By her standards, Theresa May was relatively restrained at the Davos summit.  She loves enemies, and not in the Christian way. In front of her stood a congregation of the very people she holds up to ridicule: the plutocratic masters of the global economy, or, as she calls them, “citizens of nowhere”. On another day, she might have delivered one of the machine-gunnings that she reserves for the Police Federation or Boris Johnson. But this time she had another mission: to position Britain as the new global leader in free trade and reintroduce her country to the world.

The result was nothing short of a manifesto for a new British foreign policy and one of the best speeches given by a Prime Minister in recent years. It was a landmark not only in the evolution of her approach to Brexit, but in the development of her own political identity. It shows how far she has travelled in just a few months.

The traditional Davos speech involves clichés about the world’s ills and abstract nonsense like the “fourth industrial revolution”. The Prime Minister preferred to talk plainly. Rather than join them in lamenting populism, she sought to explain it: if people’s legitimate grievances aren’t addressed by established political parties, voters turn to insurgents. She could have added that Britain, virtually alone in Europe, has no problem with populism: the BNP dead, Ukip in crisis. And why? Because we had Brexit. It was not a Trump-style disruption; Brexit was how Britain avoids Trump-style disruption.

This is the point that European leaders find hard to understand. From Sweden to Sardinia, they are facing Eurosceptic insurgents whom they portray as barbaric and xenophobic. So they tell themselves (and their voters) that Britain has succumbed to a similar malady and is now sinking into a pit of hate crime, nativism and isolationism. This is not an anti-British agenda, necessarily, just the panic of politicians who can’t think of other ways to fend off new challengers. Mrs May came to offer some gentle advice: if you respond to people’s concerns, populism tends to go away. As Britain’s recent mini-revolution has just demonstrated.

Still, the Prime Minister has arrived rather late to all this. One of the great risks of Brexit was that the vote would be portrayed as a once-great country in meltdown, retreating from the world. Such concerns needed to be answered clearly, calmly and repeatedly. Had Boris Johnson become Tory leader he would have done this from day one. But Mrs May arrived in office implementing what seemed to be a far meaner version of Brexit than the one compellingly articulated by the Vote Leave campaign. We heard about EU nationals as bargaining chips, companies drawing up lists of foreigners, and new rules making it harder for foreigners to buy British companies.

And:

In her speech, she quoted Edmund Burke, to the effect that if a state cannot change, it cannot survive. That good governments do not become wedded to mistakes, but scour the horizon for opportunities and adapt with the times. As she has worked out, the same is true of prime ministers.

I am relieved.  OK, the Prime Minister and her Cabinet were thrown in at the deep end but they were not providing the kind of Brexit that I voted for.  Fortunately this has changed dramatically in little over a week. 

How did that happen?  Was it a tactical decision to appear to have turned inwards, to lull the Brexit opposition and EU into a false sense of security before striding boldly and positively forward?  I hope not and I don’t think so.

Was it a simultaneous eureka moment By Theresa May and Chancellor of the Exchequer Philip Hammond, or did they receive some very helpful advice?  I suspect it is the latter although we may never know.  However, I do recall mentioning shortly after Theresa May became Prime Minister that she could always get some sound advice from The Telegraph’s editorial team.  While very much on her side, they had become a little more critical in the last several weeks, but no more as we see with the article above. 

Whatever, Theresa May and Philip Hammond have reassured their supporters.  They have also seized the initiative on Brexit and are determined to set their own agenda with a divided EU which is in disarray.  Good luck to them.

Here is a PDF of Fraser Nelson’s article.    

(See also: Instead of wasting time trying to replay Project Fear, banks must help us get the best deal from Brexit, by Allister Heath for The Telegraph)

Iain Little's presentation last Monday: Things To Watch Post Trump - What I'm Buying Today, is posted in the Subscriber's Area.

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

Remember 2015 when the F.A.N.G, stocks were all the rage and media pundits were falling over themselves to tell us how you had to own them if you were to have any chance of outperforming the major indices. 2016 was predictably a tamer year for those shares with some spending much of their time consolidating 2015’s powerful gain. However with Netflix making headlines today on successfully boosting subscribers, following an international expansion, I thought it might be worthwhile to revisit this acronym. 

Money velocity isn’t a bullet-proof economic indicator. Financial innovation, and the rise of shadow banking, have made it hard to measure exactly how much money is floating around in the financial system. And some would say that "money" itself is going through an identity crisis these days.

Hunt isn’t the only one seeing the record-low pace as an ominous sign. The fact that money velocity declined rapidly during years of near-zero interest rates may signal aggressive monetary easing actually led to deflation instead of inflation, economists at the St. Louis Fed wrote back in 2014.

"In this regard, the unconventional monetary policy has reinforced the recession by stimulating the private sector’s money demand through pursuing an excessively low interest rate policy," economists Yi Wen and Maria A. Arias wrote.

"I know I’m the minority here,” Hunt said. “I’m just trying to see the world as I think it should be seen.”

 

I have long argued that the disintermediation associated with the internet and technological innovation is a major contributor in the decline in the velocity of money. The downtrend in the data from 1997 offers a graphic representation of the deflationary influence of technology. It also helps to explain why the surge in the quantity of money associated with quantitative easing has not resulted in high inflation. 

Pot luck... If the Canadian government continue to support AND passes legislation favorable to the development of the cannabis industry, some companies may have exponential growth, My pick has been Canopy on the TSX and I will continue to hold it.

Thank you for highlighting Canopy Growth Corp which as you point out is one of Canada’s most popular vehicles for expressing a view on cannabis. Canada is home to a significant number of recreational cannabis and cannabis related pharmaceutical start-ups, which as you say. would benefit from favourable legislation. You never know before the bull market ends there may be calls to exchange the maple leaf for something even more commercial than maple syrup.

The euro region could break up if political leaders don’t get to grips with the discontent that’s spurring support for populist leaders across the continent, JPMorgan Chase & Co. Chief Executive Dimon said he had hoped European Union leaders would examine what caused the U.K. to vote to leave and then make changes. That hasn’t happened, and if nationalist politicians including France’s Marine Le Pen rise to power in elections across the region “the euro zone may not survive,” Dimon, 60, said in a Bloomberg Television interview with John Micklethwait.

“What went wrong is going wrong for everybody, not just going wrong for Britain, but in some ways it looks like they’re kind of doubling down,” Dimon said in the interview Wednesday at the annual meeting of the World Economic Forum in Davos, Switzerland. Unless leaders address underlying concerns, “you’re going to have the same political things about immigration, the laws of the country, how much power goes to Brussels.”

Officer Jamie Dimon said. 

Dimon’s remarks on Europe were unusually pessimistic, coming in a wide-ranging interview in which he also criticized regulations that he said stunt economic growth. But he reiterated optimism for President-elect Donald Trump. Minutes later, Goldman Sachs Group Inc. Chief Executive Officer Lloyd Blankfein also expressed concern about Europe, telling CNBC that leaders are facing a backlash in the midst of a long, complicated process to create an economic bloc.

Many people have said this for some time, including in this service, but Jamie Dimon’s view will attract more attention.

Eurozone leaders provide a classic example of arrogant groupthink.  They speak mainly to each other, in the comfort of their palatial headquarters in Brussels and Strasbourg, financed by beleaguered taxpayers, and agree that they know what’s best.  Yes, “they’re kind of doubling down,” as Dimon says.   

Philip Hammond has rightly warned the EU that “we will do whatever we have to do”. So, in addition to pursuing trade agreements around the globe, what could we actually do, to convince the world that we have good enough plans for them to start buying pounds?

Here are five ideas:

1. Establish Free Ports. My very talented successor as MP for Richmond, Yorkshire, Rishi Sunak, has pointed out how Free Ports could bring a major boost to the economy, manufacturing and the north. This would allow goods to be imported, manufactured and re-exported without any duties or taxes because they would not officially enter the UK. The jobs created could run into tens of thousands, and the merchandise handled into hundreds of billions of pounds.
2. Give tax incentives to key global industries. Special tax relief for the film industry has been a huge success: major new studios have been built in Britain, over 200 films a year are being made here and we have 260,000 jobs thriving on the back of them. Every £1 of tax relief is meant to bring £12 back into the economy. We could give similar carefully targeted incentives to other creative, scientific and high-technology businesses, helping aerospace, biotechnology and others to see the UK as especially attractive.

This item continues in the Subscriber's Area.

Philip Hammond’s comment that “we will do whatever we have to do” was the perfect response to the EU, and from a former Remainer who previously sounded very pessimistic.    

Here are my brief responses to William Hague’s five ideas:

“Establish Free Ports.”  I had not thought of this but it makes sense to me. 

“Give tax incentives to key global industries.”  I would favour across the board tax cuts which could be revenue neutral or even positive if the UK economy grew sufficiently as a consequence.  Special tax relief did create a booming film industry in the UK and helping the scientific and high-technology businesses is certainly a very good idea since they represent the future.  However, less glamorous industries are also important for a diversified economy and why cherry pick?  We do not want to create unnecessary resentment and damage other contributing industries. 

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

I just wanted to say how much I agreed with the subscriber email 2 yesterday on the ‘huge difference’ you & Eoin make with your service.

Give me the Markets Now over Davos any day of the week.

The financial services industry needs more people with competence & integrity like Iain Little & Bruce Albrecht. David Brown’s laser sharp intellect (& I suspect more ‘right brained’ judgement) knocks spots off so many of the city talkers I come across.  

I would have really enjoyed the ‘pub’ afterwards but I had to be home early. I find it best not to irritate my wife by getting home too late & the dog is always there waiting for his walk.

With best regards

Thank you so much.  It was good to see you again, looking so well, and I enjoyed our chat as we were approaching the Club.  There is no better audience than veteran subscribers and I learn something new at every session of Markets Now. 

I sympathise with your wife and patient dog, and am sure your early arrival back home was welcomed.  

David Brown’s excellent presentation on our new Industrial Revolution is posted in the Subscriber’s Area.

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

As much as 12 trillion yuan ($1.73 trillion) in bonds—or 19% of the country’s $9 trillion bond market—could be subject to such repurchase agreements, according to an estimate by Shui Ruqing, president of bond clearing-house China Central Depository & Clearing Co., cited last month in China’s influential Caixin Magazine. Traders say the deals are so opaque that even estimates are hard to make.

Banks sometimes use the “dai chi” agreements to move risky assets temporarily off their books during earnings periods or audits, the people said. Brokers like Sealand typically use them to borrow quickly and flexibly—leveraging their investments many times over, they said.
Until last year, Chinese financial regulators had largely ignored the practice, beyond saying they opposed it during a bond-market crackdown in 2013. But the informal nature of dai chi also meant the trades could be difficult to enforce when conditions worsened.

“Because it’s not really an official business, agreements aren’t legally binding,” said the executive who had bought bonds from Sealand.

Sealand’s problems became apparent on Dec. 15, when the southern China-based company announced that two of its traders had forged dai chi agreements worth 16.5 billion yuan ($2.4 billion), a move that market participants interpreted as meaning the broker didn’t intend to honor the deals.

The amount was more than five times what Sealand had declared in its Sept. 30 financials as its financial assets under official repurchase agreements, and more than seven times its disclosed bond-holdings.

 

China has developed extraordinarily quickly from a closed backwater into a massive financially significant hub. While the pace of development has been blistering the evolution of regulatory standards of governance has been much more moderate. The single party system where cronyism, nepotism and the modern equivalent of simony combine to ensure just about anything is permissible, provided your social standing is within the correct circle, and only exacerbates the situation.  

Citigroup Chief Executive Officer Michael Corbat and Goldman Sachs CEO Lloyd Blankfein have been cutting costs and restructuring management to adjust to stricter capital requirements and a revenue downturn since the financial crisis. Goldman Sachs’s 2016 revenue was the lowest in five years, though investors and analysts are speculating the firm’s trading operations could be one of the biggest beneficiaries of Trump’s policies.

“The benefits from higher interest rates, accelerating capital deployment and historically low credit costs have been evident throughout the large-cap U.S. bank earnings releases,” Marty Mosby, an analyst at Vining-Sparks IBG, said in a note. “The fundamental story remains intact.”

 

Bond trading profits are dominating headlines among the major banks but hide the fact that most have seen their businesses contract over the last few years as the high cost of complying with regulation bit into the size and scope of their businesses. 

Dayton said Sessions "may be against marijuana policy reform, but he is not stupid. He knows that these cannabis laws are hugely popular, not just among Americans in red and blue states, but with his boss who campaigned in favor of these laws." 

While his responses, on their face, were hardly a coup for the cannabis industry, Sessions didn't morally condemn pot smokers either. 

"The United States Congress has made the possession of marijuana in every state, and distribution of it, an illegal act," he testified. "If that ... is not desired any longer, Congress should pass a law to change the rule." 

The Drug Policy Alliance, an organization opposed to the war on drugs, called the testimony "wishy-washy at best." The group's senior director of national affairs, Bill Piper, added: "It is clear that he was too afraid to say the ‘reefer madness’ things he said just a year ago, and that’s progress. But he made it clear throughout the hearing that he will enforce federal law."

 

While a good many politicians have made statements condemning cannabis use “evolution” of their views on the topic are increasingly required as an ever increasing number of states legalise recreational or at least medical use. That has created a bull market in supply of the herb, not least because it grows like a weed. Wholesale prices have contracted considerably as operations initiated following Colorado’s legalisation reach commercial scale. That has resulted in mixed performance for the related shares. 

London: British prime minister Theresa May has flagged a trade deal with Australia as a priority for a "new global Britain".

In a historic, detailed speech, Mrs May dashed the hopes of Remainers and delighted Brexiteers by setting out a vision of an independent UK – a "trading nation" that will look beyond Europe to "new friends and old allies".

She confirmed the UK would leave the European single market and instead would negotiate a new free trade deal with the European Union.

She was less clear on the UK's role in Europe's customs union, saying Britain would not be part of the common commercial policy or external tariffs, but could remain a "signatory to elements" in order to lower barriers to trade.

She emphasised the British people had voted to regain control of immigration, though she wanted European citizens already in the UK to retain their right to work there.

She revealed that the final Brexit deal would be presented to the British parliament for a vote before it comes into force – though she did not discuss what would happen if it was voted down, saying instead she was confident it would be approved.

Mrs May concluded with a barely-veiled threat to Europe: that if they sought a "punitive" Brexit then it would be "an act of calamitous self-harm" as the UK would retaliate by lowering its tax rates below Europe's to draw companies and investors from the continent.

She also admonished Europe for "trying to hold things together by force, tightening a vice-like grip that ends up crushing into tiny pieces the very things you want to protect".

But she said it was "overwhelmingly and compellingly in Britain's national interest that the EU should succeed".

Mrs May's speech drew a rapturous reception from those who had campaigned for Brexit, with UKIP leader Nigel Farage commenting "I can hardly believe that the PM is now using the phrases and words that I've been mocked for using for years. Real progress."

But it is likely to be less welcome in Europe.

European ambassadors were present in the room for the speech, and Fairfax understands few if any applauded the conclusion.

Some were seen shaking their heads when it came to the threat of Britain becoming a tax haven.

In a deliberate irony the speech took place at Lancaster House in London, where Margaret Thatcher set out her plan for the UK's membership of the single market in April 1988.

Mrs May began by saying she wanted the country to be "a truly global Britain", a "best friend and neighbour" to Europe but one that "goes out into the world to build relationships with old friends and new allies alike ... a great global trading nation respected around the world".

She said the UK would begin by adopting EU laws, then modifying them, to allow a smooth transition and certainty for business.

Mrs May also spent some time reassuring Ireland that there would be a "practical solution" that balanced the common travel area with Northern Ireland with the need to protect the UK's new immigration controls.

"Nobody wants to return to the borders of the past," she said.

On immigration, she said the UK would "get control" of the number of people coming to Britain from the EU, but would guarantee the rights of EU citizens already in Britain as an "important priority", preferably before the rest of the Brexit deal was done.

On trade, she said "as a priority, we will pursue a bold and ambitious free trade agreement with the European Union.

"This agreement should allow for the freest possible trade in goods and services between Britain and the EU's member states. It should give British companies the maximum freedom to trade with and operate within European markets – and let European businesses do the same in Britain.

"But I want to be clear. What I am proposing cannot mean membership of the single market."

This agreement might take in elements of the current single market as it "makes no sense to start again from scratch", she said.

But the UK needs to leave the single market and key elements of the customs union, Mrs May said, in order to strike its own trade deals.

"We want to get out into the wider world, to trade and do business all around the globe."

"Countries including China, Brazil, and the Gulf states have already expressed their interest in striking trade deals with us. We have started discussions on future trade ties with countries like Australia, New Zealand and India. And President-elect Trump has said Britain is not 'at the back of the queue' for a trade deal with the United States, the world's biggest economy, but front of the line."

Well done Theresa May and her team.  This speech has ended much uncertainty and also frustration on the part of Brexit supporters, who’s numbers have increased following the historic vote.

Importantly, even the Chancellor Philip Hammond has come to his senses following a dreary Autumn Statement on 23rd November.   

As for EU spokesmen, I have heard some more lame “cherry picking” comments in response to Theresa May’s speech today.  No, the government is not cherry picking – we are leaving the EU.  

It’s not enough for Theresa May to say that if she doesn’t get a bespoke UK/EU free trade deal outside the Single Market and the Customs Union, she will walk away and risk the imposition of tariffs on both sides. She has to mean it — and be believed.
Such rough talk from her supposedly ultra-cautious Chancellor gives her much greater credibility in such a stand-off.

But Mr Hammond’s change of tone is not just a negotiating ploy. As he also pointed out to his German interviewers: ‘Since the referendum, we have seen, on the European side, movement away from the UK positions . . . to things that are anathema to the UK: more political integration.’

Some of that ‘movement’ would now be causing political mayhem in the UK, if we had not already voted to leave. Here are just four examples.

Last week, details leaked of an EU White Paper suggesting Brussels be allowed to impose taxes directly on member states, to include a levy on CO2 emissions, an electricity tax and an EU-wide corporate income tax.

Last month, the European Court of Justice ruled that British laws allowing the security services retention of bulk data on calls and emails would not be allowed to stand as they ‘exceeded what is strictly necessary’.

Also last month, Brussels ruled that all members of the Single Market had to impose a requirement that every off-road vehicle — every quadbike, every golf-cart — had to be covered by insurance for ‘third-party injury and damage’. Our own Department for Transport said that it ‘opposed measures which impose an unreasonable burden on the public’ but that it would have to abide by the new rule until Britain exits the EU.

And, only a few days ago, Brussels ruled that even motorists who break the law by driving without insurance should be protected if their car is damaged — so law-abiding drivers face an increase in insurance bills to cover that cost.

It is only because we are leaving the EU that these four power-grabs — proposing new EU-wide taxes; adversely affecting MI5’s ability to protect the British people; creating a totally new overhead for farmers and families playing around with quadbikes; and driving up the costs of running a car — have not caused an even sharper spike in the British people’s hostility to our membership.
 

That is what the bureaucratic EU does – it makes silly nanny state rules which damage free enterprise, slow GDP growth and increase unemployment.  

I spent much of the afternoon watching the live coverage of Rex Tillerson’s senate confirmation hearings.  I was very impressed with his responses, and found that some of the questions he was asked were entirely inappropriate for a public hearing as they would reveal possible ploys for dealing with the Russians.  The most petty moments were the grandstanding questions of Rubio, who appeared adolescent in contrast to a pro like Tillerson. How fortunate for all that Rubio was eliminated early on in the campaign.

Regrettably there was an overlap and I had to leave that coverage to watch The Donald.  There is clearly something wrong with that man on a personal level, but he has a very good case for the attempted vilification by certain segments of the media.  I loved his rebuff of CNN by refusing to accept any questions from their correspondent.  His comments re Buzzfeed were predictable, NYT, Vanity Faire, Streep pettiness, but that group is a joke anyway.  For me the most impressive moment was the time on stage of his attorney, who detailed the alleged efforts he has made to separate his past business ventures from his future job.  She was excellent, but I did wonder just how many blank pages there were in those stacks of documents lying on the table to her right.  Perhaps the rebuffed CNN reporter will have had a quick look.

Thanks for your thoughts on this important confirmation hearing.  I saw a brief section of the Rex Tillerson hearings over the weekend and was impressed.  He was very articulate, knowledgeable and reassuring on a range of subjects. 

In fact, I would not have minded if he had just become the president elect.  I also maintain that Trump has selected the most capable business team of any president during my lifetime.  I think that will be good for the USA and I hope to see more successful people from the private sector nominated for senior governmental roles in the UK and any other democracies.  

(See also: If Rex Tillerson Is Confirmed By The Senate, What Does That Mean For XOM?, by Martin Tillier for Nasdaq)

A third major factor making for a stronger world economy is not directly related to the financial crisis. At the beginning of last year the markets and many commentators managed to get themselves extremely worked up over the damage supposedly done to the world economy by low oil prices. By contrast, it seemed to me that low oil prices had to be a good thing. But the losses from low oil prices were highly concentrated and visible in the short term; by contrast, the gains were more widely distributed and might only become evident to the beneficiaries after a period of time. Accordingly, it was likely that there would be a short-term hit to the global economy, offset by a longer-term gain. We are now into that longer term.

Meanwhile, the recovery from ultra-low oil prices has brought a further benefit, namely the easing of the pressure on hard-pressed companies and countries. Russia, for instance, should emerge from recession this year. Even so, oil consuming companies and individuals are still facing much lower prices than they were two years ago. The result is that the world should now be experiencing a substantial net dividend from lower oil prices.

The upshot of all of this is that world growth this year is set to be higher than last year. Not only that, but it may well be a good deal stronger than almost anyone expects.  Of course, in the world of forecasting you have to be prepared for surprises. Over the last few years we have all been exceedingly well prepared for downside surprises. What I am about to say is decidedly risky but I will say it nevertheless: I have a hunch that we now need to be prepared for surprises on the upside.

I have been making many of these points for a while, so I agree with Roger Bootle. 

Businessman Trump will certainly want to improve the US economy and he has selected a highly experienced and business savvy cabinet to help him achieve this goal.  There is a risk that he might trigger a trade war with China, but I think he is too smart for that lose-lose mistake. 

Trump is fed-up with what he saw as Obama’s passivity.  He wants China to know that the US will now compete, and also cooperate, on a level playing field.  The same goes for Russia and any other country, although I think he could be particularly helpful towards the UK, as thanks for Brexit which Trump believes helped him to win the Presidential Election.  He holds little affection for the EU, having heard more about it from Nigel Farage, and having seen some of the whopping legal settlements and fines imposed on US corporations.  He probably views the EU as a rival rather than a friend, and he knows it has seldom paid its 2% of GDP per country NATO fees. 

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

I just wanted to say again 'thank you'. I know it feels hard work at times but you make a huge difference to many lives with your efforts at Fuller Treacy Money and Markets Now.  Please keep going. I will support you all I can. It is a real pleasure to know you. 

Thank you for this thoughtful email. 

I have learned a great deal from my subscribers over the decades.  They include some of the nicest and most knowledgeable people, sometimes from very different professions, that I have ever met.  

We had thirty-five people, including speakers, at The Caledonian Club on Monday evening.  I think that is close to the maximum size for these events because part of the fun is meeting everyone and chatting during the breaks, and also at the cash bar afterwards.  The Caledonian is proving to be an excellent, civilised venue with nice rooms and new projection equipment which is very good.       

A link to today's video may be found in the Subscriber's Area. 

Gundlach: People have forgotten the mood regarding stocks and bonds in the middle of 2016. Investors embraced the idea that zero interest rates and negative rates would be with us for a very long time. People said on TV that you should buy stocks for income and bonds for capital gains. This is when 10-year Treasuries were yielding 1.32%. Someone actually said rates would never rise again. When you hear “never” in this business, that usually means what could “never” happen is about to happen. I told our asset-allocation team in early July that this was the worst setup I’d seen in my entire career for U.S. bonds. It occurred to me that the bond-market rally was probably very near an end, and fiscal stimulus would soon become the order of the day. 

Schafer: People were also worried about deflation back then. 

Gundlach: Based on a comparison in July of nominal Treasuries to Treasury Inflation-Protected Securities, or TIPS, the bond market was predicting an inflation rate of 1.5%, plus or minus, for the next 30 years. Now, that is implausible, and kind of proves the efficient-market hypothesis is wrong. More likely, the inflation rate would increase not in five or 10 years, but one year, because commodity prices had already bottomed. The Federal Reserve Bank of Atlanta’s wage-growth tracker is now up 4%, year over year. Oil prices have doubled since January 2016, to around $52 a barrel, which likely means that headline CPI [the consumer-price index] will be pushing 3% in April. 

I expect the history books will say that interest rates bottomed in July 2012, and double-bottomed in July 2016. At some point, the backup in rates will create competition for stocks. Bonds could rally in the short term, but once the yield on the 10-year Treasury tops 3%, which could happen this year, the valuation argument for equities becomes problematic. When the long bond [the 30-year Treasury] was at 2%, bonds had a P/E of 50. Compared with that, a P/E of 20 on stocks didn’t look all that bad. But if the 10-year yield hits 3%, you could be talking about 4% on the 30-year, which implies a P/E of 25. 

Something else happened in 2016: The Fed capitulated, as I predicted a year ago. The Fed gave up on its forecast for higher interest rates and lowered its dot projections for 2017, just when it might have been right. [The Fed’s so-called dot plot shows the interest-rate projections of the individual members of its policy-setting committee.] In December, the Fed had to reverse itself and raise rates. 

Priest: For the first time in years, the Fed didn’t lower its forecast for GDP [gross domestic product] growth in coming years. Central banks and the International Monetary Fund have been dead wrong for years with their annual forecasts for world GDP growth. The danger now is that pressure on P/E multiples will be negative. Unless we get tax reform and more growth in the real economy, the chances of a down stock market aren’t insignificant this year. 

Gundlach: Fed Chair Janet Yellen suggested a few months ago that running a “hot” economy might not be such a bad idea. But when unemployment is low, wages are rising, and significant fiscal stimulus is likely, inflation could exceed consensus expectations. Jim Grant, the founder of Grant’s Interest Rate Observer, wrote a fantastic article a few years ago likening the current environment to the 1940s and ’50s. Short-term interest rates were at 3/8s in the late 1940s, and long rates were around 2%-2.5%. Inflation was running at 2%. Everyone had been predicting higher inflation rates, but after a long period of 2%, they gave up. Then inflation spiked to 8%. It came out of the blue. 

Gabelli: Does the strength of the dollar change your thinking? 

Gundlach: A strong dollar keeps inflation lower. It is helpful to the bond market. A weak dollar isn’t helpful to the bond market. However, I brought along a quote from President-elect Trump today because it makes me think. He said, “While there are certain benefits to a strong dollar, it sounds better to have a strong dollar than it actually is.” Is it really a given that Trump will bring us a strong dollar if he is supposed to be helping the forgotten middle class.

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

Bonds sold off very aggressively following the November election result and the Dollar surged. The news flow has been sensational and Twitter has probably never been so popular but the reality is that both of these overextended short-term moves are unwinding. 

Forging more than half the world's steel, Chinese imports of iron ore for the full year 2016 topped one billion tonnes for the first time. The 1.024 billion tonnes constitute a 7.5% increase over the annual total in 2015 and is indicative to what extent exporters from Brazil and Australia has been able to displace domestic producers struggling with low grades and high costs.

The total value of cargoes climbed to just under $58 billion, with the average import price over the course of 2016 at $56.50 per tonne. The all-time record in terms of dollar value was set in January 2014, when the country imported $111.3 billion worth of iron ore back when prices were firmly in triple digit territory.

 

Iron-ore prices have not quite broken out to new recovery highs but have sustained last year’s breakout from a well-defined base formation and the upside can be given the benefit of the doubt provided that remains the case. 

Alibaba’s move to partner with Maersk Line should be seen as a game of one-upmanship with US rival Amazon, a leading name in online logistics has said.

Chinese customers will now be able to book space on Maersk ships, a first for the industry and one that potentially removes many freight forwarders as middlemen.

Dr Zvi Schreiber, CEO and founder of logistics technology Freightos, offered his perspective on the bigger picture and what this deal means for online shoppers and Alibaba’s rival, Amazon.

“Maersk is testing the waters of digital sales with one of the world’s largest ecommerce companies while threatening forwarder business. But for Alibaba, this is a direct challenge to global retailers like Amazon. Beyond drones and futuristic supermarkets, Amazon opted to get licensed as a forwarder. Alibaba one-upped them by going directly to the world’s largest ocean liner. Point, Alibaba.” 

 

There is a great deal of speculation going on at present relating to the implications of a Trump presidency on global trade. Certainly an America first manufacturing policy would have profound implications for low cost, high population countries’ ability to compete against what would in all likelihood be a highly automated US attempt to re-shore. Nevertheless even with the most ambitious timetable that kind of initiative could take years to unfold. 

A link to today's video commentary may be found in the Subscriber's Area.

Some of the items discussed include:

Caution dominated markets amid tough talk from May and Donald Trump about Europe’s economic and political institutions. British government officials trying to limit damage to the pound will speak to major banks in London before the U.K. leader sets out her vision for leaving the bloc in a speech on Tuesday, according to people familiar with the situation. Meanwhile Trump predicted that Britain’s exit will be a success that will encourage others to do the same. He also branded NATO obsolete.

“Markets are trading in risk aversion mode,” said Neil Jones, the head of hedge-fund sales at Mizuho Bank Ltd. in London. “Investors and corporates around the world are concerned by the prospect of a hard Brexit. Pound rallies are limited and weak, while plunges are harsh and prolonged.”

 

When we get down to basics. The UK is betting it will not be the only country to leave the EU. If it is correct in that view then it will have made the correct decision by gaining first mover advantage and the current concerns about the form of the subsequent relationship will be academic. 

On the other hand, the European Commission has to successfully sell the idea that the UK should never have been brought in to begin with and that it can hold the remaining group of Eurozone nations together. It has to do that because the prospect of countries leaving the EU, raises the very real possibility that creditors in Germany will not be paid back the money they lent to countries like Greece, Cyprus, Italy, Spain, Portugal, Ireland et al. 

Enjoy watching the video presentations. Thought you may be interested in the following interview of Gary Shilling; 

Thank you for you kind words and this interesting interview which may be of interest to subscribers. 

Gary Shilling’s view that technological innovation is inherently deflationary is very much in tune with our view. The increasing commercial applications of biotechnology, automation, artificial intelligence, the internet and mobile technology are all likely to enhance productivity and could very well represent a deflationary influence. On the other hand, the increasing calls for free money (universal social payments) lower taxes, more spending and deregulation have the capacity to stoke inflation.

On your piece about MOOCs I couldn't help but observe that you did not mention FutureLearn

This service is UK based and is an offshoot of the Open University.

It claims to be the largest MOOC. See below. I've used it and it's very good. I particularly like the fact that many courses are short - 6 weeks and typically 2 - 3 hrs per week.  
All the best

 

Thank you for highlighting FutureLearn.com which, as you point out, is another major centre of online learning and builds on Open University’s long history of distance learning. This article from May last year highlights how a number of universities will allow students to earn as many as 30 credits towards a degree using FutureLearn’s portal. That’s a powerful method to help reduce the cost of earning a primary degree and enhances even further our ability to enjoy learning throughout our lives.

This is indeed well under way and generally government-supported trend globally, with Germany (as always) at the forefront, but also the US and the rest of Europe promoting and facilitating the process.

The article below is interesting I think

It gives an idea of how easily these processes are implemented (2 weeks to start production) and the advantages offered to producers (design innovation + shorter time to market + customisation). €2 million investment for being able to produce a total of 200k pieces every year seems very low.

Shima Seiki (6222) - that provided the machinery to Benetton - is a company worth looking into, and the recent rally in share price confirms what you mentioned re the growth potential from clothing manufacturers in Asia.

This is also confirmed on their IR page
 

 

Thank you for this above article expounding upon the seamless garment manufacturing being pioneered by Shima Seiki. Seamless garment manufacture has been around in the hosiery business for a long time but finishing was always required to sew the legs on the gusset. Introducing seamless manufacture to outer wear is a major innovation and as you point represents an additional sign of increasing interest in automation in the garment industry. 

Kenneth Rogoff can pinpoint the moment he started to grow concerned Donald Trump would be the next U.S. president: It was when Rogoff’s fellow attendees at the World Economic Forum’s annual meeting last January said it could never happen. “A joke I’ve told 1,000 people in the months since leaving Davos is that the conventional wisdom of Davos is always wrong,” says the Harvard professor and former chief economist of the International Monetary Fund. “No matter how improbable, the event most likely to happen is the opposite of whatever the Davos consensus is.”

The repeated failure of business and political elites to predict what’s coming—last year, that included the U.K.’s vote to leave the European Union—doesn’t strike those returning this month to the Swiss Alps as very funny. After a year in which political upsets roiled financial markets and killed off the careers of once-dominant Davos-going politicians, the concern for delegates attending this year’s meeting isn’t that their forecasts are often wrong, but that their worldview is.

In its four decades of existence, the WEF has nurtured a broad consensus in favor of globalization and open markets. At its core is the notion that capital, goods, and people should be able to move freely across borders, a principle that can deliver huge benefits to those with education and money but seems terrifying to those without either. For the 3,000 people who will convene in the small Swiss town from Jan. 17 to 20, the 2017 event could be a moment of reckoning. At speakers’ podiums, coffee bars, and the ubiquitous late-night parties, they’ll be asking themselves whether Davos has become, at best, the world’s most expensive intellectual feedback loop—and, at worst, part of the problem. “Since the recession, the boom has benefited the upper-income earners and done little for those in the middle or on less. That’s the backlash,” says Nariman Behravesh, the chief economist for research provider IHS Markit. “The Davos vision of the world has not delivered a broad-based economic recovery.”

I think Kenneth Rogoff is right.  Obviously many things are discussed at Davos but there is usually a dominant subject or theme, at least according to the press, and the consensus is generally wrong. 

Why does this happen?  After all, the people attending are generally highly intelligent, if not always analytical or introspective.  Could it be a smear on the part of envious press attending along with other observers who are not principle attendees?  Presumably not if Kenneth Rogoff says “the conventional wisdom of Davos is always wrong”. 

Could it be guilt mixed with fear, leading to a first-class ticket on the Titanic mentality?  They may not be literally at sea but the analogy has relevance as they are sheltered in luxury on a frozen alp.  Presumably they can only go downwards from there. 

There is also a typically behavioural answer.  When a number of different people are confined in close proximity, whether it be at Davos, in stadiums, or large open-plan financial dealing rooms, they quickly become susceptible to groupthink. In other words, their individual thoughts and opinions will be subconsciously suppressed, as they become part of the developing crowd view.  This form of bonding can occur for a combination of different reasons, including friendship, admiration and even fear.  Groupthink is as powerful as it is unanalytical.    

We should monitor reports from Davos, if only because any conventional wisdom could be a contrarian indicator.  Trump’s tweets could be a topic, as they currently are everywhere else, but what conventional wisdom might they produce in Davos?  We will soon know but if it is fear of war with China or Russia, or just a routine impeachment, I might have to buy more commodities.      

Dear David, 
Thank you for posting this and other articles from the Telegraph, which are always informative. I particularly enjoy reading A E-P. He has a breadth and depth of experience that is quite unique among UK journalists and he never fails to be dramatic. I remember 2008 when A E-P was calling for a financial crash, and few others agreed. I don't know whether he acted on it and made any money. I rather doubt it. 
One thing I bear in mind (with all newspaper articles) is that journalists are not investors - and if they were successful investors they would not be journalists!
Your views on markets have more gravitas than any journalist.

Thanks for your email and I feel similarly about A E-P.  He is erudite; I enjoy the classical and international references; he is extremely well informed and in my opinion, the most interesting writer in the financial industry.  I too remember A E-P's analysis in 2008 and he was brilliant.

I think you are right about journalists having sensible restraints on trading various instruments, although I hope they can invest in funds.  This article from Business Insider - The Insane Difference In The Rules For Journalists And SEC Employees When It Comes To Trading Stocks, is informative:  I thank you for saying that my views on markets have gravitas, but in this industry we need to remember that we are only as good as our last call / trade / investment.

Hi, David, and thank you for posting the above article. I tend to agree with your assessment of it. My one observation is that while the author impugns the Fed, and justly so, as a principle player in fostering the zeitgeist we hope Mr. Trump will cause to be successfully addressed, he makes no mention of a fiat monetary system that enables the Fed to play its role so generously. Is it fair to view that as a significant omission or am I flirting with the danger of the single story?

I think the Fed or any other central bank is always going to be controversial, not least because they have so much power and influence within fiat monetary systems. My own view is that they generally help economies more than they harm them.  For instance, I maintain that following 2008 we would have seen widespread depressions, rather than many lengthy recessions. 

More recently, the Fed and other central banks have been widely criticised for discouraging economic recovery, not least by making commercial banks less profitable so that they were reluctant to lend.  Critics have also said that only rich people, mainly with equity portfolios, have benefitted from record low interest rates. 

There is definitely some truth to these points.  However, I also think that governments could and should have increased fiscal spending, but very few did so.  With minimal GDP growth, many corporations were also reluctant to spend.  The leading central banks often called for more government and corporate spending but were generally ignored. 

This situation may have looked like the question: Which came first, the chicken or the egg?  However, I think governments were more at fault than the central banks, which were too often left almost solely in charge of providing stimulus. 

In the US, this problem certainly contributed to the election of Mr Trump, who many people said was unqualified to be president.  Like him or loath him, at least Mr Trump proposed very stimulative policies for the US economy, which we never saw from Mr Obama and which Mrs Clinton was not proposing.  

By my count, Trump wins the first round comfortably, before he is even inaugurated.  Of course anything can happen over the next four years and it will certainly be interesting.        

At least thirty-one people will be attending, including the speakers.  We will be in the splendid Morrison Room on the right as you enter the Club.  Sarah Barnes might just be able to shoehorn in another couple of people if you contact her via the brochure. 

I am looking forward to a lively, interesting and enjoyable evening.

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

The UK’s largest cap index is in the process of completing a 16-year range by breaking on the upside. The Index has rallied for six consecutive weeks, hit new all-time highs last week and improved on that performance this week. Prior to this breakout it had spent three years ranging below, but in the region of, its previous peaks. While a short-term overbought condition is evident that is consistent with what is to be expected from a major breakout. 

The three-way conflict simmered throughout 2016. Eurozone policy makers say its resolution can’t be put off much longer. Prime Minister Alexis Tsipras is considering the option of snap elections if the creditors don’t soften their positions.

The IMF is holding a hard line partly to put pressure on the eurozone to lighten Greece’s debt burden, say people involved in the negotiations. IMF officials have said Greece’s economy is already overtaxed.

New taxes that came into effect on Jan. 1 are squeezing household incomes further. Economists say even-higher income taxes—in the form of lower tax-free income allowances—could add to a mountain of unpaid taxes. Greeks currently owe the state €94 billion ($99 billion), equivalent to 54% of gross domestic product, and rising, in taxes that they can’t pay. Three in four Greeks can’t pay household bills on time, according to the 2016 European Consumer Payment Report, a private-sector survey.

Extended families often rely on grandparents’ pensions. Further cuts in that lifeline could end hopes for a return to economic growth. Unemployment remains more than double the eurozone’s average at 23%. About 74% of the jobless have been out of work for more than a year and thus receive no benefits.

 

Greece got itself into a world of trouble by fudging economic statistics to gain entry to the euro. By succeeding in that endeavour it paid scant regard to its ability to pay back the vast quantities of money subsequently borrowed and the generous social programs it funded. 

Singapore’s Strait Times Index is breaking upwards to new recovery highs amid a firmer tone for the Singapore Dollar and is being let by the financial sector. 

Bank of America calls it the Icarus Trade. Global stock markets will surge by another 10pc in a parabolic 'melt-up' this quarter, akin to the final stage of the dotcom boom.

This will be followed by a mirror 'melt-down' later in 2017 as the US Federal Reserves squeezes global liquidity, and rising bond yields puncture the Trump reflation trade.

Michael Hartnett, the bank's investment strategist, says there will be a perfect moment for the 'Big Short' within a few months, but first we must all wait for the speculative fever to pass. The warning signs of a market top are not yet flashing red.

The Bull/Bear ratio is a frothy 3.4, but far from extreme. The cash reserves of money managers have fallen to a 19-month low of 4.8pc. The danger zone is nearer 4pc. Powerful rallies tend to draw all but the most steely resisters into the vortex first.

Bank of America recommends "laggard risk assets", singling out British assets as the ultimate unloved play. We in the UK may think that the headline rise of the FTSE-250 over the last twenty months is not so bad, but for sophisticated investors who think in dollar terms it has been a 20pc haircut. Britain PLC is cheap.

Picking the last pennies off tracks before an incoming train is only for the nimble and brave.  Mr Hartnett says bond stress is creeping up on the markets. The peak-to-trough losses for holders of US Treasuries over the last five months are already greater than before the 1987 crash, the Orange County and Mexico blow-ups in 1994, and is not far short of the 'taper tantrum' in 2013.

The great unknown is where the pain threshold lies in a global system with debt ratios that are now roughly 40pc of GDP higher than just before the Lehman crisis. Bank of America fears a further rise in yields of 50 to 75 basis points may be enough to trigger a "financial event".

HSBC's latest global outlook is even darker. Indeed, it is astonishing. The bank expects yields on 10-year US Treasuries to push a little higher to 2.5pc before crashing back to historic lows of 1.35pc by the end of the year, taking global yields with them.

Markets will conclude by the summer that Trumpian stimulus does not add up to much, and that the reflation narrative is a hoax. "We believe that equities are walking a tightrope, and there is a fairly long way to fall," said the bank.

While I do not take a view on stock prices, HSBC's outlook is broadly in line with my own. The world cannot easily withstand the sort of Fed tightening now being etched into forecasts by the macro-economic fraternity.

The Institute of International Finance says debt has reached $217 trillion, a record ratio of 325pc of GDP. What is remarkable is that even in mature economies -  trying to 'deleverage' - the ratio jumped by 6pc of GDP to 390pc over the first nine months of last year.

There is almost nowhere left to hide. Corporate debt in emerging markets has risen from $6.5 trillion to $25.5 trillion since Lehman, with the 'credit gap' signalling danger in China, Hong Kong, Singapore, Thailand, Saudi Arabia, Chile, Turkey, and Indonesia. Total off-shore dollar debt has risen fivefold to $10 trillion since 2000.

One expects a range of different forecasts at the beginning of January each year, and 2017 is no exception.  Love him or loath him, president-elect Trump is particularly newsworthy and a factor in these forecasts.  

On Monday I posted James W Paulson’s bullish report for Wells Capital Management in which he referred to the return of animal spirits no less than 24 times.  In Ambrose Evans-Pritchard’s column above he first quotes Michael Hartnett from Bank of America who predicts further momentum gains before “a perfect moment for the ‘Big Short’ within a few months”.  AEP then cites HSBC’s latest global outlook as even “darker” and in line with his own views.  The bank expects US 10-Year Treasury yields to retest their early-July lows near 1.35%, with equites walking a tightrope from which there is a long way to fall. 

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

JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said he’s optimistic about President-elect Donald Trump’s administration because of the group of people he’s assembled to fill his cabinet.

“If you want to win the game, put Tom Brady on the field,” Dimon, 60, said in an interview Thursday on CBS This Morning. Trump’s “hired a lot of professional people, people that are experienced, successful, smart and patriotic,” he said.

Dimon’s comments came amid this week’s marathon of Senate confirmation hearings. All of Trump’s picks are expected to win confirmation, barring unexpected revelations or major gaffes.

Dimon praised Steve Mnuchin, Trump’s pick for Treasury secretary, saying the former CEO of OneWest Bank Group LLC is “very qualified” and “wants to do the right thing.” Despite rumors last year that he was under consideration for the Treasury job, Dimon said Thursday he wasn’t offered the position, adding that he hasn’t finished his work at JPMorgan and at the Business Roundtable, an association of U.S. CEOs.

Rex Tillerson, Trump’s nominee for secretary of state, is “respected by everyone he deals with around the world,” Dimon said. Tillerson, the former CEO of Exxon Mobil Corp., has faced criticism for his dealings in Russia in the run-up to his confirmation. He was pressed on U.S.-Russia relations during his Senate confirmation hearing on Wednesday, responding that Moscow has acted against U.S. interests and urged an “open and frank dialogue” on areas of mutual concern.

“Rex Tillerson is a class act -- he’s smart, he’s patriotic,” Dimon said. “Almost every big company has dealings in Russia; that doesn’t mean he’s not a patriot.”

I maintain that Trump has assembled the strongest business team for his Cabinet that I have seen from any president in my lifetime.  That can only be good for the US economy, which is positive for global GDP growth generally.  I am obviously not alone in this view, which is widely reflected by Wall Street since the surprising election result on November 8^th.   Moreover, this is a team which can be very effective while Republicans also control both the Senate and the House of Representatives.

However, the problem is Trump’s other side, which is both discouraging and highly irritating for many people, even among those who support him.  He is not a fool, and there have obviously been attempts to undermine him.  The US presidential campaign was more contentious than any other which I have witnessed.  It is time to move on and the new president can set the tone for his administration. 

Trump aspires to two terms.  Fine, but to achieve that he will need to develop gravitas.  His inauguration speech will be the time to demonstrate that aspect of his character, along with the inclusivity seen in his brief statement immediately following his election victory.     

I look forward to another lively and enjoyable evening, which features the return of Dr David Brown who will discuss the new Industrial Revolution.  

Meanwhile, I hope subscribers have profited from the Trump bull market rally, recently consolidating a short-term overbought condition.  It will be interesting to see how Wall Street performs during the rest of this week.  If indices such as Nasdaq Composite remain steady, let along firm, we could see another upside momentum move. Conversely, watch out over the next few months if the early November reaction lows are broken.  Note how well the UK’s FTSE 100 Index has performed, benefitting considerably from all the inform commodity shares. 

Keep an eye on China’s Shanghai A-Shares Index, because the world’s second largest economy is the next biggest international influence after Wall Street.  China remains an enigma; bullish and bearish views could not be further apart, so keep an eye on Bitcoin which fallen back sharply.  China’s government has clearly moved to stem this route for exporting capital and the Offshore Renminbi has also established a peak of at least near-term significance.    

It will be interesting to discuss all of this at Markets Now on January 16^th, and to hear your views as well.  Come along to contribute and enjoy the fun.

Stop Press: Iain Little’s colleague, Bruce Albrecht, will be joining Markets Now on the 16^th and delivering a short chart-based presentation.  

Even an America-first advocate like Trump should be concerned by this because people joining the middle classes in Vietnam, Mexico or Egypt will be potential customers for U.S. goods exporters.

Why might it happen? Back when the U.S. middle class flourished after World War II, factory automation was expensive. Robots were limited to only a few sectors -- mainly the auto industry -- and those automatons weren’t that sophisticated. Wages rose thanks to improved productivity, but workers weren’t completely made redundant by the machines.

Poorer countries in Asia or Africa probably won't be that lucky. Today's robots are far more capable, are being deployed in a wider range of industries, and are cheaper too. That leaves less room for wages to rise before humans are priced out of the labor market. More low-cost automation also means manufacturing can be re-shored to developed economies.

German robot maker Kuka AG, acquired last year by China’s Midea Group Co., estimates a typical industrial robot costs about 5 euros ($5.28) an hour. Manufacturers spend 50 euros an hour to employ someone in Germany and about 10 euros an hour in China.

When I spoke to KP Reddy, the CEO of Softwear, a year ago the biggest takeaway was how he described the strong interest they were receiving from major clothing manufacturers in Asia. They want to be fully automated within the decade so they are investing now. 

I’ll end this section by sharing my latest epiphany on the macro.  I realized recently that in my early decades in the investment business, change came so slowly that people tended to think of the environment as a fixed context in which cycles played out regularly and dependably.  But starting about twenty years ago – keyed primarily by the acceleration in technological innovation – things began to change so rapidly that the fixed-backdrop view may no longer be applicable.

Now forces like technological developments, disruption, demographic change, political instability and media trends give rise to an ever-changing environment, as well as to cycles that no longer necessarily resemble those of the past.  That makes the job of those who dare to predict the macro more challenging than ever.

The Velocity of M2 has been declining since 1997. A housing bubble, sovereign debt crisis and bubble, commodity bull market and crash and massive monetary largesse have done nothing to stall the decline.

This argument from the St. Louis Fed in 2014 blames the refusal of consumers to spend as the primary culprit and suggests ultra-low interest rates are at least partially to blame. Here is a section:

And why then would people suddenly decide to hoard money instead of spend it? A possible answer lies in the combination of two issues:

A glooming economy after the financial crisis

The dramatic decrease in interest rates that has forced investors to readjust their portfolios toward liquid money and away from interest-bearing assets such as government bonds

In this regard, the unconventional monetary policy has reinforced the recession by stimulating the private sector’s money demand through pursuing an excessively low interest rate policy (i.e., the zero-interest rate policy).

Bitcoin drops 6% after PBOC Shanghai says it conducted on-site inspection at Shanghai-based BTCChina.com to check for any violations of market manipulation, money laundering and safety of customer funds.

Bitcoin prices have plunged 20% from record high of $1,091.7 on Jan. 4

Current trading price at BTCChina.com, platform tailored to Chinese clients, dropped 9% from 24-hour high

Trading volume was 1.5m bitcoins on BTCChina as of today, 1.2m on Huobi.com today, 1.8m on OKCoin.cn

NOTE: Bitcoin trading could only accommodate a small fraction of funds leaving China, Bloomberg Intelligence says

NOTE: BTCChina, Huobi.com, OKCoin.cn are major bitcoin trading platforms providing services to Chinese clients

NOTE: Jan.9, China to Study Bitcoin Custodian Platform: Securities Journal.

Bitcoin is a small market compared to national currencies, However there is no getting around the fact that Chinese traders represent the majority of participants in that market. Therefore rather that Bitcoin representing the primary organ for money leaving the country it has been the victim of its own limited success by embarrassing monetary policy makers.

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

Here is a summary of the points covered:
    
TIPS yields at potential support, Dollar weaker, resources shares hitting new recovery highs, uranium and shipping rallying from deeply oversold conditions, South Korea outperforming, Genetic Sequencing collapsing in price.

State-owned uranium company and global production leader, Kazatomprom, said production for 2017 will be reduced by 2,000 tonnes, which is about 3% of the total global output, according Cantor Fitzgerald Canada Research’s figures.

“These strategic [uranium] assets are far more valuable to our shareholders and stakeholders being left in the ground for the time being, rather than adding to the current oversupply situation,” Kazatomprom Chairman Askar Zhumagaliyev said in the statement.

He added the production would pick up pace once market conditions improve.

Cantor Fitzgerald’s analysts Rob Chang qualified the move as a “game changer,” adding he expected to see across the board strength in the uranium space very soon.

“Kazatomprom’s relentless increases in production over the years was one of the top causes for uranium price weakness,” Chang said in a note to investors.

 

Uranium prices have now unwound their oversold condition relative to the trend mean. It is as yet unclear whether this decision by Kazakhstan was the catalyst for the rally to date and will continue to act as a bullish factor. However what we can conclude is that prices are uneconomic for even the most efficient producers at these levels so marginal supply is under pressure. That is a recipe for higher prices over the medium-term.

Samsung is emerging from its biggest corporate crisis, when reports of incendiary Note 7s forced the Korean company to kill its most profitable gadget. It still hasn’t revealed the results of a subsequent investigation into an episode that cost Samsung more than $6 billion and assured Apple Inc. of the lead in premium devices over the holidays. It’s now counting on its next marquee phone to repair its reputation.

“Despite the Note 7’s vacuum, Samsung acquitted itself well on the back of sound S7 sales,” said Lee Seung-woo, an analyst with IBK Securities Co. in Seoul. “After a softer landing in the first quarter, Samsung is on track for record June quarter profit with the new S8 coming to market.”

Operating income rose to 9.2 trillion won ($7.8 billion) in the quarter ended December, its biggest profit in three years, the Suwon, South Korea-based company said in preliminary results Friday. That compares with the 8.29 trillion-won average of analysts’ estimates compiled by Bloomberg in the past four weeks.

 

The heir to Samsung’s empire is being accused of taking part in a bribery scandal yet the share continues to outperform suggesting this news was already priced in. Perhaps more important is the fact Samsung was awarded more US patents last year than any other company. That suggests it at least has the potential to improve on its product line even after the Note 7 debacle. 

Gold prices may have peaked in 2013 but so did the balance sheets and debt loads of the gold miners within our coverage, as the companies chased M&A and project development. Throughout 2015, and in particular 2016, the industry as a whole made FCF generation and balance sheet deleveraging high priorities. As seen below, the net debt balances of the gold miners under our coverage have declined 47% since the peak while Net Debt/EBITDA has improved by a full 1x turn, despite an average gold in 2016 that was 12% below the 2013 average.

The industry-wide focus on cost cutting and FCF generation has created companies that are less levered plays to rising gold prices, as was the case in the run up to peak gold prices in 2013. Industry FCF generation, as measured by our coverage universe, has improved greatly in the last few years. Despite much higher gold prices in 2012/13 (averaging $1,540/oz), FCF was negative as both capex and operating costs were significantly higher than current levels. As mentioned above, an industry-wide focus on FCF has clearly shown in the last few years. We forecast 2016E FCF in our coverage universe to exceed $4bn, the highest figure since the turn of the decade. 

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

Gold miners are much more leveraged to the gold price today than they have been in a very long time. They have slimmed down budgets, are eschewing spending on new projects and therefore any improvement in gold prices is reflected in free cash flow.  

The introduction of NovaSeq marks one of the most important inflection points of innovation in Illumina’s history. In the same way that HiSeq X enabled the $1,000 genome with the HiSeq® architecture first announced in 2010, we believe that future systems derived from the NovaSeq architecture we are launching today one day will enable the $100 genome and propel discoveries that will enable a deeper understanding and better treatments for complex disease,” said Francis deSouza, President and CEO of Illumina. “The NovaSeq Systems enable the study of genetic links between health and disease at an unprecedented scale by making it possible to sequence more samples at greater depth and take on projects that would otherwise be cost-prohibitive. By accelerating the trajectory of genomics with these systems, Illumina is making it possible to envision a future in which all people can benefit from precision medicine.”

The NovaSeq Series includes the NovaSeq 5000 and 6000 Systems. These instruments offer ease of use features similar to those found in Illumina’s desktop sequencing portfolio, including automated onboard cluster generation, cartridge-based reagents, and streamlined workflows. With scalable throughput, users will have the flexibility to perform sequencing applications requiring different levels of output by simultaneously running one or two flow cells from up to four different flow cell types.

The NovaSeq 5000 and 6000 Systems are priced at $850,000 and $985,000 respectively. Compared with other Illumina sequencing systems, both have lower per sample consumable costs for most sequencing applications. They provide laboratories that cannot afford the capital cost of a HiSeq X Five or HiSeq X Ten System with a roadmap to completing human whole-genome sequencing projects at a cost of $1,000 per genome.

 

It will be a few years before we have a $100 genome sequencer but the announcement that it is a possible iteration of the new architecture is a major development. 

Falling from $100 million in 2001 to $1000 last year and $100 within the next few years represents an exponential decline which will have ground breaking repercussions for the genetics industry. 

Optimism among America’s small businesses soared in December by the most since 1980 as expectations about the economy’s prospects improved dramatically in the aftermath of the presidential election.

The National Federation of Independent Business’s index jumped 7.4 points last month to 105.8, the highest since the end of 2004, from 98.4. While seven of the 10 components increased in December, 73 percent of the monthly advance was due to more upbeat views about the outlook for sales and the economy, the Washington-based group said.

The share of business owners who say now is a good time to expand is three times the average of the current expansion, according to the NFIB’s data. More companies also said they plan to increase investment and keep hiring, which reflects optimism surrounding President-elect Donald Trump’s plans of spurring the economy through deregulation, tax reform and infrastructure spending.

“Rising confidence adds to the economy’s upward momentum,” Jim O’Sullivan, chief U.S. economist at High Frequency Economics in Valhalla, New York, said in a note. At the same time, the “NFIB membership appears to be disproportionately Republican, so it is possible that the data will start overstating strength, opposite the pattern during the Obama administration.”

The NFIB report was based on a survey of 619 small-business owners through Dec. 28. Small companies represent more than 99 percent of all U.S employers, according to the U.S. Small Business Administration. A small business is defined as an independent enterprise with no more than 500 employees.

Fifty percent of respondents, the biggest share since March 2002, said they expect better business conditions in the next six months. That was 38 percentage points higher than in November. The net share of firms projecting higher sales jumped by 20 points to 31 percent. Some 29 percent say they will boost capital outlays within six months.

“We haven’t seen numbers like this in a long time,” Juanita Duggan, president and chief executive of the NFIB, said in a statement. “Small business is ready for a breakout, and that can only mean very good things for the U.S. economy. Business owners are feeling better about taking risks and making investments.”

This is exceptionally good news and can only help US GDP, which is also a boost for the global economy

In our 12/19/2016 Weekly View, we indicated that we were assessing our tactical position as we felt sentiment was approaching optimistic extremes.  Last week, we made a tactical decision to reduce US Stocks in our balanced portfolios.  Going into the end of 2016, our balanced portfolios had more equity exposure in order to take advantage of the post-election rally in the US.  Below is a summary of our current positioning as a result of the most recent portfolio changes:

1. As we begin 2017, it is our belief that the post-election rally may have gotten ahead of the new administration’s policy implementation.  We remain optimistic about the prospects for US stocks as a result of expected policy changes from the new administration and Congress.  However, our measures of investor sentiment suggest that our optimism is now widely shared.  In the first quarter, the details of policy will become more apparent, as will any differences among policymakers.  This process may be more challenging than anticipated.  

We have a global stock market rally sparked by Trump’s election.  As we approach the first half of January, stock market performances in the first two weeks of January 2017 could not be more different than what we saw in early 2016.  Seasonal factors are favourable, although this made no difference last year. Nevertheless, on average they have worked more often than not, which is why this time of year is known for its favourable seasonal factors. 

Perhaps more importantly, animal spirits in favour of stock markets have returned for the first time in a long while.  Most of the hedge shorts have probably been covered but I doubt that most long-only investors are fully invested. 

This item continues in the Subscriber’s Area, where The Weekly View is also posted, along with an article.

Here's an article that was written by a friend that appeared in this month's Jan. Issue of Marc Faber's Gloom Boom and Doom.  George is a very successful California Real Estate investor and one of the savviest stock market investors I have ever come across. The article was written in December and is quite timely. I thought I would share it with you, with George's permission. 
 

My thanks to you and George Karahalios, and I am very happy to post his article.  It is powerful, passionate, informative and credible.  I think most subscribers will agree with a great deal of it, as do I.   

I look forward to another lively and enjoyable evening, which features the return of Dr David Brown who will discuss the new Industrial Revolution.  

Meanwhile, I hope subscribers have profited from the Trump bull market rally, recently consolidating a short-term overbought condition.  It will be interesting to see how Wall Street performs during the rest of this week.  If indices such as Nasdaq Composite remain steady, let along firm, we could see another upside momentum move. Conversely, watch out over the next few months if the early November reaction lows are broken.  Note how well the UK’s FTSE 100 Index has performed, benefitting considerable from all the inform commodity shares. 

Keep an eye on China’s Shanghai A-Shares Index, because the world’s second largest economy is the next biggest international influence after Wall Street.  China remains an enigma; bullish and bearish views could not be further apart, so keep an eye on Bitcoin.  Rich Chinese are said to be behind Bitcoin’s sharp rise in their efforts to get money out of the country.   

It will be interesting to discuss all of this at Markets Now on January 16^th, and to hear your views as well.  Come along to contribute and enjoy the fun.

Stop Press: Iain Little’s colleague, Bruce Albrecht, will be joining Markets Now on the 16^th and delivering a short chart-based presentation.  

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

As for a new Ice Age, the Russian Academy of Science’s Pulkovo Observatory in St. Petersburg, considered one of the world’s most prestigious scientific institutions, recently issued a new study titled, “The New Little Ice Age Has Started.” According to the study, the average temperature around the globe will fall by about 1.5o C (2.7o F) when the planet enters the deep cooling phase of this new Little Ice Age, expected in the year 2060. The study goes on to predict that after 2060 the Earth will experience four-to-six 11-year solar cycles of cool temperatures before beginning the next quasi-bicentennial warming cycle around the turn of the 22nd century.

Habibullo Abdussamatov is the head of space research at Pulkovo and the author of the study. He has been predicting the arrival of another ice age since 2003, based on his study of the behavior of the sun’s different cycles and the solar activity that then results. His model is based on data from the Earth’s 18 earlier little ice ages over the past 7,500 years, six of them experienced during the last thousand years. Based on his model, he began predicting over a decade ago that the next little ice age would start between 2012 and 2015. Abdussamatov’s models have been affirmed by actual data, including the rise of the oceans and the measurable irradiance sent earthward by the sun. Given the accuracy of his predictions, which have been demonstrated in numerous studies since 2003, he now predicts that we entered the 19th Little Ice Age in 2014-2015. This forecast would appear to fly in the face of climate change scientists pointing to 2015 and 2016 as being the warmest years on record – and forecasts that we will experience more record warmth in coming years.

Mr. Abdussamatov’s views stand in opposition to the conclusions of climate models, as he has tied his forecast of a prolonged cooling spell to solar, not man-made, factors. The recent disappearance of sunspots from the face of the sun, which also occurred during the Little Ice Age in the late 1600s, has made Mr. Abdussamatov’s contention no longer an isolated view. In fact, organizations such as the National Astronomical Observatory of Japan and the Riken research foundation have reached similar conclusions. The battle over whether man-made or natural forces are the primary driving force behind global warming and climate change will likely become more contentious in the next few years. The key point is that the world’s population is at greater risk of serious harm from colder temperatures rather than warm temperatures, which seems to be ignored by government officials and the media. We guess, cold and ice doesn’t lend themselves to as spectacular disaster scenes as heat-related weather events.

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

I am more than willing to accept that humans have an impact on our environment. After all there are a lot of us and we engage in a great many industrial activities. However the sun is a major contributor to weather patterns and its cycles cannot simply be ignored. I predicted back in 2009 the most recent solar activity peak would represent a lower low and that has now come to pass. As we head into another solar minimum we can anticipate colder winters in the years ahead. However to go from there to a prediction of an impending mini-Ice Age is quite a leap. 

It's only the 5th, but the year to date fall in the price of coking coal has already reached 8%. The steelmaking raw material is also a round $100 below its multi-year high of $308.80 per tonne (Australia free-on-board premium hard coking coal tracked by the Steel Index) hit in November.

On Thursday the price dropped another 4.5% to $208.10 a tonne, the lowest since September 29 and one of the biggest declines (for the spot price) on record. In 2011 floods in key export region in Queensland saw the coking coal price briefly trade at an all-time high $335 a tonne.
With demand both more diverse and less predictable, the increasingly widespread transition towards market-based pricing couldn’t be more timely

Still, metallurgical coal is up 150% over the past year and averaged $143 a tonne in 2016 (about the same as it did in 2013). There was a more than $100 differential between the spot price average and the fourth quarter contract benchmark.

 

The oldest adage in the commodity markets is that “the cure of high prices is high prices”. There was a temporary dearth of coking coal so prices rose quickly for most of the latter half of 2016. However with new supply coming to market the necessity to pay ever higher prices has been reduced and coking coal has pulled back sharply. A potentially lengthy period of ranging is likely required before substantially higher prices can be sustained. 

As Brazil struggles through its worst recession on record, dozens of businesses have set up operations across the border, creating thousands of jobs. Broadly welcomed by the Brazilian government at first, the migration of investment is now facing increasing scrutiny as unemployment rises to unprecedented levels.

"It used to be a joke," said Murillo Onesti of Sao Paulo law firm OLN Advogados, referring to Paraguay’s past reputation in Brazil as a source of cheap knock-offs. "China faced the same resistance at first. But people are seeing now that you can produce better quality goods at a lower price."

In effect since 2000, Paraguay’s "maquila law" aims to replicate the success of Mexico’s maquiladora -- or manufacturing plant -- operations. Goods can be imported tax-free for assembly, then sold locally or exported with only the value-added part taxed at a rate of just 1 percent.

It’s been a long time since we heard anything resembling a capitalist growth story from Latin America. However following a decade where commodity driven profits ushered in high spending rates and socialist ideologues, the continent has had to reassess and more business friendly policies are emerging.

 

Inflation rage is coming to the boil in Germany. Leaders of the country's prestigious institutes warn that the economy is hitting capacity constraints and risks spiraling into a destructive boom-bust cycle.

In a series of interviews with The Telegraph they said that the ultra-loose monetary policy of the European Central Bank is now badly out of alignment with German needs. It has begun to threaten lasting damage, and is fast undermining political consent for monetary union.

"The ECB wants to inflate away the debt of the southern European countries. This is a clear conflict of interest with net creditors like Germany," said Clemens Fuest, president of the IFO Institute in Munich.

"There is a debate building up on the expropriation of German savers by the ECB. This is going to become very difficult if inflation approaches 2pc and they still do nothing. People will conclude that their true motive is redistribution," he said.

What is new is that Germany's inflation rate has suddenly jumped to 1.7pc after a long and deceptive period of quiescence. It is now much higher than in southern Europe.

The mechanical effect is to drive real interest rates to minus 2pc, lower than at any time in German history other than the two hyper-inflations after the First and Second World Wars.

Professor Clemens said the politics are poisonous because the ECB's majority bloc is openly sweeping aside German objections. This plays into the hands of the eurosceptic Alternative fur Deutschland (Afd), while the ruling Christian Democrats are toughening their line to stop a leakage of votes.

"The perception is that we are being dominated by foreigners. This is going to become a big issue in the campaign," he said.

The ECB plans to extend its programme of bond purchases until the end of the year after it expires in March, albeit trimming the pace from €80bn to €60bn a month.

Prof Clemens warned that this is far too slow. "They should start cutting by €10bn a month as soon as April, and end QE completely in October," he said.

The mix of rising inflation and negative rates is toxic for ordinary Germans, who keep much of their household wealth in bank accounts.

It is often claimed that Germany has a unique savings culture. The German term for debt (Schuld) is the same word as guilt. Putting money aside dutifully has a diamantine moral appeal with almost religious undertones.

Economists dismiss this is as a fallacy. Germany's savings habits are the result of tax laws, demographics, and the structure of the banking system. But whatever the cause, the political consequences matter.

The tabloid newspaper Bild Zeitung leapt on the latest price data, splashing with a "Horror-Kurve" showing inflation soaring to seemingly frightening heights.

ECB President Mario Draghi will not tailor monetary policy in favour of Germany when most other EU economies are still struggling to fend off deflation.  Moreover, GDP growth is only just starting to recover in Southern European nations.  They have endured economic depressions during recent years. 

Meanwhile, Germany’s economy is now booming and its rate of inflation has risen from just below zero last April to 1.7% in mid-December.  It could be close to 2% when this month’s figures are released, or even higher.  German house price increases were a modest 1.5% in 2H 2009 but are appreciating at more than 12% per annum today. 

The Bundesbank will continue to complain but Germany remains the chief beneficiary of Euroland.  If it left the single currency, a new Deutschmark would be far stronger and a headwind for Germany’s export-led economy.

These problems were widely anticipated by analysts who knew their currency history.  No single currency for several different countries has survived without fiscal union.  

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

Welcome to the New Year! The current economic recovery turns nine this summer making it the third longest in U.S. history. However, this calendar-old recovery still appears young at heart. It has not yet sustained a real growth rate above 3%, has never been driven by excessive borrowing or lending nor produced a significant capital spending or housing cycle. Moreover, because it has only recently returned to some semblance of full employment, it has yet to seriously aggravate inflation. Yields about the globe remain near all-time records lows and the Federal Reserve is only now beginning to finally normalize monetary policy. Finally, despite an almost three-and-a-half fold increase in the U.S. stock market from its 2009 low, this bull market has never generated a broad-based public run into equities.

Perhaps for the first time in this recovery, we expect animal spirit behaviors; those originating from confidant businesses, consumers and investors, to increasingly characterize both the economy and the financial markets in 2017. Essentially, this furthers trends already evident during the last few months of 2016. After almost a two-year hiatus, economic growth recently accelerated and broadened about the globe. This rare synchronization in the economic recovery comes just as the U.S. has finally returned to full employment. Consequently, improved economic growth is also aggravating inflation and interest rate concerns.

Although broader economic growth, a restart of the earnings cycle and the election of a pro-business U.S. president have recently combined to boost confidence and awaken the animal spirit throughout the private sector, it also represents a quandary for the financial markets. The stock market begins the year surging to new highs as confidence in the durability of the economic recovery improves. However, the bond market is being battered by rising inflation expectations and recognition that the artificially low yield structure orchestrated about the globe during this recovery may finally be ending.

Here are some specific impressions for the economy and the financial markets in 2017.

Economic growth

The 2017 economic outlook is shaped by many important factors including a synchronization of economic policies about the globe, an economic recovery which is broadening both globally and within the U.S., a refresh and restart of the profits cycle, an end to the global manufacturing recession and collapse in commodity prices, the potential for awakening animal spirits and the increasing likelihood that a

recession is still multiple years away.

Synchronized global economic policies

Not only has global economic growth been persistently subpar, it has never been synchronized. Economic policies typically conflicted during this expansion and economic boats around the globe have seldom risen together. While the U.S. has persistently employed stimulus, other developed and emerging economic policies have often been restrictive. While Japanese policy officials were hesitant earlier in this recovery, today, similar to the U.S., they are implementing full-out central bank balance sheet stimulus. Likewise, the eurozone, which earlier adopted fiscal tightening, is now also fully embracing monetary stimulus. Moreover, the oil crisis has forced energy-based economies like Canada and Australia, which earlier felt sheltered from many ongoing global struggles, to also boost accommodation.

Consequently, as illustrated in Charts 1 and 2, in the last couple years, policy officials everywhere have simultaneously attempted to improve the economic

recovery. Already, signs of a synchronized global economic bounce are materializing and we suspect this will become more obvious as the year progresses.

There is a lot to like in this global report which I commend to subscribers.  After eight years of mostly negative comments, including a number of very bearish reports from so many analysts and strategists, this is the most bullish detailed report by far that I have seen since the 2008 crash. 

Market sentiment has steadily improved since Trump’s surprise presidential election.  This is despite many alarmist forecasts in anticipation of a Trump administration, albeit mostly from the left-leaning press.  Clearly the money men are delighted to see a President-elect who is interested in the US economy, and promises a number of stimulative policies.  This has led to a number of upside breakouts, often from multi-year trading ranges from trading ranges, and not just among US indices.     

In fact, James Paulsen mentioned “animal spirit”(s) 24 times in the report above.  Is that a record?  He also mentioned “synchronized” or “synchronization” of economic policies eight times. 

This item continues in the Subscriber’s Area where James Paulsen’s report is also posted.

I look forward to another lively and enjoyable evening, which features the return of Dr David Brown who will discuss the new Industrial Revolution.  

Meanwhile, I hope subscribers have profited from the Trump bull market rally, recently consolidating a short-term overbought condition.  It will be interesting to see how Wall Street performs during the rest of this week.  If indices such as Nasdaq Composite remain steady, let along firm, we could see another upside momentum move. Conversely, watch out over the next few months if the early November reaction lows are broken.  

Also, keep an eye on China’s Shanghai A-Shares Index, because the world’s second largest economy is the next biggest international influence after Wall Street.  China remains an enigma; bullish and bearish views could not be further apart, so keep an eye on Bitcoin.  Rich Chinese are said to be behind Bitcoin’s sharp rise in their efforts to get money out of the country.   

It will be interesting to discuss all of this at Markets Now on January 16^th, and to hear your views as well.  Come along to contribute and enjoy the fun.

Stop Press: Iain Little’s colleague, Bruce Albrecht, will be joining Markets Now on the 16^th and delivering a short chart-based presentation.  

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

Dr. Denner continued, “The transaction also underscores the tremendous value that shareholder activism can create for shareholders, patients and society. While ARIAD’s stock price was collapsing and many investors were abandoning the company, Sarissa Capital saw a company with important drugs and innovation and stepped in to become one of ARIAD’s largest shareholders. However, many things needed to be fixed before the value could be realized. With a new board and management team, ARIAD was able to focus on optimal capital allocation and operational excellence. As a result, the company created meaningful shareholder value and advance the options for those suffering from rare cancers.”

“The acquisition of ARIAD is a unique opportunity that will enable us to positively impact the lives of more patients worldwide, advance our strategic priorities and generate attractive returns for our shareholders,” said Christophe Weber, president and chief executive officer of Takeda. “This is a very exciting time for Takeda as we will broaden our hematology portfolio and transform our global solid tumor franchise through the addition of two innovative targeted therapies. Opportunities to acquire such high-quality, complementary targeted therapies do not come often, and we are very excited about the potential for this transaction to benefit patients, our shareholders and other stakeholders.”

 

Developing new drugs is prohibitively expensive. With no guarantee of success large pharmaceutical companies have in many respects outsourced the bulk of R&D to small biotech companies. The result is that these smaller companies spend a great deal of time and effort developing new drugs and become takeover candidates when they develop high probability solutions. Considering the fact that the cost of developing new drugs continues to increase the biotech ecosystem is likely to remain in this condition for the foreseeable future. 

Thank you for another very well done video commentary. I think it was excellent. When you or any one from the collective have time, could you please share their/your views on the effect of India's move to change their currency bills. Thanks in advance

Thank you for your kind words and I am delighted you are enjoying the video commentaries, which have so far been very well received and are a further example of how technology is advancing the ease with which we can communicate. 

I love you Vimeo updates and prefer to just the audio. While we have made new highs in the US equity indexes, it appears they are quite extended to the trend means which makes them prone to sharp pull backs in the short term. Would you not agree?

Thank you for your valuable feedback relating to the video commentaries, and for this question sure to be of interest to other subscribers. 

The deep but short lived pullback in 2014 represented the first major inconsistency in what had been a rhythmically trending environment for more than two-years. It represents a clear example of “a consistent trend losing consistency at the penultimate high” which we talk about at The Chart Seminar. The volatile range that unfolded from 2015 lowered investor expectations for future potential and conditioned them to expect sharp pullbacks not least due to the effects of high frequency traders. 

The consultants we spoke with who rejected the notion of disruption in their industry cited the difficulty of getting large partnerships to agree on revolutionary strategies. They pointed to the purported impermeability of their brands and reputations. They claimed that too many things could never be commoditized in consulting. Why try something new, they asked, when what they’ve been doing has worked so well for so long?

We are familiar with these objections—and not at all swayed by them. If our long study of disruption has led us to any universal conclusion, it is that every industry will eventually face it. The leaders of the legal services industry would once have held that the franchise of the top firms was virtually unassailable, enshrined in practice and tradition—and, in many countries, in law. And yet disruption of these firms is undeniably under way. In a recent survey by AdvanceLaw, 72% of general counsel said that they will be migrating a larger percentage of work away from white-shoe firms.

Furthermore, the pace of change being managed by the traditional clients of consulting firms will continue to accelerate, with devastating effects on providers that don’t keep up. If you are currently on the leadership team of a consultancy and you’re inclined to be sanguine about disruption, ask yourself: Is your firm changing (at least) as rapidly as your most demanding clients?

Finally, although we cannot forecast the exact progress of disruption in the consulting industry, we can say with utter confidence that whatever its pace, some incumbents will be caught by surprise. The temptation for market leaders to view the advent of new competitors with a mixture of disdain, denial, and rationalization is nearly irresistible. U.S. Steel posted record profit margins in the years prior to its unseating by the minimills; in many ways it was blind to its disruption. As we and others have observed, there may be nothing as vulnerable as entrenched success.

 

With the rapid pace of technological innovation no sector is immune to disruption. The consulting sector has existed in a bubble for a long time because they have been able to sustain the illusion of fully customisable solutions when in many cases what is being offered is a template driven product. There will of course always be a market for truly customised answers to difficult questions but what can be automated eventually will be as technological innovation marches onwards.

We should be grateful to Sir Ivan Rogers for accidentally reminding us that we need wholesale reform of our broken Civil Service, since the cultural chasm between Whitehall and the public has grown dangerously large. 

For Sir Ivan, now thankfully our outgoing ambassador to the EU, and many other mandarins of his ilk, the barbarians truly are at the gates. They now mostly realise that Brexit is going to happen, but remain desperate to find ways to blunt its implementation.

In places, Sir Ivan’s resignation email reads like a parody, a textbook illustration of the dangers of creating a permanent ruling class. At times, one could even be forgiven for believing that he saw himself as a Platonic philosopher-king, entrusted to guard the guardians and to keep those pesky politicians and voters in line, ensuring that they don’t deviate from the expert orthodoxy of the times.

Sir Ivan is one of the most powerful, unaccountable men in Britain, and yet, hilariously, sees his and his colleagues’ job as “speaking truth to power”. He cannot even bring himself to write about Brexit without using inverted commas around the word – or as Americans would put it, sneer marks. He forgets that with independence comes a duty not deliberately to undermine the Government.  

His attack on “muddled thinking” – from Brexiteers in Government, presumably – is especially revealing: it is the meaningless insult favoured by the mandarin classes. The French try to dismiss arguments by deeming them “illogical”; the equivalent British put-down is haughtier, snootier and reeks of classism. 

Yet Sir Ivan himself confuses opinion and facts, claiming that “contrary to the beliefs of some, free trade does not just happen when it is not thwarted by authorities”. Try telling that to those who repealed the Corn Laws, or to unilateral free trading economies such as Hong Kong. Commerce is something that emerges spontaneously from the free interaction of human beings; it does not require structures. Of course, Sir Ivan is right that in the current context multilateral liberalisation deals may be the best solution to maximise overall free trade, and that these can be fiendishly complex. 

But the problem is that we are asking too much of some of our civil servants, whose heart simply isn’t in Brexit. For the past 50 years or more, the British establishment’s foreign policy mission has been a united Europe. There were other major projects too, including dismantling the Empire, fighting the Cold War, helping to rebuild the free-trading international economy and signing up to a new global environmentalism. But since 1990 at least, the construction of Europe has been our most important foreign policy goal, an all-consuming project.

The Civil Service didn’t just help deliver government policy: it embraced the project. Many of its brightest minds, when exposed directly to Brussels, went native. This was not just the professionalism which sees officials nationalising firms under a Labour government before privatising them under a Tory one: it was a fundamental and permanent shift. Nation-states were out; liberal democracy was out; corporatism and rule by the technocrats were in. 

The Leave side collected very few votes in Whitehall last June: the Civil Service was institutionally Europhile. Officials could barely imagine how Britain could possibly function, let alone thrive, outside of the EU. 

Bizarrely, however, we are operating under the assumption that the people that have dedicated their entire working lives to promoting European integration can suddenly devote themselves to delivering the best possible Brexit. We are asking the old guard to become the revolutionaries, with immediate effect. Some can, of course, especially the younger, more ambitious officials who see how the world is changing, but not all. 

Other countries don’t work this way: Barack Obama’s people are not being asked to implement Donald Trump’s plans. Instead, the president-elect is hiring 4,000 or so people. It is common in other countries for new governments to recruit large numbers of political appointees; it is also healthier as it means the government isn’t controlled by self-serving and institutionalised lifers.

This is a superb analysis by Allister Heath.  I can understand why PM Theresa May did not wish to upend civil service personnel working in the EU, but she and the capable Sir David Davis should have anticipated the problem.  After all, it is difficult to get someone to stop believing in something, when that person’s salary depends on them believing in it.

David Davis is Her Majesty’s Principle Secretary of State for Exiting the European Union.  That is a grand title for what is currently a very small department.  It should be beefed up with known Eurosceptic MPs such as John Redwood, who can work with pro-Brexit Civil Servants led by Sir Tim Barrow. 

I am not suggesting that they prepare for a long negotiating war on the EU’s terms, attempting to overturn their labyrinthine obstacles.  Those are intended to ensure that the EU remains a club which European countries can apply to join but once in, never leave of their own choice.  That is an absurdity.  The future of the UK will not be decided in Brussels. 

Britain needs to seize the initiative so that it can exit from the EU quickly and cleanly.  The key points are not complicated.  1) Theresa May has already said that the UK must have sole control of its immigration policies and all other forms of law making.  2) The next Brexit point should be to offer the EU free trade on a take it or leave it basis, otherwise WTO rules will apply to our trade with the EU.  3) There will be no restraints on the UK’s freedom to trade with any other nations of interest, which are outside the EU’s closed shop.     

The innovation centre dates from 2013, and was born out of a desire to group E6’s R&D teams in one place; it also rationalised its manufacturing facilities across the world. The lab occupies the front plot of Harwell Campus, a science park that is home to around 200 organisations. The European Space Agency is across the road, and it is a short walk to the UK’s Synchrotron, which fires electrons at near-light speeds around a ring.

E6 prides itself on a “start-up” ethos; like Google, it allows its staff to use 10pc of their time to work on pet projects. The 180-strong workforce at Harwell includes people from 54 countries and there are free language classes and sports teams. Hühn acknowledges that Brexit “doesn’t make life easier” when it comes to recruitment, but insists Harwell’s location near Oxford is attractive.

While cutting tools are the bread and butter of E6’s work, it is also forging ahead into more exotic areas. Synthetic diamonds are in the race to become the bedrock of quantum computing – a theoretical field that promises massive computational power that eschews the digital technology of “classical” machines.

Quantum computing involves the entanglement of particles in the sub-atomic realm. When one particle becomes ‘entangled’ with another, it synchronises with its partner, even when they have no physical connection. Manipulating one can change the state of the other. Albert Einstein called it “spooky action at a distance”.

Scientists at E6 and Harvard achieved a breakthrough last year when they proved that one particle could alter another 1.3km away without any possible transfer of data between them. “It fundamentally proved this entanglement process is a physical reality - there’s no other explanation for it,” says scientist Matthew Markham.

Yet the properties of diamonds get even weirder. It transpires that diamonds with a ‘nitrogen vacancy defect’ - a gap in the lattice that makes up the crystal - are highly sensitive to magnetic waves at room temperature. The hope is that these diamonds, embedded in handheld scanners, could eventually replace MRI scanners; experiments have already shown that a red diamond can pick up the firing of an axon in the brain of a marine worm. “In 10 years’ time you could envisage having a helmet with diamond sensors that would be the equivalent of MRI sensors,” says Markham.

Scientists also believe that these diamonds could one day use magnetic distortions caused by the sun to triangulate their position on the earth. This would eliminate the need for GPS, which relies on satellite signals to tell a driver where they are; it could also make driverless cars a reality. Currently a diamond with an NV defect has been calibrated to detect the magnetic signature from a car at 300m.

Many of these experiments are decades away from practical applications. But, as Hühn remarks, sometimes they have to “evangelise” about diamonds to create a market for their products. “We need to demonstrate what can be done and then make it transparent to the market,” he says.

And it all starts with carbon – amazing.

Look what lies ahead: “… quantum computers may theoretically be able to solve certain problems in a few days that would take millions of years on a classical computer. (Source: Nasa)”

This era of accelerating technological innovation has only just begun.  Moreover, it will only be limited by: 1) the availability of time on earth, which hopefully lasts for at least a few million more years; 2) human destructive instincts, hopefully kept in check; 3) more optimistically, the extent of human imagination and creativity; 4) the creativity of artificial intelligence aided by quantum computers.

Unfortunately, E6 is not a publicly listed company.

I look forward to another lively and enjoyable evening, which features the return of Dr David Brown who will discuss the new Industrial Revolution.  

Meanwhile, I hope subscribers have profited from the Trump bull market rally, recently consolidating a short-term overbought condition.  It will be interesting to see how Wall Street performs in the first two weeks of January.  If indices such as Nasdaq Composite remain steady, let along firm, we could see another upside momentum move. Conversely, watch out of the early November reaction low is broken.  

Also, keep an eye on China’s Shanghai A-Shares Index, because the world’s second largest economy is the next biggest international influence after Wall Street.  China remains an enigma; bullish and bearish views could not be further apart, so keep an eye on Bitcoin.  Rich Chinese are said to be behind Bitcoin’s sharp rise in their efforts to get money out of the country.   

It will be interesting to discuss all of this at Markets Now on January 16^th, and to hear your views as well.  Come along to contribute and enjoy the fun.

Stop Press: Iain Little’s colleague, Bruce Albrecht, will be joining Markets Now on the 16^th and delivering a short chart-based presentation.  

Iceland is the answer to our prayers. The country has a surfeit of cheap electricity from volcanoes and melting glaciers that is either sold for a pittance, or goes to waste.

The Icelanders would dearly love to sell this power to us at global prices to pay down the banking debts of 2008. Britain would dearly love to buy it from them as our coal plants and ageing nuclear reactors are shut down, with little to replace them beyond the variable winds of the North Sea.

Advances in high voltage technology make it possible to transmit Iceland's low-carbon power to the industrial hubs of northern England by underwater cables with an energy leakage of just 5pc, and probably at lower costs per megawatt hour (MWh) than the nuclear power from Hinkley Point. And unlike nuclear, the electricity is 'dispatchable'.

“We can turn it on and off in fifteen minutes to half an hour. It is the only battery that is really available today for green energy,” said Hordur Arnarson, head of Iceland’s national utility Landsvirkjun.

It is hard to imagine a more elegant back-up for the UK's vast experiment in off-shore wind, the backbone of British electricity by the late 2020s.

Combined with interconnectors from Holland and France - and soon Norway - it could plug much of the intermittency gap through the dog days of a windless anticyclone. The power can flow both ways: surges in North Sea wind could be stored in Nordic reservoirs.

Roughly 70pc of Iceland's electricity comes from hydropower through glacial run-off. This is mostly sold to aluminium smelters for a derisory price. Water washes over the top of the dams for parts of the year because the island has no way of selling the excess energy.

Hydro could probably provide the UK with one gigawatt of stable baseload, but then there is the tantalising potential of geothermal power from the island's 350 volcanoes as well.

The advances in drilling are breath-taking. An Icelandic project backed by the US National Science Foundation is currently boring the deepest hole ever attempted into the fluids of the inner earth at Reykjanes on the Mid-Atlantic Ridge. As of late December it had reached a depth of 4.626 kilometres, approaching temperatures of 500C.

The team aims to stop just short of the magma, at 200 times atmospheric pressure, where hot rock mixed with sea water releases ‘supercritical steam’ with enormous energy. This is the Holy Grail of geothermal power, if it can be extracted safely in a thermal mining cycle.

Drilling to just short of the magma – what could possibly go wrong?  Hollywood has a new topic (Ice-hot?) for next summer’s splat film. 

Seriously, it is another triumph for technological innovation that the capture and transmission of this energy is even considered feasible.  It may be so but costs in the region of the appallingly expensive and outdated Hinkley Point nuclear project are hardly encouraging.  If lower costs are worth considering, and they certainly should be, fracking for natural gas is a much better idea for the UK and many other countries over the next two decades.

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

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

The employment report added to data ranging from housing to manufacturing and auto sales in suggesting that President-elect Donald Trump is inheriting a strong economy from the Obama administration. The labor market momentum is likely to be sustained amid rising business and consumer confidence.

Trump, who takes over from President Barack Obama on Jan. 20, has pledged to increase spending on the country's aging infrastructure, cut taxes and relax regulations. These measures are expected to boost growth this year.

But the proposed expansionary fiscal policy stance could increase the budget deficit. That, together with faster economic growth and a labor market that is expected to hit full employment this year could raise concerns about the Fed falling behind the curve on interest rate increases.

 

The US Hourly Earnings chart was updated today and it broke out. If people are demanding more money for the same work, it is hard to argue inflation is not picking up. Even though rents have increase, insurance premiums are higher and education has been outpacing wage growth for years these figures do not move the needle in how the Fed measures inflation the way wages do. 

The offshore yuan is sinking because there is some recovery in the dollar, perhaps the unwinding of short-yuan positions has mostly been done, and it’s closing the gap with the onshore currency,” said Roy Teo, senior currency strategist at ABN Amro Bank NV in Singapore. The yuan is likely to weaken this year as capital outflows continue and the U.S.
Federal Reserve increases interest rates, Teo said.

China’s central bank raised its daily reference rate by 0.92 percent to 6.8668 per dollar on Friday, following a 1 percent drop in a gauge of the greenback’s strength overnight.

The offshore yuan was trading 0.8 percent weaker at 6.8457 per dollar as of 5:23 p.m. in Hong Kong, paring its weekly gain to 1.9 percent, the most in data going back to 2010. The onshore rate slumped 0.6 percent. Friday’s fixing was weaker than Mizuho Bank Ltd.’s prediction of 6.8447 and Australia & New Zealand Banking Group Ltd.’s estimate of 6.8456.

The three-month yuan interbank rate in Hong Kong, known as Hibor, surged to a record high, while the overnight rate jumped 23 percentage points to 61 percent, the highest since last January’s cash crunch. Rising interbank rates can make some short positions prohibitively expensive.

 

The Chinese administration has attempted to squeeze short sellers in much the same way it did a year ago when it believed perceptions of the Yuan as a one way bet were too prevalent. That does not mean the Chinese don’t want, or perhaps more importantly need, a weaker currency. They do but they want it to weaken in a measured manner.  

“It’s the world’s best asset in the world’s worst market,” said Leigh Curyer, chief executive officer of NexGen Energy Ltd., a Vancouver-based uranium producer. “I don’t think there’s a mine profitable at current spot prices. This short-term spot price isn’t reflective of the cost of producing a pound globally.”

The outlook isn’t entirely bleak. Losses are forcing uranium mines to cut production or close, which may eventually create a supply crunch, while accelerated building of nuclear plants in China and India could help revive demand. But it may take a while for those developments to take hold, according to a report last month from Morgan Stanley, which said it can’t identify any medium- or long-term driver for prices.

Uranium extended its fade last year even as most other raw materials recovered. The Bloomberg Commodity Index of 22 items posted its first annual gain since 2010, advancing 11 percent.

 

When Tata Motors bought Land Rover it held onto the name for obvious reasons. It knew it didn’t stand a chance of selling a luxury vehicle under the moniker Tata Motors. If nuclear energy could do the same it would be in a much better position. Reactors being built today bear little resemblance to those which have garnered such a bad reputation over the last number of decades. However that is not the point. Public opinion is not yet in favour of uranium fuelled energy and there is little evidence that is about to change not least because it simply does not have a high profile credible spokesperson to champion it. 

Intel founder Gordon Moore declared half a century ago that computer power would roughly double every two years as the silicon chips powering them developed.

The maxim, which became known as Moore’s law, directed technology companies for five decades before reaching a crunch point last year. Physicists and technology giants alike said transistors had reached a point where it was no longer economically viable to make them smaller, bringing about the end of the law.

But Intel’s chief executive Brian Krzanich has put an end to such fears with news the company will release a 10 nanometre chip in 2017. The tiny chip will be cheaper than its predecessor, Intel said, keeping Moore’s law alive.

"I've heard the death of Moore's law more times than anything else in my 34-year career and I'm here today to really show you and tell you that Moore's law is alive and well and flourishing," Krzanich said.

The news came as Intel opened the doors on its virtual reality project, which includes applications for the technology, content production and a headset. For Krzanich, VR is one of the most exciting uses of the faster processor coming this year.

“Imagine in your living room being able to walk around the next hotel you’re going to visit, or visiting the event you’re going to,” said Krzanich in a demonstration of the VR uses Intel is working on at the Consumer Electronics Show in Las Vegas.

Some of the applications Intel is developing include live sports games in VR and monitoring remote areas, such as solar panel farms, through a live 360 video stream from a drone and a VR headset.

The chipmaker has teamed up with La Liga to fit three stadiums with 360-degree cameras that will stream to 38 channels this year.

“From the comfort of your home you could be transported to your favourite seat,” said Krzanich. “This is the future of how you’ll view sports. You’ll have the opportunity to go to games you’ve never been to before.”

I do not assume that silicon chips will always be used for the more complex challenges, because the technology for transistors is still in its infancy, relative to future developments.  We live in an exciting era of accelerating technological innovation, which will not end of its own accord.

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

Dear David

I really enjoyed reading this very positive article about the UK economy which was written by a distinguished and well-informed commentator.

All the points he makes sound good sense to me. The most surprising thing is the newspaper in which it was published, the rabidly anti-Brexit Independent. Maybe some newspapers are at last tiring of their own negativity!

Best wishes

Thanks for this and more people in the UK now hold similar views, than at the time of the referendum. 

The biggest risk, in my opinion, would be a frustratingly long exit from the EU, which would increase uncertainty, not least within both the UK and international business communities.  I hope the Supreme Court will bear this in mind and decide on what is best for the UK under the current circumstances.  However, if it rules that legislation is required before notice of Brexit is served – a debatable legal point - I think the additional delay would be both divisive and more costly for the UK economy. 

When 13 tech bosses – among them some of the world’s richest entrepreneurs – were summoned for a meeting with Donald Trump, one face was conspicuous in its absence.

Facebook’s role in the US election had been much scrutinised: it was accused of being a petri dish for fake news that allowed anti-Clinton stories to spread like wildfire; and the social network was employed to great effect by the Trump campaign, which built up profiles of voters to target and bombarded them with ads.

And yet, Mark Zuckerberg was nowhere to be seen at Trump Tower. Instead, he sent his trusted deputy and chief operating officer, Sheryl Sandberg, making Facebook the only company at the meeting without its CEO in attendance.

Zuckerberg has not explained his absence, but two likely – and related – reasons may well become clear. Firstly, the man who started Facebook 13 years ago now has priorities outside of its daily running: as with many tech founders, he would prefer the nitty gritty of advertising relationships and regulatory tangles to be dealt with by someone else, as Zuckerberg focuses on his missions – the $45bn fund he has set up with his wife Priscilla Chan, or the internet.org project to bring connectivity to the world’s poor.

But more fundamentally, Zuckerberg may see a photo-op with the president-elect as harming his own political ambitions, especially if he plans to act on them sooner rather than later.

If your main impression of Facebook’s founder came through seeing The Social Network in 2010, you might find the film's portrayal of Zuckerberg as an awkward Machiavellian schemer a little difficult to square with the idea of a role in public office.

But in recent years he has been spring cleaning his image. Connecting directly to the world via his own Facebook page, Mark Zuckerberg is now the family man, the internationalist and the statesman (his profile is full of images documenting meetings with Narendra Modi, officials in Beijing, and Pope Francis).

While like much of his Silicon Valley brethren, he is a natural liberal, lobbying on immigration and science research, but Zuckerberg has been careful to appeal to a wider base. In response to allegations that Facebook suppressed conservative news, he fired the team responsible and replaced them with supposedly bias-free algorithms. He has declined to take the immediate action that many liberals demanded on Facebook’s fake news problem.

He has come out as religious after years of claiming atheism, a move that a cynic could point to as practically mandatory for high office. And most recently, he announced his ambition to visit every state in the US in order to understand the effect of globalisation. “We need to find a way to change the game so it works for everyone,” he said on Tuesday.

It may seem a bit early to be discussing this possibility shortly before President-elect Trump is sworn in on 20^th January… but perhaps not.  After all, Trump has certainly opened the door for unconventional candidates who have never held political office. 

Might the possibility of a bad Trump presidency close that door?  Theoretically, yes although I think it would be premature to assume that Trump will be judged as having more failures than success over the next four years.  In any event, Trump and Zuckerberg have very different profiles.   

I think it would be a great idea if Zuckerberg ran for President in 2020, or 2024.  Governance is everything and countries with the most capable leaders generally outperform.  If nominated by his Party, I suspect Zuckerberg would win.

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

I look forward to another lively and enjoyable evening, which features the return of Dr David Brown who will discuss the new Industrial Revolution.  

Meanwhile, I hope subscribers have profited from the Trump bull market rally, recently consolidating a short-term overbought condition.  It will be interesting to see how Wall Street performs throughout January.  If indices such as the Nasdaq Composite remain steady, let along firm, we could see another upside momentum move. Looking further ahead, I would give the upside the benefit of the doubt provided the early November reaction low is not challenged.  

Also, keep an eye on China’s Shanghai A-Shares Index, because the world’s second largest economy is the next biggest international influence after Wall Street.  Sharp reactions in Bitcoin and the offshore Chinese Renminbi suggest that China is trying to slow its currency outflow.     

It will be interesting to discuss all of this at Markets Now on January 16^th, and to hear your views as well.  Come along to contribute and enjoy the fun.

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

The number of U.S.-listed companies has declined by more than 3,000 since peaking at 9,113 in 1997, according to the University of Chicago’s Center for Research in Security Prices. As of June, there were 5,734 such public companies, little more than in 1982, when the economy was less than half its current size. Meanwhile, the average public company’s valuation has ballooned.

In the technology industry, the private fundraising market now dwarfs its public counterpart. There were just 26 U.S.-listed technology IPOs last year, raising $4.3 billion, according to Dealogic. Meanwhile, private U.S. tech companies tapped the late-stage funding market 809 times last year, raising $19 billion, Dow Jones VentureSource’s data show.

Private funding markets have taken on attributes of public equity, such as an ability to hand employees shares they can trade. Airbnb Inc.’s recent $850 million funding round, which valued the home-rental company at $30 billion, enabled employees to sell $200 million of stock. Investors, particularly in late-stage funding rounds, now often have a better view of a private company’s financials than they used to, including through quarterly conference calls.

“There’s no great advantage of being public,” says Jerry Davis, a professor at the University of Michigan’s Ross School of Business and author of “The Vanishing American Corporation.” “The dangers of being a public company are really evident.”

 

There have been two important themes that have shaped the view going public is not the most worthwhile exercise for new companies. The overbearing nature of regulatory requirements has increased substantially over the last decade, not least in response to the financial crisis, and this represents a significant cost for public companies which private companies avoid. It is quite simply a hassle for small companies to go through the motions of preparing earnings reports on a quarterly basis and formulating them in such a way as to be amenable to analysts. 

Bitcoin's value suffered its biggest single-day decline in two years Thursday, just hours after China's offshore yuan posted its biggest two day gain and days after the cryptocurrency touched $1,000.

The price of bitcoins against the U.S. dollar fell 13% in London trading, changing hands at around $950 each by 13:45 GMT. Bitcoins traded as low as $880 during a volatile session which saw it reach as high as $1137, according financial bookmakers IG.

The moves follow the biggest two-day gain on record for China's offshore yuan, which trades more freely than the domestically controlled currency of the world's second-largest economy. Speculation of government buying led the gains as investors bet authorities are determined to stem capital outflows and avoid a sustained decline in the currency ahead of the inauguration of President elect Donald Trump, who has vowed to label China as a currency manipulator.

The connection is relevant in the nearly all of the daily trading in bitcoin is linked to the yuan, which has fallen more than 7% against the dollar over the past year, as speculators attempt to skirt currency controls and ensure value.

The offshore yuan gain 1% to 6.7989 against the greenback in Asia trading, putting downward pressure on the dollar index and boosting the yen in foreign exchange trading. The move whipsawed the dollar index, a measure of its strength against a basket of six global currencies, from a near 14-year high on Tuesday to three-week low of 101.74 by the start of European trading before it recovered to 102.10 by 13:45 GMT

I have been pointing out in recent audios that China represents the majority of Bitcoin trading and what goes on in that country is likely to have a profound impact on the value of the cryptocurrency. In many respects we might look on Bitcoin as the anti-Renminbi because it tends to do best when Chinese investors are worried about the stability of their domestic currency. 

Treasuries extended gains across the curve, driving down benchmark yields by the most since the days after the June Brexit vote, as traders across financial markets backed away from crowded bets.

The benchmark 10-year U.S. yield plunged about eight basis points to 2.36 percent at 12:15 p.m. in New York, touching the lowest level since Dec. 8, according to Bloomberg Bond Trader data. It’s on pace for the biggest decline since June 27. The 10-year break-even rate, a market measure of inflation expectations, fell from close to the highest level since 2014.

Across financial markets, trends snapped Thursday as investors weighed the risk of a lackluster payrolls report Friday and the prospect that trades based on Donald Trump’s impending presidency had gone too far. Data from the ADP Research Institute on Thursday indicated companies added fewer jobs in December than forecast. The figures come a day before the Labor Department releases its monthly payrolls report. 

“A bunch of the widely predicted trades for this year are all being broken at the same time, with oil going lower, investment-grade corporates widening out, TIPS break-evens tightening, and then rates rallying as a result,” said Mike Lorizio, a Boston-based senior trader at Manulife Asset Management, which oversees about $343 billion. “Some key levels being broken just inspired further buying.”  

 

The odds are in favour of the view that the 35-year bull market in bonds is over, however it would be a mistake to think that such a lengthy expansion will end overnight. Inflationary expectations might well be justified in the medium-term but they have run ahead of the market and Treasury yields in the region of 2.5% are competitive with many equities and therefore desirable by bond investors conditioned over generations to buy the dip. 

The VIMEO software for the new subscriber’s audio demands lots of download capacity. I am fixing this issue with my phone company. Is it possible to include a separate Audio file with the combined Video & Audio? If I am away from the house I like the choice to just to listen to the audio. If this is too difficult don't worry I like the new Video and Audio format. Eoin see you in Singapore in April.

Thank you for this question which gives me the opportunity to clarify what services we are in fact providing and I look forward to renewing our acquaintance in Singapore in April. 

I record the video and audio file concurrently and post them separately. You will find links to the video on the homepage for the relevant day but I also post the regular audio file separately in the Subscriber’s Audio section. You can access it either through the embedded audio player at the top of the page of via the Subscriber’s Audio section of the site where all our audios are archived. 

If you thought you had already read the gloomiest possible prognosis for bonds, wait until you read this one.

Paul Schmelzing, a PhD candidate at Harvard University and a visiting scholar at the Bank of England, said if the latest bond market bubble bursts, it will be worse than in 1994 when global government bonds suffered the biggest annual loss on record.

“Looking back over eight centuries of data, I find that the 2016 bull market was indeed one of the largest ever recorded,” wrote Schmelzing in an article posted on Bank Underground, which is a blog run by Bank of England staff. “History suggests this reversal will be driven by inflation fundamentals, and leave investors worse off than the 1994 ‘bond massacre’”.

Schmelzing, whose research focuses on the history of international financial systems, divided modern-day bond bear markets into three major types: inflation reversal of 1967-1971, the sharp reversal of 1994, and the value at risk shock in Japan in 2003.

The Bank of America Merrill Lynch Global Government Index of bonds fell 3.1 percent in its worst-ever annual loss in 1994 as then-Fed Chairman Alan Greenspan surprised investors by almost doubling the benchmark rate. Treasury 10-year yields surged from 5.6 percent in January to 8 percent in November.

The current bond market is facing the “perfect storm” of potential steepening of the bond yield curve, monetary policy tightening, and a multi-year period of sustained losses due to a “structural” return of inflation resembling that of 1967, he said. Last quarter was the worst for government bonds since 1987, according to data compiled by Bloomberg.

Global inflation expectations, as measured by the yield difference between nominal and index-linked bonds, have risen to the highest since May 2015 after falling to a record low in February last year.

“By historical standards, this implies sustained double-digit losses on bond holdings, subpar growth in developed markets, and balance sheet risks for banking systems with a large home bias,” Schmelzing said.

I maintain that US 10-year Treasuries will not break their July low of 1.318% during my lifetime.  In fact, it may not be broken in this century.  Why?  Because this is one of the biggest bubbles of all time.  It developed over 35 years and took US yields to their lowest levels since The Great Depression (1929-39). 

However, this is certainly not a consensus view.  Until very recently, there was a clear consensus that we were living in ‘a new normal’ of disinflation and deflation.  We were told that GDP growth in developed countries would remain historically low for many more years.  In fact, some bond market experts say that US 10-year Treasury yields will break their July 2016 lows within the next three years.  It is often hard to accept that one’s favourite trend is ending.

Consequently, for perspective we should look at some long-term charts.

This item continues in the Subscriber’s Area, where six charts and an additional article are also posted..

Theresa May has appointed Sir Tim Barrow, a career diplomat, as the new British ambassador to the EU in Brussels, replacing Sir Ivan Rogers, who quit on Tuesday.

Her decision means she has ignored calls from within the Tory party to appoint a wholehearted Brexiter – possibly from outside of the civil service – to the job.

Rogers, the head of UKRep – in effect the UK embassy in Brussels – resigned in frustration on Tuesday urging his fellow civil servants to provide impartial advice, and stand up to muddled thinking. He also made clear he thought that the UK government not only lacked an agreed exit strategy, but also a coherent exit negotiating team.

Barrow was the UK ambassador to Moscow until 2015 and in March 2016 succeeded Sir Simon Gass as political director at the Foreign Office. He has extensive European experience and acted as first secretary at UKRep. His appointment is also a victory for the Foreign Office, which lost the UKRep post to former Treasury officials in 2012.

May is due to trigger article 50, to formally start EU talks, in March, requiring her to urgently recruit someone committed to delivering Brexit, but also knowledgeable about how the labyrinthine EU works.

Barrow said: “I am honoured to be appointed as the UK’s permanent representative to the EU at this crucial time. I look forward to joining the strong leadership team at the Department for Exiting the EU and working with them and the talented staff at UKRep to ensure we get the right outcome for the United Kingdom as we leave the EU.”

A Downing Street spokesperson called Barrow “a seasoned and tough negotiator, with extensive experience of securing UK objectives in Brussels”. They added: “He will bring his trademark energy and creativity to this job, working alongside other senior officials and ministers to make a success of Brexit.”

Theresa May certainly needs a British ambassador who is committed to delivering a successful Brexit.  Sir Tim Barrow apparently has the presence and credentials for this important task, including being “knowledgeable about how the labyrinthine EU works”.  However, the UK should not be playing the labyrinthine game, designed to deter countries from leaving the EU.  Until EU negotiators fully understand that a quick, hard Brexit is not only a possibility, but would also be preferred by many UK citizens and businesses, negotiations will be a waste of time.   

I look forward to another lively and enjoyable evening, which features the return of Dr David Brown who will discuss the new Industrial Revolution.  

Meanwhile, I hope subscribers have profited from the Trump bull market rally, recently consolidating a short-term overbought condition.  It will be interesting to see how Wall Street performs in the first two weeks of January.  If indices such as Nasdaq Composite remain steady, let along firm, we could see another upside momentum move. Conversely, watch out of the early November reaction low is broken.  

Also, keep an eye on China’s Shanghai A-Shares Index, because the world’s second largest economy is the next biggest international influence after Wall Street.  China remains an enigma; bullish and bearish views could not be further apart, so keep an eye on Bitcoin.  Rich Chinese are said to be behind Bitcoin’s sharp rise in their efforts to get money out of the country.   

It will be interesting to discuss all of this at Markets Now on January 16^th, and to hear your views as well.  Come along to contribute and enjoy the fun.

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

No industry is immune to fraud, and the hotter the business, the more hucksters flock to it. But Silicon Valley has always seen itself as the virtuous outlier, a place where altruistic nerds tolerate capitalism in order to make the world a better place. Suddenly the Valley looks as crooked and greedy as the rest of the business world. And the growing roster of scandal-tainted startups share a theme. Faking it, from marketing exaggerations to outright fraud, feels more prevalent than ever—so much so that it’s time to ask whether startup culture itself is becoming a problem.

Fraud is not new in tech, of course. Longtime investors remember when MiniScribe shipped actual bricks inside its hard-disk boxes in an inventory accounting scam in the 1980s. The ’90s and early aughts brought WorldCom, Enron, and the dot-bombs. But today more money is sloshing around ($73 billion in venture capital invested in U.S. startups in 2016, compared with $45 billion at the peak of the dotcom boom, according to PitchBook), there’s less transparency as companies stay private longer (174 private companies are each worth $1 billion or more), and there’s an endless supply of legal gray areas to exploit as technology invades every sector, from fintech and med-tech to auto-tech and ed-tech.

The drama has some investors predicting more disasters. “What if Theranos is the canary in the coal mine?” says Roger McNamee, a 40-year VC veteran and managing director at Elevation Partners. “Everyone is looking at Theranos as an outlier. We may discover it’s not an outlier at all.” That would be bad news, because without trust, the tech industry’s intertwined ecosystem of money, products, and people can’t function. Investors may find the full version of the old proverb is more accurate: “One bad apple spoils the whole barrel.”

 

Fraud isn’t generally identified immediately because it takes time for such contrivances to be discovered. The impetus for investigation doesn’t generally arise until someone goes looking for the money that was invested, when the expected return does not materialise. It took the credit crisis to reveal problems with Madoff’s Ponzi scheme, yet it had functioned unperturbed by regulators for years before that event. The above article does an excellent job of identifying the frauds which have occurred in Silicon Valley as well as the culture that promotes exaggeration.

China’s currency stockpile has probably shrunk further after hitting a five-year low of $3.05 trillion in November, according to the median estimate in a Bloomberg survey before data due as early as this week.

Capital outflows from China accelerated in recent months as the yuan suffered its worst year of losses against the U.S. dollar since 1994, declining 6.5 percent. About $760 billion left the country in the first 11 months of 2016, according to a Bloomberg Intelligence gauge. The yuan will decline 2.7 percent the rest of this year, according to the median estimate in a Bloomberg survey.

“The policies, if implemented, can help increase foreign-exchange supply in the onshore market, and hence help defend the yuan in the short term,” said Carol Pang, vice president for fixed income, currency and commodities at Zhongtai International Holdings Ltd. in Hong Kong. “However, it won’t change market expectation of further depreciation.”

 

The Renminbi is somewhat oversold at present following a quicker pace of depreciation in the last quarter than seen in the three-year downtrend to date. Therefore there is scope for a reversionary rally or at least some steadying. 

So the project was one of those moments when you look back on it where we did the hard analytical work, drew a conclusion, acted on our judgement, and it worked and went according to expectations.

I don’t mean picking a certain price I just mean a general trend. I’m quite proud of that actually and sometimes the detail work is really valuable. We’ve redone it recently to understand the hard rock sector and the conversion plant capacity in China. Although that’s harder than what we did in Chile I think we got a pretty good understanding.

That again supports the view that supply growth is being over estimated and over simplified and that it will take longer—just like we did—and there will be delays because of complications in China and offtake and everything will slip because it always does.

So when you look at the supply/demand curve, our view is that it (lithium market) goes very tight for a number of years. And the first relief, if it is relief, will really be that period around 2020.

 

The only way to get around the fact many sources of renewable energy are intermittent is through storage. Right now lithium is the benchmark electrolyte for batteries’ and a great deal of research is going into developing better anodes and cathodes to boost energy density, safety, recharging speed and cost. That suggests the lithium product cycle still has a long way to run which is benefit for miners of the element not least as new potential demand growth drivers evolve. 

Just wonder why the Iron ore chart in the library starts only in 2008. Is there another source for 50 years of iron prices?

Thank you for this question which may be of interest to other subscribers. Iron-ore is not traded on a futures exchange. Historically prices have been fixed by contracts between the major miners and consumers with little involvement from the markets. The price for iron-ore quoted in the Chart Library is for Chinese imports at Ningbo and is used as a benchmark because China is such a dominant force in the market. We only have data since 2008 because that is when China started reporting it.  

President-elect Donald Trump blasted a move by House Republicans to effectively weaken the independent Office of Congressional Ethics that investigates lawmakers’ alleged misconduct.

“With all that Congress has to work on, do they really have to make the weakening of the Independent Ethics Watchdog, as unfair as it may be, their number one act and priority,” Trump wrote on Twitter Tuesday morning. “Focus on tax reform, healthcare and so many other things of far greater importance!’ He closed his tweet with “#DTS,” a reference to his campaign promise to “drain the swamp” of corruption in Washington.

Trump was reacting to a move House Republicans made behind closed doors Monday night, when the caucus voted to approve an amendment to a broader House rules package that would make the office “subject to oversight” by the House Ethics Committee and significantly restrict its powers. The House will vote Tuesday on the rules package as members open the 115th Congress.

The approval of the amendment, proposed by Judiciary Chairman Bob Goodlatte of Virginia, comes amid broader calls from Trump for steps to fight corruption in Washington, including term limits on lawmakers and restrictions on lobbyists.

“Republicans claim they want to ‘drain the swamp,’ but the night before the new Congress gets sworn in, the House GOP has eliminated the only independent ethics oversight of their actions," Minority Leader Nancy Pelosi of California said in a statement. "Evidently, ethics are the first casualty of the new Republican Congress."

House Speaker Paul Ryan defended the change in a statement Tuesday that insisted the ethics office will still “operate independently.”

“The evenly divided House Ethics Committee will now have oversight of the complaints office,” said Ryan of Wisconsin. He said the House panel would exercise that oversight only to "ensure the office is properly following its rules and laws," and said he’s instructed the House committee not to "interfere with the office’s investigations or prevent it from doing its job."

Commenting on Trump’s tweets has already become an international blood sport and the President-elect has yet to be sworn in.  Is this good for democracy?  Yes, if it increases interest and involvement in the political process.  No, if it permanently lowers the standards of political decorum, not that they were very high before Trump’s tweets. 

Meanwhile, I’ll credit Trump for his timing and propriety with the two tweets above.  Yes – DTS.  

  (Stop Press: New Republican Congress reverses ethics move after outcry, from the BBC)

Sir Ivan Rogers has quit just months before Theresa May triggers formal Brexit negotiations with the EU in which he would have been expected to play a major role. 

He was expected to be in post until October 2017 but will instead leave within the coming weeks and a replacement will be announced in due course.

A UK Government spokesperson said: "Sir Ivan Rogers has resigned a few months early as UK Permanent Representative to the European Union. 

"Sir Ivan has taken this decision now to enable a successor to be appointed before the UK invokes Article 50 by the end of March. We are grateful for his work and commitment over the last three years".

The Financial Times reported that Sir Ivan did not explain the reasons behind his decision when he informed staff of his decision to leave early, but that he played down his resignation by stating it was only slightly ahead of his planned departure date.

The news has prompted concerns that the UK will get a worse Brexit deal than it would have if he remained part of the team.

Charles Grant, director of the Centre for European Reform think-tank, said: "Ivan Rogers's resignation makes a good deal on Brexit less likely. One of the very few people at the top of British government who understands [the] EU".

Sir Ivan may understand the EU’s intentionally convoluted procedures but he was one of Cameron’s appointees to this insiders’ club and they had different plans.  He should have resigned with Cameron and I think Prime Minister May’s team ought to appoint their own pro-Brexit representatives for negotiating with the EU. 

These need not be mainly civil servants.  I would prefer to see some smart, tough and pro-Brexit businessmen and lawyers among the UK’s negotiating team.   Additionally, the UK should push for an early exit from the EU, as I have said repeatedly.  There is little to be gained from lengthy negotiations.  These would only be divisive and frustrating in terms of UK business planning.  A lengthy exit would also delay the establishment of new trade links with other countries.  EU governments will be under pressure from their own corporations, to negotiate mutually sensible trade terms with the UK, once we have left this closed shop. 

A PDF of The Telegraph’s article is posted in the Subscriber’s Area, along with a link to another relevant article.

A few years ago, I bought one of those irresistible Christmas presents that you pretend are for the kids, but which you really want to try out yourself. 

It was a quad bike. To be accurate, it was a mini quad bike. It was superb. In length and breadth it was no bigger than an armchair, but it was full of grunt.

We would all pile on it in a pyramid of humanity and careen around the garden: up the bank, into the ditch, slap bang into the tree. It had fat round tyres with deep grass-chewing treads. It roared with a proper trail bike roar, and sent out pleasing clouds of aromatic white smoke.

We gave it some welly, I can tell you; and after a while our tyres began to feel the strain. One day the technical demands became too much. I gave it away to the next door neighbour, who is more mechanically minded than I am, and whose kids are younger and certainly less heavy.

So it is in his interests that I now report an appalling development in the life of off-road quad bike owners. If my neighbour wants to continue to enjoy that quad bike; if he wants to thrill his children; if he wants to exercise the right of every free-born Brit to pootle blissfully on his own quad bike on his own private land – then he is going to have to pay. As things stand, he is going to have to find insurance. Yes: to find a broker to cover the risk posed by his quad bike – to any human being or property coming into contact with that rumbustious rugrat of a machine. 

I hope I do not have to try too hard to convince you that this is insane. Of course this quad bike is dangerous, in the sense that the contents of your cutlery drawer are dangerous. It is perfectly true that if you drove that quad bike at full tilt over a 6ft ha-ha, you would probably do yourself an injury. If you happened to be hurtling round a blind corner, and your neighbour happened to be coming the other way, planning to remonstrate with you, perhaps, about the noise, your neighbour might suffer in the collision. But this country has rubbed along for decades – more than a century, in fact – without seeing any statutory requirement to insure off-road vehicles such as quad bikes. 

Where does it come from, this new rule, or this threat of regulation? There is not a single MP – not even a Liberal Democrat – who has campaigned for the compulsory insurance of off-road children’s quad bikes. There is no pressure group; there have been no querulous voices on the Today programme. There is no need, no call, no demand, no appetite, no reason, no justification, not even the shred of the beginnings of a case – in the United Kingdom – for this kind of pointless and expensive burden on millions of people.

It is hardly surprising that the number of new regulations increases in line with the number of unelected regulators in office.   

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

We are too often tempted to pontificate.  This lack of ego control may indicate a need to attract attention, not least to influence others when we have positions which will be affected.  These egregious mistakes are made by all investors from time to time, and radical short to medium-term forecasts can indicate desperation.

Comparatively inexperienced investors may be less prone to this loss of judgement than experienced leveraged traders.  However, they may impede their own learning curve if overly influenced by those who appear to have better insights or at least more experience.

How can we reduce these problems?       

This item continues in the Subscriber’s Area.

I look forward to another lively and enjoyable evening, which features the return of Dr David Brown, who will discuss the new Industrial Revolution.  

Meanwhile, I hope subscribers have profited from the Trump bull market rally, recently consolidating a short-term overbought condition.  It will be interesting to see how Wall Street performs in the first two weeks of January.  If indices such as Nasdaq Composite remain steady, let along firm, we could see another upside momentum move. Conversely, watch out of the early November reaction low is broken.  

Also, keep an eye on China’s Shanghai A-Shares Index, because the world’s second largest economy is the next biggest international influence after Wall Street.  China remains an enigma; bullish and bearish views could not be further apart, so keep an eye on Bitcoin.  Rich Chinese are said to be behind Bitcoin’s sharp rise in their efforts to get money out of the country.   

It will be interesting to discuss all of this at Markets Now on January 16^th, and to hear your views as well.  Come along to contribute and enjoy the fun.

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

Thank you for Friday’s weekly summary, especially the long excursus on technology

It is good from time to time to digress on the long term trends that are likely to influence markets in the future

The short term price action is important but your reflections on the technology developments are very much appreciated

Good work in the New Year!
And

Thank you so much for another nice long term audio last Friday. But you did not comment on precious metals, and gold mining companies. Could you kindly comment on these as well as the oil companies i.e. shell/Exxon etc. at your convenience. Tks again. And best wishes for the New Year to you and David.

 

Thank you both for your well wishes and I look forward to covering both the outlook for technology and precious metals in depth this year. Last Friday I intentionally decided to expound upon the case for technological innovation representing a powerfully bullish factor for both the global economy and the stock market over the coming decades. 

Full details of these trades are posted in the Subscriber's Area

“It’s earnings growth that drives stocks over the long term,” said Tom Cassidy, chief investment officer at Univest Wealth Management Division. While “we won’t know if any of these policies will actually be implemented until later next year,” a continued rebound in earnings should nevertheless prop up stocks for additional gains, Mr. Cassidy said.

?Earnings for companies in the S&P 500 grew 3.1% in the third quarter from a year earlier, according to FactSet, entering positive territory for the first time since the first quarter of 2015, when they grew 0.5%. Analysts polled by FactSet expect the rebound to continue, and are estimating a 3.2% growth rate in the fourth quarter of 2016.

An end to the longest earnings slump since the financial crisis also comes against a backdrop of improving economic data. U.S. gross domestic product, a broad measure of the goods and services produced across the economy, posted its strongest quarterly pace of growth in two years in the third quarter, according to data released by the Commerce Department in December.

 

There is no doubt that the earnings recession which prevailed for the last 15 months acted as a headwind to sentiment and more importantly corporate profits. There were fears that the loss of momentum in margin expansion was a precursor to recession and this was enough to keep many investors on the side lines. 

According to the Adamas outlook for rare earth demand from 2016 through 2025 over the past five years upwards of 30,000 tonnes of annual rare earth oxide demand were lost due end-users’ growing concerns over supply security. On top of that more than 20,000 tonnes were lost as a result of the ongoing phase out of several mature technologies, such as fluorescent lamps, NiMH batteries, and hard disk drives used in PCs.

According to the authors following the lengthy and painful adjustment, the REE market will return to strong global demand growth for a number of rare earth elements including neodymium, praseodymium, dysprosium, and lanthanum. The resulting rise in price will help "sustain the profitability and growth of today’s dominant producers, and incentivize continued investment in exploration and resource development globally":

REE demand will boom from 2020 onwards as growth rates of top end-use categories including electric vehicles, wind turbines and other hi-tech applications accelerate.

 

Rare earth miners went through a crushing bear market and it is arguable whether it has ended. The growth of new sources of demand is a potential medium-term bullish catalyst. However it is unlikely China will surrender its dominance of the global supply chain not least because it wishes to attract and support advanced manufacturing companies. 

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