and servicing earlier this year.  This may turn out to be a blessing in disguise.  C is up 58% over the past twelve months vs 13% for the S&P 500, so like JPM we’d say that the risk is on the downside for this much maligned stock.    

Will C hit its revenue and earnings numbers for Q2 2017?  Probably, especially now that they’ve jettisoned the mortgage business.   But the larger question is why does C still exist?  In the wake of the 2008 financial crisis, C has been struggling to redefine itself in a way that makes sense to investors. 

But having sold the asset management business to Morgan Stanley (NYSE:MS) and the mortgage business to New Residential (NYSE:NRZ) and Cenlar FSB, there is not much left besides the consumer lending book and the payments business.  As we’ve noted in previous comments, C’s board ought to consider selling the payments business for a premium price, spin the proceeds to shareholders, then dispose of the other assets for whatever they can get before turning off the lights.

 

Consumer lending and credit cards is not a bad market to be in considering the relative performance of companies like PayPal and Visa relative to traditional banking. With the steady march of online retail and instant gratification consumer credit remains a growth market. 

While bond markets are rallying as investors wager the data will trigger a rate cut from the Reserve Bank of India, the figures signal the economy faces hurdles even as the stock market surges to a record, the rupee rallies and the world’s major economies head into an era of higher borrowing costs.
There’s a realistic chance of a 25-basis point rate reduction in August, Indranil Pan, chief economist at IDFC Bank Ltd., said. “It could be a very close call as the RBI is expected to remain cautious of the international rhetoric of tighter monetary policy and unwinding of quantitative easing," Pan said in a note.

Some of the pessimism stems from the fact that is India is still recovering from a cash ban that interrupted employment for millions, forced farmers into fire sales of agricultural produce and bogged down the manufacturing sector. The introduction of a goods and services tax on July 1 only added to the confusion while a glut of bad loans means businesses are not borrowing to invest in Asia’s third-largest economy.

Bank credit to industry contracted in the year to May, while deposits surged following the ban of high-denomination notes in November, leaving the banking system grappling with surplus cash.

Data on Wednesday showed headline consumer price inflation fell to 1.5 percent in the year to June from an annual 2.2 percent a month ago and below forecasts for a 1.6 percent reading. That’s below the RBI’s medium term target of 4 percent and through the bottom of its 2 percent projection for the first-half. Core inflation, which strips out volatile food and fuel items, also slipped below 4 percent.

 

For long suffering investors who forced themselves to accept India’s persistently high inflation, weak currency and lumpy growth, the last year must feel like a blessing. The prospect of RBI rate cuts is gaining credence and that is being reflected in the outperformance of the stock market. 

Rare earths are in increasing demand in several fields of high tech.  Lynas Corporation, the world’s biggest rare earths producer outside China, has had a chequered life but under new management appears poised to benefit substantially.  It may be of interest.  A copy of its Quarterly Activities Report taken from the company’s web site ( https://www.lynascorp.com ) is attached.

Needless to say, I am long this stock.

 

Back in 2010 China made sure everyone knew it is in command of the global rare earth metals market, when it restricted supply to Japan, in particular, but also to a number of other importers. The result was a surge in metal prices as supply was constrained and considerable investment in additional supply outside China. 

Lynas was one of the companies that IPOED to secure capital to bring Australian supply to market. It is also one of the few that survived when the market crashed as China reversed course and flooded the market with supply. 

I hope you are well and that David is recovering / progressing well.

I was just thinking about your theme of cheap local robotic manufacturing and our Brexit.

It another thing to our advantage as we will become less reliant on German and EU manufactured goods. Plus long term, it will effect Germany quite a bit, won't it?

 

Thank you for your well wishes on David’s behalf and this question which may be of interest to subscribers. 

I was in contact with David today and he is recovering following the heart related issues he needed to have ablation for last week. He picked up a secondary infection while in hospital which has put a dampener on his recovery but is home and looking forward to making a full recovery. He is less than impressed by what he calls the "factory farming" nature of the medical system but is otherwise is good spirits. 

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

A faster pace of global growth should support U.S. exports, she said, and a recovery in drilling activity should support business investment.

“These developments should increase resource utilization somewhat further, thereby fostering a stronger pace of wage and price increases,” she said.

Yellen said the central bank’s policy rate “would not have to rise all that much further” to get to a rate that keeps supply and demand in balance in the economy. Eventually, “factors,” which she did not specify, holding down the so-called neutral rate will diminish over time, she said, which supports the Fed’s case for continued rate hikes over the next couple of years.

 

The Fed’s balance sheet stands at $4.4 trillion and it wants to experiment with shrinking it ahead of the planned refinancing of a significant quantity of Treasuries from 2018 through 2021. It’s rather questionable how it can also raise rates while shrinking the balance sheet and Janet Yellen’s testimony today suggests the Fed has reached the same conclusion. 

I thought you would be interested in this story from The Times. It’s a UK perspective but made a point about lithium battery technology that hasn’t been much aired. Perhaps because I haven’t heard much about alternative battery technology. I’d be interested in your take on it.

Thank you for this article which I would rate as an example of flawed conventional thinking that doesn’t take account of some pressing needs that are affecting the UK economy today. 

Details of this trade are posted in the Subscriber's Area. 

Retail’s “shifting sands and macro headwinds will make near-term earnings beats challenging” for PepsiCo, Wells Fargo analyst Bonnie Herzog said in a note to clients. Still, PepsiCo gets a large proportion of revenue from snacks, which are easier to sell online than beverages, she said. That means the company is better positioned to adapt than some of its peers.

PepsiCo’s comments were similar to those made by Coca-Cola CEO James Quincey, who told Bloomberg in May that when shoppers skip trips to the local mall and shop online, they also forgo buying Coke at a vending machine or food court. Coca-Cola investors will be watching to see how that may hurt second-quarter results on July 26.

Nooyi’s remarks were “an acknowledgement to the intensifying competitive environment that will likely get more so with Amazon involved,” Bloomberg Intelligence analyst Ken Shea wrote in an email. Still, some consumer products companies will be more vulnerable than others to change, and PepsiCo’s “huge distribution reach and agility arguably make it less vulnerable” to changing shopper behavior than its peers, he said.

 

Amazon Prime Day was the firm’s highest grossing ever, with its discounted Echo speaker being the top seller yesterday. The company sells just about everything and is now offering try-before-you-buy on fashion, same day delivery and investigating how to sell pharmaceuticals and auto parts. It is logical that even companies which reside squarely in the consumer staples sector but also get part of their income from discretionary products would be affected by the demise of the shopping mall. 

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

“We’ve never have had QE like this before, we’ve never had unwinding like this before,” Dimon said at a conference in Paris Tuesday. “Obviously that should say something to you about the risk that might mean, because we’ve never lived with it before.”

Central banks led by the U.S. Federal Reserve are preparing to reverse massive asset purchases made after the financial crisis as their economies recover and interest rates rise. The Fed alone has seen its bond portfolio swell to $4.5 trillion, an amount it wants to reduce without roiling longer-term interest rates. Minutes of the Fed’s June 13-14 meeting indicate policy makers want to begin the balance-sheet process this year.

“When that happens of size or substance, it could be a little more disruptive than people think,” Dimon said. “We act like we know exactly how it’s going to happen and we don’t.”

Cumulatively, the Fed, the European Central Bank and the Bank of Japan bulked up their balance sheets to almost $14 trillion. The unwind of such a large amount of assets has the potential to influence a slew of markets, from stocks and bonds to currencies and even real estate.

“That is a very different world you have to operate in, that’s a big change in the tide,” Dimon said. All the main buyers of sovereign debt over the last 10 years -- financial institutions, central banks, foreign exchange managers -- will become net sellers now, he said.

 

These are common sense statements from one of the most important CEOs in the industry and suggests central banks need to be very careful about how they adjust the status quo. That’s particularly true considering the effect quantitative easing has had on asset price inflation which was by design. 

Consensus among many in the UK, and from both sides of the Brexit argument, is that unwinding British membership has nothing to do with political will but that it might yet be brought its knees by the sheer technical challenge. 

I lunched yesterday with a former British diplomat who spent much of his embassy time in the trade department. After a career in the Foreign and Commonwealth Office he is not one to make rash and unconsidered statements although he too is part of a growing group of people in this country that believes Brexit might yet founder when the divorce process becomes simply too complicated to be executed. A patch here, a patch there, the odd bridging agreement and a bucket load of postponements and the withdrawal process could find itself spun on indefinitely. 

Don’t get me wrong; I’m not saying that this is the most probable of outcomes but it is beginning to emerge as a distinct possibility…. not that anybody either close to or actually in government would dare say anything to that effect.

 

The UK government is in something of a bind. It has a reduced majority and Prime Minister May has had to resort to appealing to the good nature of her bitter political rivals in other parties for support to get her through the Brexit negotiations.  More than anything else that displays how weak a hand she is playing after the election. 

The chain of events began in October when the federal government tightened mortgage insurance requirements, and continued into April when the province imposed a 15 percent tax on foreign purchasers. Home sales fell 37 percent in June from a year earlier and prices rose the least since January 2015. Then last week the regulator said it’s considering requiring lenders to stress test uninsured mortgages, which is expected to cool things further.

On top of all this, Governor Stephen Poloz will lift the benchmark overnight rate on Wednesday to 0.75 percent from 0.5 percent, according to 22 of 31 economists in a Bloomberg survey while the rest see no change. The rate could rise to or past 1 percent in a year, a separate survey shows. In anticipation, Canada’s biggest banks are also tightening. Royal Bank of Canada raised its fixed rates for 2-,3-, and 5-year term mortgages by 20 basis points.

An increase of 75 basis points to 100 basis points in the Bank of Canada’s key rate by the end of 2018 would remove 6 percent to 8 percent of buyers from the country’s real estate market if banks fully price it into their loans, according to Will Dunning, chief economist at industry group Mortgage Professionals Canada. A slowdown in property deals may pose a risk to Canada’s growth -- the fastest among Group of Seven countries -- just as the economy seems to be overcoming a slump triggered by a drop in global oil prices.

“Right now people are staying away from buying," Dunning said by phone. "If they stay away over a longer period of time, that could become dangerous, that could become deflationary."

 

Canada avoided the worst ravages of the credit crisis because its banks were not exposed to subprime loans, its domestic housing market was not as overbought in 2007 as the USA’s and commodity prices staged an impressive rebound. The near bankruptcy of Home Capital, only avoided by a last-minute investment by Warren Buffett, was a warning shot for the financial system that is now dealing with elevated real estate pricing in both Vancouver and Toronto. 

As Tesla Motors begins to build the world’s largest lithium-ion battery in Australia and other vehicle makers such as Volvo get on board the electric vehicles train, concerns are rising over the environmental footprint of mining that and other materials used in car batteries, as well as their eventual disposal.

According to analysts at UBS, by 2025 the market will need 12 times the battery capacity currently available. At the same time, only 5% of lithium-ion batteries get recycled, versus more than 90% of those used in conventional vehicles, reports Financial Times:

“One of the challenges of making battery recycling economically viable is the quantity of battery material that is needed to keep utilisation rates of recycling facilities sufficiently high,” say analysts at Morgan Stanley. “The risk, therefore, is there may not be the necessary infrastructure in place in time for the first significant wave of EV batteries to reach end of life.”

Demand for the commodity has been rising as of late, which in turn has caused prices to more than double in the past 18 months.

The need for the metal is expected to triple by 2025, but not all the countries rich in lithium are taking advantage of the boom. At the same time, new actors are emerging worldwide.

 

This article carries a number of interesting graphics on which countries have the largest lithium reserves and which are the largest producers. With demand for the metal expected to multiply over the next decade a supply inelasticity meets rising demand growth model is in place at least until the necessary infrastructure to produce and recycle the metal has been built which could take another few years. 

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

So our message to the folks in Jackson Hole this week is that the end of the Fed’s reckless experiment in social engineering via QE and near-zero interest rates will end in tears.  “Momentum” stocks like TSLA, to paraphrase our friend Dani Hughes on CNBC last week, will adjust and the mother of all rotations into bonds and defensive stocks will ensue.  We must wonder aloud if Chair Yellen and her colleagues on the FOMC fully understand what they have done to the US equity markets.

The notion that five years of market manipulation by the FOMC (and other central banks, to be fair) can end happily seems rather childish, especially when you consider that the other great accomplishment by the Fed during this period is a massive increase in public and private debt. Once the hopeful souls who’ve driven bellwethers such as TSLA and AMZN into the stratosphere realize that the debt driven game of stock repurchases really is over, then we’ll see a panic rotation back into fixed income and defensive stocks.

The period from QE 1 in 2012 represents one of the most reckless episodes in the history of the US central bank, a period where the FOMC essentially encouraged a partial LBO of the US equity markets. The key question for the FOMC and investors seems to be this: How much new equity issuance can the markets support if public companies eventually need to reduce debt and rotate out of the LBO trade constructed by Yellen & Co?
 
Corporate credit spreads are the key indicator to watch, both in terms of the economy and the financial markets.  It’s a game of financial musical chairs. Ray Dalio, Janet Yellen and all of us are dancing.  When does the music stop?    

 

Massive monetary accommodation where interest rates have been driven to unprecedented low levels has resulted in a boom in financial engineering. Issuing new debt when it is so cheap is a no brainer when it can be used to reduce total debt servicing costs and to buy back relatively expensive equity. 

“One of its more important features is that you don’t have identities tied to this,” said Spencer Bogart, head of research at venture firm Blockchain Capital. “This financial privacy is an important characteristic.”

Ether, the second-most-popular cryptocurrency after bitcoin, is used to pay for applications or programs that run on the Ethereum blockchain, a secured list of transactions that can be shared. That allows for the use of “smart contracts,” or pieces of computer code that make the terms of such agreements operate automatically. The blockchain has the potential to reshape business and finance by enabling immediate settlements of activities such as bank transfers and securities trades.

JPMorgan Chase & Co., BP Plc, Microsoft Corp. and ING Groep NV are among those experimenting with it. The current value of all the ether held, $23 billion, means dozens of electronic wallets have accrued nine-figure positions. Many of them could be held by individuals, according to a Bloomberg analysis. Individuals can hold multiple wallets.

 

Interest in cryptocurrencies has surged this year with stories, such as this one, of riches made almost overnight attracting legions of private investors into the market. The immutability of bitcoin and the anonymity of holding its, the ability to transfer currency across borders without government interference and the fact supply is limited are all aspects of the market which appeal to investors. However, it is the smart contracts aspect of the cryptocurrency market that represents where it can grow and which lends it utilitarian value. 

Ashish Shah, head of equities at Mumbai-based A.C. Choksi Share Brokers Pvt., said his firm placed orders for AU Small Finance Bank Ltd. on its first day of trading. As of 3:15 p.m. local time, he was still waiting to find out if his firm owned the stock, which rose 51 percent on its debut.

“We punched in the trades and they are still pending, and we don’t know whether we got the shares,” said Shah. “Will they be scrapped, reversed or executed? The bourse could have done a better job at communicating as clarity reduces chaos.”

The NSE handles about twice the stock volume of rival BSE Ltd. and controls about 80 percent of India’s derivatives market, which is among the world’s largest. The exchange company, which has filed for an initial public offering, has been embroiled in a probe into whether it allowed preferential access to some high-frequency traders. BSE saw its volume almost double over previous days, data compiled by Bloomberg show.

“NSE deeply apologizes for the glitch,” it said in an emailed statement. “The matter is being examined by the internal technical team and external vendors, to analyze and identify the cause which led to the issue and to suggest solutions to prevent recurrence.” A Securities and Exchange Board of India spokesman declined to comment on the developments.

 

Trading halts as a result of glitchy software are not quite the same things as runs on prices due to panicky selling but are nonetheless an inconvenience and a symptom of how reliant the global market is on computers. 

A link to this week's Big Picture long-term video is posted in the Subscriber's Area. 

One slightly more plausible suggestion has been a sudden liquidity drain that sparked a bout of panic selling. Indeed, markets have been fairly thin over the 4th of July holiday period which could have compounded fears that silver was becoming illiquid in the wake of JP Morgan’s recent acquisitions. This being said, the extent to which JP Morgan has ‘rigged’ silver markets is constantly challenged and courts seem to be unable to agree on if the institution is breaking antitrust legislation.

Stop loss orders have also been fingered as a cause for the sudden rout for all the usual reasons. Specifically, the hitting of numerous stop loss orders in rapid succession could have easily amplified the effects of a sell-off – even if they probably didn’t trigger the downtrend in the first place. Moreover, given that many traders may have been out of action due to the holiday’s in the US, it’s quite reasonable to expect more ‘set and forget’ trades to have been placed than is typical. This would have left the metal more exposed to this type of risk than we would usually expect.

 

Silver is prone to volatility not least because it is a substantially thinner market than gold which is why we so often refer to it as “high beta gold”. The price fell by almost $2 around midnight UK time when markets are thin before rebounding to almost unchanged. It then traded laterally in an inert manner until an hour before the US open when it traded down from $16 to $15.50 before stabilizing again. That represents substantial volatility but the question is what now?

The Fed seems to have rose-colored glasses on regarding this experiment ahead in terms of even gradually unwinding the balance sheet and the impact on the same financial markets that are deemed at least those around the table (presumably the one with Bloomberg terminal) to be excessively exuberant. And at the same time, the view on the economic outlook seems quite rosy, then again, the central bank has overestimated economic growth consistently for the past seven years. Old habits die hard.

But there are some at the Fed that share our views on many items. Here were a few new wrinkles:
“Contacts at some large firms indicated that they had curtailed their capital spending, in part because of uncertainty about changes in fiscal and other government policies…”

Reports regarding housing construction from District contacts were mixed.”

District contacts reported that automobile sales had slowed recently; some contacts expected sales to slow further, while others believed that sales were leveling out”

So here we have soft capex, soft housing and soft autos. But yet the consensus view is that the economy is doing just fine. A case of cognitive dissonance?

 

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

You have Ray Dalio saying, keeping dancing but stay close to the door, regarding the equity market. Jeff Gundlach says the run-up in yields is only beginning. David Rosenberg says deflation is here to stay. The problem for investors is that they all make cogent arguments and it is difficult to divine just where we are and what is likely to happen next. Let’s just stick to the charts. 

While U.S. production grew slightly in 1978, and then remained stable until 1983 before once again growing. The emergence of the North Sea as a significant new oil supply basin (UK and Norway) as well as Mexico’s offshore oil success demonstrated the power the sustained higher oil prices had on creating new supplies. The impact of new supplies contributed to OPEC’s collapse.

At the same time oil supply outside of OPEC started growing, oil consumption in the developed world (OECD) fell, which is demonstrated by the United States and Europe consumption curves in Exhibit 13. Those two regions are the key part of the OECD. Non-OECD consumption continued growing. As the chart shows, the demand reduction was significant, and was key to crippling OPEC’s pricing power as was the growth in new oil supplies.

As we look at the factors helping to reshape today’s oil market, environmental pressures, especially the potential impact of electric vehicles, coupled with the impact on oil demand growth that will come in response to efforts by countries to decarbonize their economies, can be considered the equivalent of the 1970s oil price shock to global oil demand. Demand will continue to grow for the foreseeable future, but the annual rate of growth is likely to continue to slow until it eventually goes negative. Lower demand is coming at the same time oil companies are reducing well breakeven prices insuring more supplies in the future. These improved E&P economics is broadly similar in impact to the opening of new oil supply basins that occurred in the 1970s and 1980s. Just as the opening of new supply basins had a long-term impact, the reduced well breakeven prices will also have a long lasting impact. We can argue about how long the impact will last, but it is likely to last much longer than we expect.

History does not repeat, but it does rhyme, as suggested in the famous quote. In our view, the current oil industry downturn is rhyming more with the 1982-1986 cycle than with the 2008-2011 one. If that is true, then the industry may be looking at an extended period of low oil prices just as the industry experienced following the 1981 oil price peak. That span extended for 18 years as oil prices averaged below $45 a barrel, or the very long-term average of inflation adjusted oil prices, with the brief exceptions of the First Gulf War and 9/11. BP plc CEO (BP-NYSE) Robert Dudley’s comments in early 2015 that the industry needed to learn to live in a “lower for longer” environment seem to be proving accurate. That means the oil industry must continue adjusting its cost structure. The oil companies will need to keep their staffing lean, employ the best drilling and completion technologies available, and manage their balance sheets appropriately to succeed in the future. This environment doesn’t mean that there is no future for the oil industry. It means that corporate strategies must constantly be reassessed within a broader energy industry panorama subject to external pressures that will only grow in the future.

 

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

“The cure for high prices is high prices” has been an adage in the commodity prices for decades and is no less true of oil prices. After almost a decade of high prices a great deal of additional supply has been brought to market. However, the advent of new technology which has allowed previously inaccessible reserves to be accessed, namely shale oil and gas, and the subsequent success in reducing the cost of extraction continue to represent gamechangers for the sector. That is before we begin to talk about the emerging trend of refracking; where wells that are past their peak output can be revitalized at a substantially lower cost.  

North Korea's recent launch WAS intercontinental by virtue of it reaching appx 1,000-mile apogee (height, elevation). That 1,000-mile height translates into many thousands of miles laterally. 
NASA Engineer, Retired

 

Thank you for this confirmation. Empathy is a useful tool in both looking at how markets might respond to different situations but also to geopolitics. I wonder at what the fly on the wall must hear at National Security briefings in the White House. 

North Korea has nuclear weapons and an ICBM, it is debatable whether Iran’s nuclear ambitions have been blunted, meanwhile China is growing increasingly strident about its border claims both in the South China Sea and with India, while cyberwarfare tools developed by the NSA have been leaked into the general hacking community with the number of civilian targets proliferating by the day. 

What the future of automation will be and how quickly it all happens is a guess but the trend is clear. From my perspective, the good news is that analysts, financial managers et al are at the left-hand side of the automation spectrum but the more troubling point is that there are a good many jobs that employ large numbers of people which are at risk from automation. That means we are going to need to come up with a lot more different kinds of work for people, especially those with little education, to do. 

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

With a Federal Reserve seemingly committed to raising interest rates a third time this year and speculation the European Central Bank could announce a tapering of bond purchases by the end of the year, the fundamentals aren’t encouraging. As yields are now approaching key technical marks that could trigger a fresh flush out of long-end bulls, the risk is building that Treasury yields go even higher.

Ten-year Treasury yields are on course to move “toward 3 percent” this year, Gundlach said in an emailed response to questions. There has “been no justification for the divergent policies in the U.S. versus Europe given economic fundamentals,” he said - a point he has made previously.

A 10-year yield at 3 percent would put Treasuries in “definitive” bear market territory, Gundlach added. The yield traded as high as 2.39 percent Thursday, just ahead of a key retracement level at 2.42 percent, coinciding with the May high.

“People this year had been buying long-dated Treasuries and other sovereigns as the hedge to their equity portfolios and that’s why this unwind is so ugly,” said Peter Tchir, head of macro strategy at Brean Capital LLC. “They are losing money on both the equity and debt side now, and are bailing out of their long-dated Treasuries.”

 

The risk parity trade, which has been among the most favoured by macro traders over the last couple of years, where volatility in equities is counterbalanced by equal but opposite positions in bond volatility, is coming under pressure. 

So far, the movements in equities have been relatively minor while the sell-off in the long bond has only been underway since last week. However, these types of trades are at risk both from bonds and equities moving in the same direction and upticks in volatility that are not easily hedged. 

What is the pie worth? 
How will it be split up among claimants? 
How long will it take? 
It is never over – the cycle continues; investors must understand the cyclical nature of markets and the economy 
No good or bad investments – just bad timing and bad prices 
Shortness of memory is an amazing feature of financial markets 
Tenets of Oaktree Capital Management 

1. The primacy of risk control 
Superior investment performance is not our primary goal, but rather superior performance with less-than-commensurate risk. Above average gains in good times are not proof of a manager's skill; it takes superior performance in bad times to prove that those good-time gains were earned through skill, not simply the acceptance of above average risk. Thus, rather than merely searching for prospective profits, we place the highest priority on preventing losses. It is our overriding belief that, especially in the opportunistic markets in which we work, "if we avoid the losers, the winners will take care of themselves." 

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

Saying “buy low, sell high” is simple to say but a lot more difficult in practice. While each of these famous investors has their own individual take on how best to achieve investment goals there, but there are a number of topics just about all of them cover. 

Hello Eoin! Thank you for all your hard work for us! You highlighted the Japanese Banks a few Days ago! Is there a Japanese Banks ETF or a closed end Bank fund, that you know of. Best regards. (an FM since 1988).

Thank you for your long support and this question which may also be of interest to other subscribers. There are two Japanese listed ETFs focusing exclusively on Japanese banks but I’m afraid I do not know of any others listed elsewhere whether ETFs or closed-end funds. 

The two Japanese ETFs are the Daiwa Topix Bank ETF (1615 JP) and the Nomura Topix Banks ETF (1612 JP).  

The Asian group is becoming more expensive, especially on a price-to-book-value basis, with a 77 percent premium to the wider index -- a 15-year high, Dennis said. That’s double the long-term average premium of 38 percent, he said.

Pictet Asset Management Ltd.’s Luca Paolini is also worried that a correction is coming after the MSCI Emerging Markets index’s surge. The gauge beat both the Nasdaq 100 and the MSCI All-World Index in the first half.

“If global equities do indeed witness a correction in the coming weeks, there are grounds to expect that emerging-market stocks’ outperformance will come to an end,” Paolini, London-based chief strategist with Pictet, wrote in a report.

Paolini downgraded Pictet’s view on technology stocks to single positive from double, as earnings momentum appeared to peak in May. He also suggested reducing holdings of emerging-market equities given the outsize technology exposure of the region relative to developed markets.

 

With some of the heat coming out of high momentum trades, that have driven performance this year, the potential for traders to look for additional sources of mean reversion trades has increased. There Is no denying that a number of Asian technology shares have been more than keeping pace with their US counterparts so they are at equal risk of mean reversion. 

How do I find London Metals Index and Topix bank index?

The easiest way to find both is to use the Chart Library’s dedicated search engine. To find the LME Metals Index type “metals” or “LME” into the search. For the Topix Banks Index type either “Topix Bank”. Here is a quick video with no sound to illustrate how.  

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

 

“Several preferred to announce a start to the process within a couple of months,” the minutes of the June 13-14 meeting released on Wednesday in Washington showed. “Some others emphasized that deferring the decision until later in the year would permit additional time to assess the outlook for economic activity and inflation.”

U.S. central bankers in June raised the benchmark lending rate for a second time this year to a range of 1 percent to 1.25 percent, while describing monetary policy as “accommodative” in their statement. They reiterated their support for continued gradual rate increases, according to the minutes.

Fed officials updated their balance-sheet policy in the gathering, laying out a path of gradual reductions with caps. The central bank wants to start winding down the $4.5 trillion bond portfolio without roiling longer-term interest rates, while gradually raising the policy rate. The minutes indicated that the committee wants to begin the balance-sheet process this year.

 

Here is a link to the full text of the Fed’s Minutes. 

The only example we have of withdrawing liquidity following a bout of quantitative easing is from the ECB between 2012 and 2014 when they took €1 trillion out of circulation. That resulted in deflationary pressures picking up and forced a change of emphasis in Frankfurt which has subsequently seen the size of the balance sheet more than double. Against that background it is hardly surprising there is some disagreement about how to proceed within the Fed and the consensus, as Janet Yellen stated last month, would be to proceed slowly.

Russia "pretty much threw cold water" on rumors of additional cuts, said Bob Yawger, director of the futures division at Mizuho Securities USA in New York. The American Petroleum Institute is due to issue weekly U.S. inventory numbers Wednesday afternoon.

Oil and gas companies’ shares were down across the board. Bloomberg Intelligence’s index of independent exploration and production companies fell as much as 4.4 percent. Baker Hughes plunged 34 percent on its first day of trading as a unit of General Electric Co.

While crude prices surged last week, futures are down 15 percent for the year amid concerns that rising global supply will offset the output cuts from the Organization of Petroleum Exporting Countries and its partners. Libya and Nigeria, which are exempt from the agreement, accounted for half of the group’s production boost last month, according to data compiled by Bloomberg.

"Now we’ll see if this rally was based on loose expectations that there could’ve been some agreement or additional cuts, or if it was a rally on short-covering," Mizuho’s Yawger said.

 

Oil prices have been confined to a volatile range over the last 12 months with a distinct downward bias since January. The price might have rallied for eight consecutive sessions but there has been a distinct absence of clear upward dynamics similar to those posted in August and November while the large tail on the candle that marked the May low was also a clearly bullish development. 

On Thursday night, the State Administration of Press, Publication, Radio, Film and Television ordered services including Weibo to stop broadcasting what it said was negative commentary in violation of government regulations. While the regulator didn’t say in its one-line statement what precise actions should or would be taken, it was enough to send Weibo’s stock sliding 6.1 percent in New York on Thursday. Sina, which controls the company, slid almost 5 percent.

The regulatory ban, the latest in a series of attempts to curb content on the internet, could disrupt a revival for Weibo that’s now underway. The messaging service turned to video streaming over the past year to rejuvenate growth and has since reignited user interest, pushing its monthly audience to 340 million people -- surpassing Twitter’s -- and its market value above $16 billion. Chairman Charles Chao is now focused on expanding Weibo into areas including news aggregation and live video streaming.

Weibo, AcFun and Ifeng.com are “broadcasting large amounts of programming that don’t meet national standards and which propagate negative opinions on public affairs,” the national broadcasting regulator said in a statement posted on its website. “We’re taking measures to halt the programs and begin rectification.”

 

China’s “Great Firewall” is no laughing matter with VPNs, that previously allowed people to access outside content, being issued closure orders on an increasingly regular basis. Online streaming is very difficult to censor and as a result is being sanctioned not least because this is a politically volatile period ahead of the Party Congress in the autumn. 

O'Reilly Automotive plunged by as much as 16% in early trading on Wednesday after the company announced second-quarter sales results that were weaker than it had expected. 

Sales at its auto-parts stores open for at least one year rose 1.7% in the second quarter, O'Reilly said in a release on Wednesday. That was improved from Q1 but weaker than its guidance of 3%-5% growth.

"We faced a more challenging sales environment than we expected for the remainder of the quarter," after April, O'Reilly CEO Greg Henslee said, "due to what we believe were continued headwinds from a second consecutive mild winter and overall weak consumer demand." 

"The comparable store sales shortfall will also have a consequent impact on our operating profitability," Henslee added. 

Car sales in the US slowed in the first half of this year following seven straight years of record-setting volumes. Although sales have softened, continued employment growth suggests that consumer purchases of the big-ticket items may remain healthy. 

Auto sales in June rose at a seasonally adjusted annual rate of 16.51 million, Autodata said on Monday, down 13.2% year-on-year. 

 

Automotive parts retailers are being squeezed both by declining auto sales and the rise of electric vehicles which do not need nearly as many parts to be replaced. That represents a secular headwind until they retool to offer the kinds of products drivers of cars less likely to breakdown require, like new batteries. 

From the perspective of The Chart Seminar O’Reilly Automotive represents a wonderful teaching example. It posted one of the most impressively consistent uptrends from its 2009 lows but the large reaction at the end of 2015 represented a loss of consistency. It subsequently was able to regroup and move to a new high, but that move was not sustained and the decline that followed contributed to the rolling over characteristic. 

We often see previously consistent trends lose that consistency at the penultimate high. The initial sharp drawdown cautions buyers that the imbalance between supply and demand that drove the advance could be changing. Meanwhile there are still enough new buyers coming into the market to drive the price a little higher but not enough to sustain the advance any longer. The massive reaction against the prevailing trend often gives way to a volatile ranging phase as some people argue nothing has changed and buy while others argue that the share has gone up a lot already and has stopped doing so and sell. 

The longer the range continues the greater the possibility it will constitute a top. In this case the Typ-3 top (ranging, time and size) was completed with the move below $250 in May (Also see Comment of the Day on April 4th 2017) It is now accelerating lower.  

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

Myth #2: U.S. shale production growth is going to flood the market at $35/bbl.
The fear of massive U.S. oil supply growth at oil “breakeven” prices of $35-40 per bbl is the other panic button that most investors (and many sell-siders) have been happy to push over the past few months. Yes, there are many U.S. horizontal (especially Permian) operators that can make solid incremental well returns at $35-40 per barrel if and only if they do not include any costs other than the drilling and completion costs of that next well. The problem with this type of analysis is twofold: 1) It is definitely not capturing the fullcycle returns where companies must include lifting, overhead, interest expenses, and other sunk costs. On a full cycle basis, very few U.S. E&P companies are actually generating positive returns at oil prices below $50/bbl, and 2) There is simply not enough cash being generated by U.S. E&P companies at oil prices below $50 to justify current drilling and completion activity and some of the U.S. supply growth forecasts that are now starting to appear. In fact, at current oil prices (of around $45/bbl) we estimate that the U.S. E&P industry as a whole will outspend cash flow generated by a whopping 50% this year! That amount of outspend is simply unsustainable and means the unfettered U.S. oil supply growth assumptions in a sub-$50 oil world are highly, highly unlikely.

We would also point out two other important points on this emerging U.S. supply growth panic. First, we have historically had one of the most aggressive (and accurate) U.S. oil supply growth models on the Street. Despite this, our global oil supply demand equation still suggests a meaningfully undersupplied oil market for the remainder of this year. In fact, if we go back to the beginning of this year (six months ago), our 2018 U.S. oil supply growth estimate of 1.3 million bpd was high on the Street and at least 500,000 bpd above consensus estimates at the time. Note that our current U.S. supply estimate is actually down about 500,000 bpd from our estimate a year and a half ago (early 2016) because of downward revisions in U.S. industry cash flows and emerging oil service equipment bottlenecks. In our opinion, forecasts of 2018 U.S. supply growth of 2.5 million bpd at oil prices below $50/bbl are simply not doing the math. Secondly, the longer-term fear of too much U.S. supply growth at $50/bbl ignores the fact that there is another~30 million bpd of OPEC and ~50 million bpd of non-OPEC supply (across a variety of geographies, both short-cycle and long-lead-time) that will likely be declining in a few years. Solely considering U.S. supply growth would be a “one hand clapping” approach: that is to say, it gives an exaggerated impression of how much global supply is actually growing. In 2017, for example, at least three significant nonOPEC producers – China, Mexico, Colombia – are posting sizable declines. Several others – Russia, Norway, Argentina – are flattish. Longer term, 2018 is shaping up to be the cyclical trough year for global long-lead-time project startups (down close to 50% versus 2016 levels) meaning non-U.S. oil supply growth will likely come under significant pressure in 2019 and beyond.

 

 

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

I think it’s fair to say that a lot of unconventional supply becomes uneconomic around $45 but starts making money anywhere above $55 so the big question is the extent to which producers hedged their exposure when prices were north of $55 at the beginning of the year. That is likely to be key variable in whether they are making money in the current environment. 

Lowe again pointed to the mixed nature of the nation’s labor market -- a key indicator. While the last three monthly reports have shown strong hiring gains and unemployment has dropped to 5.5 percent from 5.9 percent, under-employment remains high. There’s still plenty of slack in the labor market and this is the epicenter of any turnaround on wages -- which are increasing at the slowest pace on record.

The central bank said wage growth is likely to remain low for a while yet. Core inflation remains below the central bank’s 2 percent to 3 percent target and is only forecast to “increase gradually” as the economy strengthens. As an aside, the RBA dropped its reference to an economic growth forecast of 3 percent and said the recent slowing in gross domestic product partly reflected temporary factors, like weather, but not all of it.

“The RBA has explicitly chosen not to adopt a more hawkish tone,” said Sally Auld, head of fixed-income and currency strategy for Australia at JPMorgan Chase & Co. “Ultimately, a more hawkish central bank requires the distribution of risks around both growth and inflation to have improved, such that the current setting of financial conditions is no longer appropriate. Our sense is that this is not yet the case in Australia.”

 

The Australian Dollar has been ranging mostly below 77¢ since early 2016 and pulled back against today to confirm near-term resistance at that level. Household debt is more than a minor issue for the RBA and with commodity prices still relatively low they are going to be cautious about raising interest rates in a country where floating rate mortgages predominate. 

Trump turned to Twitter after news of the launch, before North Korea’s claim the missile was an ICBM. He wrote: "Perhaps China will put a heavy move on North Korea and end this nonsense once and for all!” In response, China Foreign Ministry spokesman Geng Shuang said Beijing had been "indispensable" in pressuring Kim.

Reclusive North Korea has for decades relied on its weapons programs as a deterrent to outsiders. Kim is also no different from his father and grandfather -- both leaders before him -- in using his military clout as a bedrock for his internal power.

Encouraging a personality cult around the Kim dynasty helps him keep a grip on generals at home and foster public obedience.

North Korea has called its weapons program a "precious sword of justice” against invaders. It has drawn comparisons with former dictatorships in Iraq and Libya, arguing that Saddam Hussein and Muammar Gaddafi fell because they gave up on developing nuclear arms.

The regime has also used provocations to secure concessions from neighbors in the form of aid. China, the main economic lifeline of North Korea, has been reluctant to press too hard in case it leads to the collapse of the regime and chaos on its border.

 

How do you make waves on the international geopolitical stage when you have a non- interventionist foreign policy? The easy answer is to have a quasi-vassal state do it for you. North Korea would not exist if it was not for China or to put it another way, North Korea only exists because of China’s desire to have a ring to buffer states around its border. 

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

Faster growth in orders and production in the final month of the quarter indicates solid demand that, together with rising exports, shows manufacturing is on solid footing. The ISM’s pulse of employment in the industry also indicates the government’s measure of factory payrolls, released as part of the Labor Department’s jobs report on Friday, will rebound in June after declining a month earlier.

The expansion was broad based, with 15 of 18 industries surveyed by the purchasing managers’ group posting growth in June. They included machinery, transportation equipment, computer and electronic products, and petroleum and coal products. The three reporting contractions were apparel, textile mills and primary metals.

The 2.9-point monthly gain in the ISM index, which was the largest jump since early 2013, is also notable as it comes amid fading expectations that the government will deliver a fiscal boost, via tax reform and infrastructure spending, in the near future.

Official’s View
“Everything was strong,” Timothy Fiore, chairman of the ISM factory survey committee, said on a conference call. Unless supply-chain constraints arise, “there’s really no reason” why the robust pace of manufacturing can’t continue, he said. At the same time, manufacturers are awaiting more clarity on potential policy changes such as taxes, regulations and tariffs on imported materials including steel, Fiore said.

 

Purchasing managers index figures for a number of countries came out today with positive figures for the USA, China, Europe and Japan all helping to confirm we are in a period of synchronised global economic expansion. With that view gaining increasing credibility it is acting as a catalyst for rotation in the wider stock market as we head into the second half of the year. 

Did you see this?

If you add also the EU's move to tax harmonisation which would damage Ireland's competitive advantage then an eventual Irexit does not seem outlandish.

 

Thank you for this article which may be of interest to other subscribers. This link to a similar article in the Irish Times contains more quotes from the original report and concludes that a recent poll suggests 88% of Irish favour remaining in the EU. 

Ireland joined the EEC because the UK was doing so. The UK is Ireland’s largest trading partner by far and agriculture continues to represent a significant employment sector both directly and indirectly. Despite the size of Ireland’s coastline, Irish fisheries are a much more important sector for Spain than they ever have been for Ireland. 

Heavy rains in Ivory Coast’s cocoa-growing areas are slowing the harvesting and sales of beans and farmers say they’re worried about black-pod disease rotting their crops.

Roads to plantations in the southwestern area of Meagui have been cut off after rivers overflowed and farmers can’t access their crops, which means they don’t know how the flowers and pods on the trees are developing, according to local grower Dongo Koffi.

“Everything is stopped at the moment,” he said by phone. “The sales have slowed down because we can’t harvest. Some farmers have some stocks of beans with them but they can’t sell them, because the roads aren’t accessible.”

While it’s still unclear whether Ivory Coast output will be materially affected, any losses due to the heavier-than-usual rainy season in the world’s top cocoa producer may help ease some pressure on prices, which have dropped by more than a third in the past 12 months amid expectations for a global surplus. The country, which is currently harvesting the smaller of two annual crops, is expected to produce a record amount this year.

 

Cocoa is trading in contango throughout the futures curve but doesn’t change the reality that cocoa needs both abundant rain in the growing season and dry weather once harvested to allow the pods to dry. That kind of variability in growing and maturing conditions is why cocoa is only grown in a relatively small number of equatorial countries with well-defined wet and dry seasons. 

A link to this week's Big Picture Long-Term video and another video covering a click through global market is posted in the Subscriber's Area. 

Thus, since 2007, indexing or passive activities have risen from approximately 7% to 9% of total managed assets to almost 40%. As you shift assets from active managers to passive managers, they buy an index. The index is capital weighed, which means more and more money is going into fewer and fewer stocks.

We’ve seen this act before. If you didn’t own the nifty 50 stocks in the early 1970s, you underperformed and, thus, money continued to go into them. If you were a growth stock manager in 1998-1999 and you were not buying “net” stocks, you underperformed and were fired. More and more money went into fewer and fewer stocks. Today you have a similar case with the FANG stocks. More and more money is being deployed into a narrower and narrower area. In each case, this trend did not end well.

When the markets finally do break, as they always have historically, ETFs and index funds will be destabilizing influences, because fear will enter the marketplace. A higher percentage of assets will be in indexed funds and ETFs. Investors will hit the “sell” button. All you have to ask is two words, “To whom?” To whom do I sell? Index funds and ETFs don’t carry any cash reserves. The active managers have been diminished in size, and most of them aren’t carrying high levels of liquidity for fear of business risk.

We are witnessing the development of a “perfect storm.”

 

Will ETFs contribute to the next major stock market decline? How could they not? They represent a significant proportion both of daily traded volume and act as repositories for substantial inventories of stock.  In tandem with the prevalence of automated trading systems we already have evidence of dislocations in the spate of flash crashes we have largely become inured to. 

The four most adversely affected of these economies in the long term were (in order) Italy, Spain, the UK and US. Post-crisis, the most adversely affected were Spain, the US, Italy and the UK. Germany was the least affected by the crisis, with Canada and Japan close to it.

It is not surprising, then, that Canada, Germany and Japan have been largely immune to the post-crisis surge in populism, while the US, UK, Italy and Spain have been less so, though the latter two have contained it relatively successfully.

Thus the rise of populism is understandable. But it is also dangerous, often even for its supporters. As a recent report from the European Economic Advisory Group notes, populism may lead to grossly irresponsible policies. The impact of Hugo Chávez on Venezuela is a sobering example. At worst, it may destroy independent institutions, undermine civil peace, promote xenophobia and lead to dictatorship. Stable democracy is incompatible with a belief that fellow citizens are “enemies of the people”. We must recognise and address the anger that causes populism. But populism is an enemy of good government and even of democracy.

 

Mrs. Treacy was at the endocrinologist for a check-up this week, everything was fine but he made a comment which really stuck with me. He said too many people want to treat the number rather than the patient. It occurs to me that central banks tend to do the same thing. 

Roughly 55 percent of global lithium-ion battery production is already based in China, compared with 10 percent in the U.S. By 2021, China’s share is forecast to grow to 65 percent, according to Bloomberg New Energy Finance.

“This is about industrial policy. The Chinese government sees lithium-ion batteries as a hugely important industry in the 2020s and beyond,” Bloomberg New Energy Finance analyst Colin McKerracher said.

In all, global battery-making capacity is forecast to more than double by 2021 to 273 gigawatt-hours, up from about 103 gigawatt-hours today. That’s a huge opportunity, and China doesn’t want to miss it.

“The Gigafactory announced three years ago sparked a global battery arms race,” said Simon Moores, a managing director at Benchmark Mineral Intelligence. “China is making a big push.” 
But don’t count Tesla out. The company, based in Palo Alto, California, plans to announce locations for up to four new factories by the end of 2017. (It’s exploring at least one site in Shanghai.) And there are few, if any, individual Chinese battery companies that can match the scale of Tesla’s production toe to toe.   

 

China went from pretty much nowhere to become the dominant force in solar cell manufacturing in a relatively short time because of unwavering government support and could easily achieve the same feat in batteries. That is quite apart from similar objectives being pursued in South Korea and Japan. 

“The bigger the household debt, the more impact a quarter percentage point increase in the policy rate will have on household spending,” he said. “In the Australian case, it is certainly possible that high household home mortgage debt will crimp consumer spending if the policy rate returned to what was once considered a relatively low long-term rate.”

Still, Edwards noted that interest paid on Australian mortgages is much less than it was six years ago: while debt has increased, interest rates have fallen a lot. Payments are now 7 percent of disposable income compared with 9.5 percent in 2011, and 11 percent at the peak of the RBA tightening cycle before the 2008 financial crisis, he said.

Moreover, if the standard variable mortgage rate peaked at around 7 percent, that would still be nearly one percentage point below the 2011 level, and two-and-a-half percentage points below the 2008 peak, he said.

“The pace of tightening will anyway be governed by the strength of the economy,” Edwards said. “If household spending weakness, if the long expected firming of non-mining business investment is further delayed, if the Australian dollar strengthens, if employment growth is persistently weak, then the trajectory of rate rises will be less steep and the pace less rapid.”

 

Australian government bond yields bounced this week in a dynamic manner to signal a low of at least near-term significance. A sustained move below 2.3% would now be required to question potential for additional higher to lateral ranging. With RBA short-term rates at an historic low of 1.5% since July last year the potential for the rate to be close to low suggests yields have likely bottomed. 

The summary of the back cover can be translated as: 

"Confessions of a liberal (nearly) repentant

The subprime debacle exposed the weaknesses of the European construction, the failure of the single currency, the excessive financialization of capitalism and the impoverishment of the middle classes and the lower classes. The rise of populism is the consequence. Europe has no other choice but its re-founding, in a geopolitical environment designed by the Americans, the Chinese and the Russians, of which it is gradually excluded. The financial position of France is so precarious that the recovery will necessarily be difficult, but essential to rebuild Europe. The year 2017 is starting a key decade for Europe: it will mark the renewal and reconquest, or the vassalization and the disappearance in the forgetfulness of history. 

This essay is an excellent tool of reflection written without taboos and with height of view; It is also a cry of alarm ... (Bernard Attali)"

http://livre.fnac.com/a10779112/Pascal-Morin-Des-subprimes-au-populisme#int=S:Derniers articles consultés|Droit|NonApplicable|10779112|BL1|L1

https://www.amazon.fr/subprimes-au-populisme-Pascal-Morin/dp/2358152218/ref=sr_1_1?ie=UTF8&qid=1498401666&sr=8-1&keywords=des+subprimes+au+populisme

http://www.editions-glyphe.com/wp-content/uploads/2017/06/Subprimes_BdC.pdf

 

Pascal Morin has been an acquaintance of mine since I was the Bloomberg account manager for Dexia Bank in Luxembourg back in 2001. He was the smart guy in the corner office all the private bankers went to when they had a question and has been working with Iain Little and Bruce Albrecht for much of the last decade. I look forward to reading the English translation of his work when it comes out. 

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

“Everyone talks about the VIX, but there are undercurrents of significant volatility in the market,” Joe Sowin, head of global equity trading at Highland Capital Management LP, said by phone. “There’s a lot more volatility in tech this month and that’s in part due to stretched P/Es, positioning and breadth that isn’t good.”

The VIX wasn’t its usual docile self, either, on Thursday. The measure jumped 3.5 points to 13.56, the highest since mid- May. Losses in consumer and health-care stocks sent the S&P 500 down 1.1 percent to 2,412.05.

Other measures of tech turbulence tell a similar story. The CBOE NDX Volatility Index has averaged 15.1 in June and has repeatedly touched levels this month that represent its biggest gap to S&P 500 implied volatility, or the VIX, since the financial crisis.

Excess volatility in technology megacaps is partly a function of how fast they have run up. While the S&P 500 has tripled since markets bottomed in March 2009, gains in the Nasdaq 100 are approaching fivefold. After rising as much as 21 percent this year, valuations in the gauge sit 30 percent above their bull market average.

As was the case on June 9 when tech shares dropped 2.7 percent, the biggest laggards in the group Thursday were semiconductor stocks. KLA-Tencor Corp., Advanced Micro Devices, and Applied Materials Inc. weighed the most, with losses of more than 4 percent.

To Peter Cecchini, senior managing director at Cantor Fitzgerald in New York, that could mean that investors are second-guessing expectations for economic growth.

“A lot of these names are cyclical tech -- when you’re looking at economic slowdowns the semiconductors always get whacked first,” he said by phone. “Look at the durable goods data, it was a mess. Maybe these cyclical names are telling us something.”

 

There has been a major disconnect between volatility on the S&P 500 and the Nasdaq-100 over the last three months with the former holding at abnormally low levels while the latter has been trending higher. 

American Express Plans 9% Dividend Hike, $4.4b Share Buyback 
Bank of America to Buy Back Up to $12b in Shares, Raise Dividend 
Citi Plans Up to $15.6b Buyback, Dividend Boost to 32c/Share 
Morgan Stanley Authorizes $5b Buyback; Lifts Dividend 25% 
Fifth Third to Boost Dividend, Buy Back Up to $1.16b Shares 
Huntington Bancshares Sets $308m Buyback, Boosts Dividend 
KeyCorp Sets $800m Buyback, Raises Qtr. Div to 10.5c from 9.5c 
Regions Financial Plans Up to $1.47b Buyback, Higher Dividend 
SunTrust to Boost Div to 40c; Sets Up to $1.32b Buyback 
State Street Sets $1.4b Buyback, Boosts Dividen

 

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

Banks have been constrained in how they can reward their shareholders because they were forced to rebuild capital, withhold even more to allow for future disasters and repay government bailouts. The fact they have almost universally passed the Fed’s latest stress tests suggests the monetary authorities are satisfied the sector has recovered enough that it can now be allowed greater leeway to exercise they balance sheets in favour of investors. 

Full details of this trade are posted in the Subscriber's Area.

The hack quickly spread from Russia and the Ukraine, through Europe and into the U.S. A.P. Moller-Maersk, operator of the world’s largest container line, said its customers can’t use online booking tools and its internal systems are down. The attack is affecting multiple sites and units, which include a major port operator and an oil and gas producer, spokeswoman Concepcion Boo Arias said by phone.

APM Terminals, owned by Maersk, is experiencing system issues at multiple terminals, including the Port of New York and New Jersey, the largest port on the U.S. East Coast, and Rotterdam in The Netherlands, Europe’s largest harbor. APM Terminals at the Port of New York and New Jersey will be closed for the rest of the day “due to the extent of the system impact,” the Port said.

Cie de Saint-Gobain, a French manufacturer, said its systems had also been infected, though a spokeswoman declined to elaborate, and the French national railway system, the SNCF, was also affected, according to Le Parisien. Mondelez International Inc. said it was also experiencing a global IT outage and was looking into the cause. Merck & Co. Inc., based in Kenilworth, New Jersey, reported that its computer network was compromised due to the hack.

 

The Wannacry cyberattack occurred in May and hit a number of hospitals and transportation networks. The first conclusion we can draw from the new but similar Petya virus is that it has taken hackers less than a month to iron out the bugs with their first attempt. The next iteration of the attack will likely be even more sophisticated.  

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

The pound soared by the most in two months and U.K. bonds slumped as Bank of England Governor Mark Carney said the Monetary Policy Committee may need to begin removing stimulus.
Sterling climbed against all but one of its major peers as the comments marked a shift in emphasis for the governor, who signaled last week that now was not yet the time to start the tightening process. The yield on two-year gilts touched the highest in more than a year as money markets adjusted to the change in language.

Sterling has borne the brunt of political and economic uncertainty since the Brexit vote, and has been further buffeted in recent weeks by a growing split among policy makers over the future path of rates. The bank’s Financial Policy Committee increased the countercyclical buffer Tuesday, marking the first unwinding of last year’s stimulus package put in place by the bank.

“The headlines appear to be in complete contrast to the Mansion House speech last week, when he said now is not the time for tightening,” said Jane Foley, head of foreign-exchange strategy at Rabobank in London. “There is the possibility that the Bank of England will, over the next few months, fire other shots across the bow really to reduce that downside potential for the pound.”

 

Central bank communication has a whipsaw feel to it over the last week. The Bank of England first said that it was not ready to remove stimulus and is now saying that an interest rate hike might be closer than we think. Meanwhile Mario Draghi fumbled his communication yesterday when he said the deflationary threat is gone which the market interpreted as a signal the ECB is discussing tapering and officials were back peddling today saying nothing has changed. 

The Federal Reserve's stress tests of major Wall Street firms last week didn't determine how much they can increase dividends and stock buybacks over the next 12 months. But they did produce some good omens for a review due today that does.

All of the institutions met the central bank's minimum capital standards on the first stage of the two-part evaluation, which measured their stability after the past year's payouts if the economy suffered a downturn with unemployment of 10% and a stock-market decline of 50%.

The results indicate the Fed is more likely to approve the firms' dividend and stock-buyback plans during the second stage -- a forward-looking review that measures what their strength would be after the expenses, using the same recession scenario. On a net basis, the payout ratio may rise to 85% of net earnings from 73% last year for the large banks tracked by Credit Suisse, analyst Susan Roth Katzke said in a note to clients.

Since the Fed reiterated that it would still scrutinize dividend ratios higher than 30% more closely, the mix of announced payouts is likely to favor stock buybacks at the biggest banks, which are still subject to a qualitative review that includes the strength of risk-planning practices, Katzke said.

 

The banking sector has had to hold a great deal of capital in reserve to meet increased regulatory demands resulting from tighter regulation in the aftermath of the financial crisis as well as the need to rebuild their balance sheets over the same timeframe. The evolution of policy which recognises the strides made by the sector in rebuilding are likely to be beneficial to investors seeking potential for dividend growth or increased buybacks. 

And particularly be prepared to rethink very high minimum wages, like those supported by the “Fight for $15” folks. For as the authors note, the first round of hikes had relatively small impacts, while the second round had huge ones, suggesting that the effects may be nonlinear. And that makes sense. Relatively few people in this country make the minimum wage, so a small increase doesn’t make that much difference to most workers, or most employers. But a large jump affects more people, and the wage increases are much bigger for the lowest-paid staffers. If you make $9 an hour, but generate $10.50 in revenue for your boss, a law that raises the wage to $10.45 may cause her to shrug and decide it’s easier to keep you on as long as she’s making something. But a wage that forces her to pay you far more than you bring in…. Continuing to employ you would just be bad business.

It’s worth noting that Card and Krueger’s famous study involved an increase in the minimum wage from $4.25 an hour to $5.05. That was a significant increase -- about 18 percent. But Seattle’s minimum wage has already increased by 37 percent, and it still has roughly another 20 percent to go.

At some level, we all intuitively understood that this was true. If the minimum wage increases by a penny an hour, probably even most rock-ribbed conservatives would not predict mass firings. On the other hand, if the wage was arbitrarily set to $100 an hour, even ardent labor activists would presumably expect widespread unemployment to follow.  You can’t flat-out say “minimum wages don’t increase unemployment,” because the size of the increase, and the level of the resulting wage, obviously matter at some margin.

 

As this article highlights, very few people in the USA earn the minimum wage. However about a third of the population earns less than $35,000 a year. $15 an hour for a 40-hour, 52 weeks a year comes out to $30,200. Therefore by raising the minimum wage to $15 either those earning slightly more than the current minimum wage will demand more for their work or they will be equated with first time job applicants at fast food restaurants. 

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

The ECB president repeated his mantra that the Governing Council needs to be patient in letting inflation pressures build in the euro area and prudent in withdrawing support. At the same time, there’s room to tweak existing measures.

“As the economy continues to recover, a constant policy stance will become more accommodative, and the central bank can accompany the recovery by adjusting the parameters of its policy instruments -- not in order to tighten the policy stance, but to keep it broadly unchanged.”

The comments echo an argument first made by Bundesbank President Jens Weidmann as early as November that, all else being equal, ECB policy would become more accommodative as inflation picked up. With his nod to a frequent critic of quantitative easing who has been calling for an end of the 2.3 trillion-euro ($2.6 trillion) program, Draghi may have set the stage for a discussion in the coming months on phasing out asset purchases. They are currently scheduled to run until the end of the year.

“Draghi moved his first step toward indicating that ECB monetary policy will become less accommodative in 2018,” Marco Valli, an economist at UniCredit in Milan, wrote in a client note. “Unless an unexpected shock materializes, a formal tapering announcement is likely to come at the ECB monetary- policy meeting scheduled on 7 September.”

 

Here is the sentence which probably had most influence on the bond markets today “that “the threat of deflation is gone and reflationary forces are at play,”. The ECB, through massive monetary accommodation, is beginning to achieve the same kind of asset price inflation that the Federal Reserve did in the USA. That is contributing to an uptick in the type of economic activity the central bank measures while the low value of the Euro has boosted the competitiveness of the region’s significant exporting base. 

On Thursday, the Food and Drug Administration approved the first next-generation-sequencing-based test, from Thermo Fisher Scientific, that can tell you how different drugs will work for you, based on the genetic makeup of each tumour. And it only takes four days to get back results. In many ways, it represents the leading edge of precision medicine’s maturation from a buzzword in grant applications and investor pitch decks to a real, workable product that can actually improve patient outcomes.

Getting the FDA’s approval took nearly two years and 220,000 pages of data. (That’s like reading Karl Ove Knausgaard’s 6-book autobiographical memoir front to back 61 times in a row. Talk about My Struggle.) But the process has helped clarify the agency’s thinking about how to regulate personalized treatments going forward, opening up doors for tech that's still in the pipeline.

The panel, called Oncomine Dx Target Test, takes a tiny amount of tumor tissue and reports on alterations to 23 different genes. All that information is useful for physicians, but three in particular—ROS1, EGFR, and BRAF—are the most crucial. That’s because those mutations have drugs to match: Precision medicine chemotherapies from Pfizer, Novartis, and AstraZeneca. The test can be performed at any CLIA-certified lab, and it’s already being offered by two of the largest oncology-focused ones.

Getting the FDA to approve that amalgam of tests wasn’t easy. “Putting multiple genes and multiple drugs on the same test; all of these are firsts,” says Joydeep Goswami, Thermo Fisher’s president of clinical next generation sequencing. “That put the technology under extraordinary scrutiny.” The FDA usually approves one diagnostic for one product or drug—that’s it. But the whole point of precision medicine is to tailor treatments for patients based on their genes, and a bunch of one-off genetic tests aren’t going to deliver on that promise. So a multi-gene, multi-drug panel is kind of a big deal.

 

I have written previously about the rotation into biotechnology shares because of the overextensions present in other sectors and the potential for base formation completion in the healthcare sector. However the above story represents an additional bullish catalyst for the sector. 

This bears the hallmarks of a fat finger 'muppet' – a trade of 18,149 ounces would be a very typical trade, but a trade of 18,149 lots of a futures contract (which is 100 times bigger) would not be… it leaves us wondering if a junior had got confused between "ounces" and "lots"… or maybe an incorrectly programmed algo ahead of options expiry on COMEX … we just don't know.

The gold price had recovered much of the lost ground in afternoon trade in New York, exchanging hands for $1,243.60 an ounce.

Norman points out that if the trade, which may also have been carried out by a central bank or a large-scale speculator opening a short position, was indeed an error the gold price bear who made the move is nursing a $36 million loss at this point.

 

The gold price experienced a $20 pull back yesterday morning. Two contrasting points are worth mentioning. The first is that despite the high volume the pullback was only $20. The second is that the price did not snap back up immediately afterward, suggesting that while the market was able to absorb the volume there was no surfeit of orders to reassert demand dominance. 

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

“The L’Oréal stake could be divested via an exchange offer for Nestle shares that would accelerate efforts to optimize its capital return policies, immediately enhance the company’s return on equity, and meaningfully increase its share value in the long run,” said Third Point, which retained former Sara Lee Corp. Executive Chairman Jan Bennink to advise on the investment.

A L’Oréal spokeswoman declined to comment.
Consumer companies have become popular targets for activist shareholders. In 2015, billionaire hedge fund manager Bill Ackman amassed a $5.6 billion stake in snack giant Mondelez International Inc. and called for management to improve the company’s performance, leading to cost cuts. Procter & Gamble Co. attracted Nelson Peltz’s Trian Fund Management LP, which revealed its position in the consumer-products maker in February and has since amassed a stake valued at about $3.3 billion, according to its latest regulatory filing.

Loeb is aiming high with Nestle as activist investors enjoy a resurgence of client inflows and returns. Third Point’s flagship fund gained almost 10 percent in the first five months of 2017, part of an industrywide rebound that saw event-driven funds return 5.6 percent on an asset-weighted basis, the most among the main strategies tracked by Hedge Fund Research Inc.

 

Nestle has a large number of businesses and, in order to remain competitive, needs to reorient itself towards growth sectors in its largest developed markets. It is interesting however that the thrust of the activism is towards highlighting the significant cross ownership Nestle has in other European companies. 

1. Will it really happen?
It’s been a long time coming -- the tax was first proposed in 2006 -- but in April, India’s president cleared the final procedural hurdle by signing off on some GST-related bills. The last flurry of activity will include rolling out the tax’s technological backbone (known as the GST Network) and training around 58,000 tax officers. Some companies want more time to ready for the new regime, but the government is sticking to its timetable.

2. What’s so good about the new tax?
Those 17 or more state and federal levies on everything from electricity to Gucci handbags complicate efforts to sell products to India’s population of 1.3 billion (about four times bigger than the U.S.). Under the current system, a product will be taxed multiple times and at different rates. In another change, the GST will apply to goods at the point of consumption, rather than where they are produced. That will reduce the cascading effect of taxes, allowing producers to easily claim credits and minimizing the opportunity for corruption.

 

Many of the issues India faces are of its own making, so simplifying the sales tax structure is a major endeavour which should have a significant positive impact on both trade and investment. Many observers have commented on the slow pace of reform during Modi’s administration but this is a landmark piece of legislation which highlights the scope of the government’s ambition to push through meaningful economic change. It also potentially suggests to the electorate that Modi will need a second term to deliver more of what people want. 

The diplomatic route that is being pursued by Donald Trump, as it was by his presidential predecessors, is not going to work. China is never going to take actions tough enough to force Pyongyang to give a “victory” to the US-led coalition.

Secondly, because the consequences of another war in Korea, even if brief and limited, would not be catastrophic for Americans... only for Koreans, and perhaps Japanese.

Thirdly, US willingness to act so decisively would convey the strongest possible message to a potentially much more dangerous would-be nuclear power, Iran, to forget the whole idea and behave.

Fourthly, foreign adventures are a classical method for national leaders to divert attention from political difficulties at home. “Trump, facing ever-expanding scandals, continually-low polling numbers, and even potential impeachment proceedings, may decide that a pre-emptive strike on North Korea is worth the costs and consequences,” Micah Zenko writes in Foreign Policy.

Much-respected analyst George Friedman of Geopolitical Futures concludes that the US continues to be “on the path to war.”

The US is not likely to unleash an attack until it has a casus belli, or a challenge from North Korea that it can point to as a defensible cause for going to war.

That hasn’t happened yet. But the situation could change very quickly if the US becomes convinced that the North has developed intercontinental ballistic missiles. Sudden falls in the South Korean and Japanese stock-markets would be an early warning of pending military conflict.

 

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

North Korea currently has three US hostages which it is undoubtedly hoping will be a deterrent to a US military strike. That may prove to be a vain hope if it persists in pursuing development of an intercontinental ballistic missile. Simple maths would suggest the lives of millions of possible US casualties outweigh the near certain death of three. 

A link to this week's big picture long-term video commentary is posted in the Suibscriber''s Area. 

In today’s video you made two very valid points:

•    The five largest stocks account for 45% of the US Biotech Index.
Biotech stocks present a short to medium term investment opportunity.

The chart for a leading biotech ETF (see below).  This potential investor finds the chart more than a little frightening.

Thank you for this email and I agree explosive breakouts can be hard to deal with. At The Chart Seminar we define ranges as explosions waiting to happen. Ranges are boring relative to the trending phases so we tend to be surprised by the ferocity of breakouts when they occur even though when a range is completed we expect prices to rise quickly because the breakout punctures a vacuum of supply above the range. 

Lowest premium in nine years will spur arabica demand, Julio Sera, risk- management consultant at INTL FCStone in Miami, says in telephone interview.

* “Who’s going to buy robusta if you can get cheaper arabica?”

* Recent sell-off is overdone and gives roasters and other end- users a chance to lock in supplies in coming months, while speculators unwind some bearish bets

* Prices will probably swing widely before end of month, 2Q

* On Thursday, futures spread between arabica in N.Y. and robusta in London narrowed to 24.4c/lb, lowest since Jan. 14, 2008, when Bloomberg data starts; on Friday, premium rose as much as 17% to 28.5c; average in 2016 was 58c

* On Friday, arabica coffee for Sept. delivery jumps 5.4% to $1.2275/lb

* On Thursday, price slumped as much as 5.4% to $1.155, lowest since March 3, 2016

 

There is a key difference between the CRB Index and the CCI Index or as they are often referred to as the CRB and the Old CRB. The CRB is liquidity weighted so it is heavily influenced by oil. The CCI (Continuous Commodity Index) is unweighted to it should give us a better reflection of investor interest in the commodity sector. 

Details of these trades are posted in the Subscriber's Area. 

“Ultimately the biggest problem that appears after today’s discussion is one of supply,” Sousa said in an interview this week. Finance ministers were told demand is “quite high” for marijuana already in Canada, he said. “So we want to make certain that, when we do proceed, there is sufficient supply to accommodate the activity because what we’re trying to do is curb the illicit use and organized crime that now exists around it.”

Trudeau’s framework for legalization, unveiled in April, will rely on Canada’s provinces to set up sale and distribution regimes, while at minimum selling recreational pot by mail beginning some time before July 2018. Key details including taxation remain up in the air. Federal Finance Minister Bill Morneau has said he favors a tax rate that will starve out the black market, one of the government’s key objectives. “That as a conclusion would lead us to say taxation rates have to be low,” Morneau told reporters after the June 19 meeting, where he said they discussed the need for a “coordinated” approach.

Initial Shortage
Canada’s burgeoning marijuana industry has ballooned in value amid optimism over Trudeau’s plan for recreational sales, which Canaccord Genuity Group Inc. said in November could reach C$6 billion ($4.5 billion) annually by 2021. Combined demand for recreational and medical marijuana may reach 575,000 kilograms by 2021, according to the report.

The government says a key aim is to shrink or altogether kill the black market, and any shortage of legal weed would hinder that effort. Trudeau’s plans also allow people to grow up to four plants in a home.

 

November 4th was a mixed blessing for the cannabis sector. On the one hand an increasing number of US states, including California, adopted recreational cannabis laws which in many cases go into effect on January 1st 2018. The flip side was that President Trump has made no secret of his ambivalence towards the sector which has decreased the potential of the Federal ban to be lifted during his tenure.