...We're miles and miles from getting a resolution and that shouldn't be too surprising. Trade is complicated. There are lots and lots of issues, not just how many soybeans and how much LNG but even more importantly, structural reforms that we really think are needed in the Chinese economy. And then, even more important than that, enforcement mechanisms and penalties for failure to adhere to whatever we agree to.

People shouldn't think the events of next week will be the solution to all of the issues between the United States and China. It's too complicated a topic. Too many issues. That's different from saying we won't get to a deal. I think there's a fair chance we do get to a deal.

How confident is China in its claims to be a global superpower? That’s the only real question in measuring how likely they are to agree a meaningful trade deal with the USA.

In his view, companies that operate with integrity rarely get enough credit for it from investors or the press. “You have people who are princes, who have good values, who treat people right. We don’t tend to pay a lot of attention; we don’t get a lot of stories about them. The surveys of the most admired businesses—how much do those evolve over time based on your market cap? What’s in vogue and in favor is ‘admired.’ ” He has watched, with chagrin, as Wall Street firms pocketed billions in fees and commissions by steering clients to bad deals that they dismiss as “O.P.M.”—Other People’s Money. “Talking about clients as though they are to be taken advantage of rather than to be honored, and respected, and cherished, as your lifeblood—it’s disgusting, but you see that in individual behavior.” He added, “When one person does that, it’s bad for all the rest of us.”

He told me, “I don’t think it’s too late for business leaders to start doing the right thing for their employees, their clients, and their communities.” And if they don’t? It could lead to regulations that, in his mind, would go too far in constraining corporate behavior. In his speech, he said, “When capitalism goes unchecked and unexamined, and management is seduced by a narrow and myopic perspective, the pendulum can quickly swing in directions where capitalism’s benefits are discounted, and its flaws exaggerated.” Klarman hopes that politicians in Washington will hear his message, but, more to the point, he wants fellow-practitioners to hear him. “If every businessperson, or enough businesspeople, don’t act as stewards of more than just the bottom line, somebody’s going to come along and do it for them.

The rising tide of progressives, socialists, unions, social justice advocates and totalitarians are all clambering for the mantle of biggest redistributionist in a crowded field. That’s not a trend individual to a single country, it’s a global phenomenon.

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

Some of the topics discussed include: stock markets quiet with positive earnings counter balancing trade and growth fears. Central Bank assets tick higher, 2019 outlook for Wall Street, ASEAN markets continue to outperform, crude oil and gold quiet, Bonds steady, discussion of risks in China.

In the new era of prudence, shareholders who’ve enjoyed fatter and fatter dividend checks can rest easy no longer.

IHS Markit Ltd. last week projected a “significant slowdown” in global dividend growth this year, at 5.9 percent, totaling $1.8 trillion, according to a bottom-up analysis of over 9,500 firms. Thanks in part to mounting geopolitical risks, that’s a shift from the 14.3 percent boom in 2018 and 9.4 percent the year before.

The business-information provider reckons about 11 percent of firms will announce a dividend cut this year -- an uptick of almost 100 names relative to 2018.

“I believe that dividends of leveraged companies can suffer more,” said Willem Sels, a London-based chief market strategist at HSBC Private Bank. “The excessive focus on the shareholder
value at the expense of bondholder value will be more muted.”

2017 represented the best of all possible worlds for investors. The tax cuts had been passed and investors got busy pricing that into the market. There was money for everything from buybacks to dividend increases and it was being paid for with tax savings, repatriated profits from overseas and fresh debt.

In other words, in the past year, banking-system liquidity has risen by about a fifth, but net credit growth has fallen by about a third. The reason is clear. Shadow finance outstanding fell by a full 10% in 2018—by far the sharpest contraction on record.

Regulators realize they have a problem. They are now trotting out new central bank lending facilities to goad banks into extending credit to small enterprises. And the economy still has some cushions. Infrastructure investment is rising again. Consumers are struggling, but less than headlines would suggest.

Both of these bulwarks aren’t as strong as a couple of years ago—consumers are more indebted and a separate campaign against off-balance sheet infrastructure fundraising is still crimping investment. If the property market falls apart, China will be in serious trouble.

China’s inefficient financial system has long needed surgery. By excising the shadow banking system without a proper transplant to replace it, regulators risk killing the patient.

China’s headline government debt is comparatively small by international standards. However, its private sector debt is larger than the USA’s government debt. By first cutting off access to funding from the state banks, then cutting off shadow banking, then banning US Dollar loans, successive windows for funding have limited access of businesses to capital.

We study a new alternative investment asset - LEGO sets. A huge secondary market for LEGO sets with tens of thousands of transactions per day has developed since the turn of the century. We find that LEGO investments outperform large stocks, bonds, gold and other alternative investments, yielding the average return of at least 11% (8% in real terms) in the sample period 1987-2015. Small and huge sets, as well as seasonal, architectural and movie-based sets, deliver higher returns. LEGO returns are not exposed to market, value, momentum and volatility risk factors, but have a unit exposure to the size factor, suggesting that this asset performs similarly to small stocks. A positive multifactor alpha of 4-5%, a Sharpe ratio of 0.4, a positive return skewness and a low exposure to standard risk factors make the LEGO toy an attractive alternative investment with a good diversification potential.

A link to the full report and a section from it is posted in the Subscriber's Area. 

OPEC’s supply cuts and US shale’s continued growth are already in the market. The question of how fast global growth will be, and therefore the demand outlook, is a movable feast but the trajectory of interest rates and the trade war are obviously important factors.

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

Here are some of the topics covered. first sign the short-term overbought condition has run into overhead resistance. Bonds firm, gold steady, dollar steady, oil eases, risk parity is derisking. 

U.S. stocks extended the biggest drop in almost three weeks as rising pessimism that trade tensions with
China will persist sent technology and multinational companies tumbling. Treasuries climbed, oil fell and the yen strengthened.

The S&P 500 sank to session lows after the Financial Times reported that the U.S. turned down an offer of preparatory discussions. Chipmakers plunged more than 3 percent, with every member of the Philadelphia Semiconductor Index in the red.

Caterpillar and DowDuPont led declines in the Dow Jones Industrial Average of more than 400 points. “Investors obviously are still a little bit edgy and therefore we would expect periods of volatility to continue,” said Mark Hackett, chief of investment research at Nationwide Funds Group, which manages $60 billion. “As the headlines continue to get more nerve wracking with regards to a global slowdown and trade wars and government shutdowns, it’s easy to spook investors, but we think those are temporary versus permanent.”

It has been a constant refrain in the Subscriber’s video and audio over the last week that a short-term overbought condition has replaced a short-term oversold condition so the risk of at least consolidation is high.

You have been emphasising the importance of liquidity as a determinant of equity market performance.  You have asked, “What is the source of liquidity to support future market gains?”.

Lawrence Fuller, publisher of “The Portfolio Architect” has provided a thorough analysis of the present unwinding of global liquidity and equity performance. On Page 4 there is a diagram showing a direct correlation in January 2019. (see attached).  I cannot locate the source of the liquidity data.

Yardeni Research Inc, January 2019 edition of its “Global Economic Briefing: Central Bank Balance Sheets” on Page 7 may be lagging but it only partially reflects the picture presented by Mr. Fuller.

Are you able to help in any way?

Thank you for the attached reports and this question which the whole world is asking. I have to say I find it gratifying more people are using my chart of total central bank assets. I first created the measure on July 10th 2014 and immediately wished I had included it in Crowd Money.

I have just discovered the following page from the UK Gov regarding shale gas exploration/production.

I am reminded by how President Obama tried to block shale oil and shale gas production in the US with worries about water pollution, earth tremors and many other PC excuses. Luckily corporate America ignored him and the US is now totally energy self-sufficient. I hope that British companies have the same attitude and can deliver what would be a real game changing energy situation for the UK. Oil is now circa 18% cheaper in the US than the global price, combined with their corporate tax rate, gives them a massive global advantage. With the UK being so gas dependent, I really hope we can overcome these political shenanigans and give the UK the industrial and consumer advantage that the US currently enjoy. 

The UK became a net energy importer in 2006. It’s hard not to draw a conclusion that the difficulties the country has experience since, from falling living standards, reduced competitiveness in manufacturing, the calls for disintegration of the union and Brexit were all exacerbated by the fact the UK used to be a major exporter and now sees its imports of oil and natural gas rise every year. There is absolutely no doubt the UK needs an energy policy that makes independence a priority. The trouble is there is not much sign of urgency to tackle this issue.

business was based on, out of a whim? E.g. who told them to get out of the custom union? How dare them taking that prerogative?

The vote against the Deal is a gentle reminder to those people that the prerogative is with the parliament, thank you very much. I think this was another reason for the GBP to be up... a reestablishment of some normality in governance. Conversely, hijacking the country out of the EU seeking a no deal to deprive the parliament of its authority must be avoided at all costs, needless to say that; in that case I am sure the GBP would fall hard, and the citizens represented in that parliament (or investors relying on that governance) would be greatly impoverished.

Was it for gross incompetence or because of a conscious design to move towards an illiberal regime, I maintain that the referendum and the attitude of the government until now has represented a very substantial breach of trust in UK institutions. It will take a much more competent political establishment and some time to mend the damage that has been done.

Finally, I would be very wary of someone claiming the will of the people of Norway was overridden: the country is a perfectly well functioning parliamentary democracy. And it is in parliaments were the will of the people ought to be represented. This is a lesson learnt several times in human history, and usually the hard way. Let’s please never, not even for one moment, forget that.

Thank you for this email which I’m sure will be of interest.

If you have a vote and your side wins you feel gratified. If your side loses you understandably feel disappointed. If you lose you can campaign for the decision to be overturned. That is your right in a liberal democracy and that right needs to be protected. However, it would not be correct to say that because you lost your have been disenfranchised.

On the other hand, if you win and the decision is not then acted upon then I believe you have just cause to feel disenfranchised since your right to self determination has not been upheld.

There are legitimate arguments about whether first past the post is the right way of dealing with such a momentous issue as whether to bring about the biggest economy and political change in decades. There are also legitimate arguments about the veracity of the claims made by both sides during the campaign. However, both of these issues while serious are the equivalent of semantics when we consider the right of self-determination. I don’t remember anyone complaining about first past the post before the referendum. I agree we need much higher quality of political institutions but that is totally reliant on people voting. If we look at the trend of political discourse however, I suspect it is going to get worse before it gets better.  

I’m a believer in referenda because Parliament is not wholly reliable in getting the best people into the best positions. If it really were a true reflection of the will of the people there would be no such thing as safe seats. However, citizens have the right to a fair and honest debate on the pros and cons of any question.

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

Some of the topics discussed include: London home prices, palladium is susceptible to mean reversion, China at a crossroads, major indices have replaced short-term oversold conditions with overbought conditions, Treasuries steady and oil steady

London home asking prices fell to their weakest level in 3 1/2-years in January as sellers spooked by
Brexit held off putting their properties up for sale.

Asking prices in the capital slipped 1.5 percent from December to 593,972 pounds ($765,000), the lowest level since August 2015, according to Rightmove. New listings in the first two weeks of the year were 10 percent lower than in 2018 as owners were deterred by the cost of moving and concern about the political backdrop, the property website said.

After years of outsize gains in home values, London and its surrounding areas have so far borne the brunt of Brexit, with a lack of clarity over the future relationship with Europe causing both households and firms to hold off on investment decisions.

Listing prices in the capital have declined from a peak of almost 650,000 pounds in May 2016, the month before Britons voted to leave the European Union.

Nationally, values rose 0.4 percent to 298,734 pounds, with the biggest gains in the north of England. Rightmove’s data is compiled from 70,068 properties put on sale by agents across the country from Dec. 9 to Jan. 12.

A separate report by Acadata, which incorporates all house transactions, showed national home prices rose 0.6 percent in the year to December. Excluding London and the south east, values climbed 1.4 percent.

There was another news story today on how Citadel Investment Management’s CEO Ken Griffin paid, a discounted £95 million, for 3 Carlton Gardens which is about half a mile of open park land from Buckingham Palace.

“Brazil is a hot topic for foreign investors,” said Fabio Alperowitch, portfolio manager and founder of Fama Investimentos, a Sao Paulo-based fund manager. “But no one will change their opinion just because of his speech. Investors’ level of skepticism with emerging markets is still high.”

On his long flight to Davos, Bolsonaro will carry the most crucial plan to tackle a budget deficit that hovers around 7 percent of gross domestic product -- a draft proposal to cut pension outlays and save as much as 1 trillion reais over 10 years. Whether he will attract enough congressional support for the bill when lawmakers reconvene in February will be a make or break moment for his administration.

Bolsonaro will not have to compete for airtime at Davos this year. However, as the above article suggests the big test of whether the enthusiasm which greeted his administration is warranted will be in how successful he is in pushing through reform and combatting corruption.

About 27 percent of LNG was sold under spot- or short-term deals in 2017, up from 12 percent in 2003, according to the International Group of LNG Importers.

That just increased the need for a reliable price benchmark and liquid futures market for hedging. Regional gas benchmarks such as Louisiana’s Henry Hub, the U.K.’s National Balancing Point or Dutch Title Transfer Facility reflect local fundamentals and therefore may not be ideal proxies for the global LNG trade, where the vast majority of sales are in Asia.

So that’s where LNG futures come in. JKM “is much more trusted, much more accurate, and the
paper market is helping make it be more responsive to price movements,” Gordon D Waters, the global head of LNG at ENGIE, said by phone on Friday. JKM contracts could reach the level of NBP or TTF “most likely within the next 5 years.” NBP and TTF volumes both averaged about 37,000 contracts a day in 2018.

There’s still a long way to go. ICE JKM is still much smaller than other global oil and gas benchmarks. Exchange open interest, or the amount of outstanding bets at the end of every day, accounted for about $2 billion at the end of 2018, compared with $36 billion for U.S. natural gas and more than $100 billion for Brent oil, according to Bloomberg estimates.

It is only a matter of time before natural gas is a futures traded international market. LNG infrastructure continues to be built out. Canada in particular needs another export avenue while Australia is also now a major exporter, as is the USA. Meanwhile Europe, Japan and much of Asia are major demand growth centres. It makes sense this is going to be a major market.  

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

Here is a link to both the unedited and edited versions of the Subscriber’s Video from January 17^th.

This has been  an educative but incredibly time-consuming experiment and I’m afraid it is not within our capabilities to persist.

What I am attempting to do is articulate the three most important points within the first five minutes of the broadcasts. Additionally, it is worth remembering that there is a lot of cross pollination between the content covered in the videos and the written commentary.

I’ve been discussing the rise of populism, for two years, as a revolt against the status quo which is leading to a lurch to the fringes of political opinion. The clarion call for people everywhere demanding change is “What about me?” The only way governments know how to placate disaffected people is to give them more money. That is why we have seen so many countries pursuing fiscal stimulus/deficit spending measures.

For the first time in my life, I bought gold because it is a good hedge,” Sam Zell, the founder of Equity Group Investments, said in a Bloomberg TV interview. “Supply is shrinking and that is going to have a positive impact on the price.”

Spending on new mines began to dry up after prices of the metal tumbled from a record in 2011, clouding the outlook for production. With gold still down by almost a third from its peak, the biggest miners are just looking at buying their competitors in a bid to bolster their output pipeline.

“The amount of capital being put into new gold mines is a most nonexistent,” Zell said. “All of the money is being used to buy up rivals.”

Tightening global liquidity and the slowdown in China is restricting the capital available to the mining sector. Additionally, prices for many commodities have been under pressure this year so it is more difficult for miners to make the case to lenders that they should be afforded more leeway. That has led to reduced spending on exploration and development. The fact that when prices are high and liquidity available banks line up to extend credit to miners contributes to the cyclicality of the sector.

China has offered to go on a six-year buying spree to ramp up imports from the U.S., in a move that would reconfigure the relationship between the world’s two largest economies, according to officials familiar with the negotiations.

By increasing annual goods imports from the U.S. by a combined value of more than $1 trillion, China would seek to reduce its trade surplus -- which last year stood at $323 billion -- to zero by 2024, one of the people said. The officials asked not to be named as the discussions aren’t public.

The offer, made during talks in Beijing earlier this month, was met with skepticism by U.S. negotiators who nonetheless asked the Chinese to do even better, demanding that the imbalance be cleared in the next two years, the people said.

Economists who’ve studied the trade relationship argue it would be hard to eliminate the gap, which they say is sustained in large part by U.S. demand for Chinese products.

On the face of it this is good news because it at least suggests the USA and China are engaging in productive discussions and some initiatives to end of the impasse are being discussed. The stock market continues to unwind the overextension relative to the trend mean as it prices in optimism that a deal with be struck.

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

Some of the topics discussed include: short-term bought condition replaces short-term oversold conditions. what does a higher reaction low look like, palladium accelerating higher, Pound firms and Brexit commentary, China's global ambitions, Emerging markets remain steady, Dollar steady, gold steady, high yield spreads continue to contract.

It seems to me that the little move up in GBP and some "local" plays (banks, home builders) reflects higher chances of the UK remaining in the EU custom union.

The Telegraph is reporting Philip Hammond told business leaders Article 50, which is the bill to remove the UK from the EU, will be extended and even be shelved in coming days. Meanwhile, close colleagues of the Prime Minister are floating the idea of a Norwegian solution which is effectively EU membership in all but name.

The Labour Party are still hoping for an election, (of course they are), but are calling for a potential hard exit to be taken off the table and Jeremy Corbyn said today he could be willing to consider another referendum. The Cabinet office estimates a fresh referendum could take 14 months to organise. That’s seems rather long but, in any case, this saga is not going to end soon.

Palladium rose as much as 5.4 percent to $1,439.29 an ounce. It traded at $1,394.97 by 1:39 p.m. in New York. At the Comex exchange, palladium for March delivery climbed 2.3 percent.

Investors are shrugging off signs of automotive weakness in key markets, with annual car sales in Europe falling for the first time since 2013. China also declined last year and sales in the U.S. barely rose.

The metal will remain in a supply deficit for an eighth straight year, according to Metals Focus Ltd. Palladium’s status as a byproduct of mines in South Africa and Russia means output levels aren’t adjustable to meet short-term demand, despite the surging price.

“Investors appear to be ignoring the fact that weak sales figures have been reported for all major auto markets in recent days,” Commerzbank analysts including Daniel Briesemann said in a note. “Instead, they are seeing news such as the planned widening of a strike to include the platinum mines of a major South African gold and platinum producer as being a good reason to buy.”

Palladium has been rallying impressively while the other precious metals have been side-lined in terms of investor interest for the last couple of years. The collapse of platinum demand following the diesel scandal made the case for more gasoline vehicles and a demand growth cycle for palladium. However, that is not a sufficient reason for the scale of the move in palladium.

China’s double-digit economic growth has slowed recently, but it served to fund several successive defense modernization Five-Year Plans. As international concern over Beijing’s human rights policies stymied the PLA’s search for ever more sophisticated technologies, China shifted funds and efforts to acquiring technology by any means available. Domestic laws forced foreign partners of Chinese-based joint ventures to release their technology in exchange for entry into China’s lucrative market, and China has used other means to secure needed technology and expertise. The result of this multifaceted approach to technology acquisition is a PLA on the verge of fielding some of the most modern weapon systems in the world. In some areas, it already leads the world.

Chinese leaders characterize China’s long-term military modernization program as essential to achieving great power status. Indeed, China is building a robust, lethal force with capabilities spanning the air, maritime, space and information domains which will enable China to impose its will in the region. As it continues to grow in strength and confidence, our nation’s leaders will face a China insistent on having a greater voice in global interactions, which at times may be antithetical to U.S. interests. With a deeper understanding of the military might behind Chinese economic and diplomatic efforts, we can provide our own national political, economic, and military leaders the widest range of options for choosing when to counter, when to encourage, and when to join with China in actions around the world.

China is building aircraft carriers and a daisy chain of military bases from the Persian Gulf back home. No one would engage in that kind of expense unless they wish to project power and protect their interests internationally.

Here is a link to the automated transcript. Unfortunately, due to time constraints we haven’t managed to get the edited version ready for today but I will have it for tomorrow.

Sometimes one can’t help but get a giggle out of the automated transcript. This appeared in the fourth line today “dead people are increasingly turning ever more bullish”. I’m not at all sure how it inserted the word dead before people but you never know it may be the universe telling us a short-term overbought condition has replaced a short-term oversold condition.

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

Some of the topcis discussed include: consistency of the Dow Jones' chart, bank earnings, investors seem to have adopted a wait and see approach to Brexit, individual emerging markets outperforming, China quiet, Tin and palladium clearly outperforming while aluminum is trending down, Dollar remains firm, differrence between now and 2016 is the Fed is tightening. discussion of the origins of populism.

With May successfully seeing off the immediate threat to her government, she now has to turn her attention to plan B, which could involve bringing the divorce deal back to another vote. She invited rival parties to start talks following the Wednesday vote.

“The pound fallout should be contained as the prime minister is safe from a leadership contest,” Kamal Sharma, head of Group-of-10 currency strategy at Bank of America, wrote in a note before the confidence vote. “There is scope for sizable pound appreciation once the political risk premium is priced out.”

The U.K. currency has weakened about 14 percent since the result of the June 2016 Brexit referendum, and analysts in a Bloomberg survey see scope for a rally to $1.34 if a divorce deal is finally agreed on.

There are three primary interested parties in Theresa May’s new appetite for cross party talks. Some Conservatives want no deal but the majority do want a deal. The Labour Party wants to be in power so it will not endorse a fresh referendum while there is any chance the government will fall; triggering a general election which it hopes to win. The smaller Liberal Democrats, Scottish Nationalists and Plaid Cymru want a second referendum which they believe the Remain side will win. Meanwhile Theresa May probably still wants her deal to make its way through Parliament.

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

In last night’s video I shared this graphic of where the major markets are trading relative to their historic P/Es since 1990. The depth of the pullback seen to date has led to a P/E contraction which has contributed to demand as bargain hunters stepped in.

Earnings per share beat on higher fees and lower taxes, Morgan Stanley analyst Betsy Graseck wrote in a note, with the bank’s net interest margin beat showcasing that BofA’s “asset sensitivity is coming through.” Trading fees and investment banking topped her estimates as well, and she sees BofA generating “strong positive operating leverage, even in a weak revenue environment” -- which isn’t priced into its stock.

Goldman’s fourth-quarter net revenue, investment banking revenue and equities sales and trading revenue all topped estimates. The bank’s release highlighted the highest net revenues in financial advisory since 2007.

Goldman’s results weren’t all positive, though, as FICC and equities sales and trading revenue missed, its investment banking transaction backlog dropped from the end of the third quarter while questions about 1MDB will likely hang over the bank.

JMP’s Devin Ryan said in a note that “relief” for Goldman’s shares is “warranted following disproportionate pressure over the past year.” He also sees Goldman’s slide deck presentation with more detail around the quarter as likely to be “much appreciated by investors and viewed as a sign that the firm is moving toward a greater level of transparency.” He’s listening for color on 1MDB on the call, which started at 9:30am, though he’s “not expecting much.” CEO David Solomon has so far said, “We apologize to the Malaysian people.”

The S&P500 Banks Index dropped abruptly in December and has rebounded to unwind about two thirds of the decline. It is now within striking distance of the trend mean which represents the first area of potential resistance. A higher reaction low and sustained move above the trend mean will be required to question the overall downward bias. There is no doubt the relief rally seen to date is encouraging but a great deal of technical damage has been done and even in a best-case scenario it will take time to repair.

There was a lot of talk about yesterday and the video ran to almost 40 minutes. That has resulted in a transcript of more than 5000 words which is about double the transcript for the 14th.

Here is a link to the unedited version and the edited version. Sarah has kindly volunteered to edit the transcript. Here is her feedback from doing so today.

That has taken considerably longer to do today. A good few hours.

The problems are:

The software doesn’t always put a full stop or comma in and without punctuation, it’s going to be a difficult read.

It also doesn’t recognise the difference between Rupee and Rupiah, which might be corrected, but if it doesn’t “learn” to recognise it, it could be a confusing read for subscribers!

It doesn’t recognise context so there/their/they’re pretty much all need correcting. Also, we’ve/we’re.

I imagine it’s almost impossible to speak as you do, without a script, and not um and ah, but when you do, the software inserts “at” so you can imagine how many there were to correct.

I am actively trying to educate the system to adapt to my speech but with little success yet. I plan on pursuing this experiment till the end of the week and then we will make a judgement on whether to persist. However, if it takes multiple hours to edit a transcript, that is simply not something we are able to justify.

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

Some of the topics discussed include: Brexit deal voted down, Pound steady, China fiscal stimulus beginning,, gold appreciatating in more currencies, A lot of bad news has been priced into valuations, Big Tech rallies but still has work to do to repair technical damage, oil steady, cannabis shares rebounding, biotech and cloud companies outperforming, cybersecurity is a market perform, Treasuries continue to unwind short-term overbought condition. 

Who would win?

Ever since Mrs May unveiled her Chequers proposal in July, the polls have all shifted towards Remain.

Whilst Brexiteers continue to invest all of their energy railing against the Prime Minister’s deal, the campaign for a so-called ‘People’s Vote’ has been gaining momentum.

According to a recent YouGov poll, which ranks Remain, May’s deal, and no deal in order of first preferences on a constituency by constituency basis, staying in the European Union now commands a lead in 600 of 632 constituencies surveyed.

But when the various options are polled in a head-to-head scenario, known as the Condorcet method, the results are very different.

They are as follows:

Whilst these various scenarios all indicate a shift towards Remain, the results are by no means decisive.

It is also worth remembering that Remain enjoyed a comfortable lead in the polls throughout the 2016 referendum and into polling day.

An historic defeat for a sitting prime minister would normally result in her ouster. A vote of no confidence will be held tomorrow but, even then, the Labour Party will need defections from the Conservative Party to force an election and that looks unlikely. The only clear conclusion is the UK is very unlikely to leave the EU at the end of March, regardless of what the outcome of political machinations over the next 48 hours will be. There simply isn’t enough time to push through an alternative, let alone a General Election or two-tiered referendum before the March 31st deadline. 

China’s government is turning increasingly to tax cuts as the first line of defense against a slowing economy, as credit data released Tuesday showed some vindication of its gradual stimulus strategy.

Further evidence of the dominance of fiscal measures emerged, as senior policy officials pledged that tax reductions on a “larger scale” are in the pipeline, amid worsening output and trade data. JPMorgan Chase & Co. economists estimate the total impact will be around 2 trillion yuan ($300 billion), or 1.2 percent of gross domestic product.

That’s a departure from the infrastructure binges coupled with massive monetary stimulus that were deployed in the aftermath of global financial crisis. Beijing is trying to put a floor under the economic slowdown without another debt blowout, with some success: Credit growth exceeded expectations in December, and the central bank has managed to curb riskier shadow banking throughout the year.

"At the moment the room for monetary policies is limited, and fiscal policies such as tax cuts are the crucial tool," said Cui Li, head of macro research at CCB International Holdings Ltd. in Hong Kong. The high leverage and property prices have limited the chances of massive monetary stimulus, she said.

"But as a pro-growth measure, tax cuts will take effects at a slower pace compared to infrastructure binges," she said.

The influence of the consumer on China’s economic future is helping to shape the policy response to the slowdown. Consumer spending now makes up a lot more of the economy than it did a decade ago. Meanwhile the consumer is considerably less levered than the corporate and semi-state sectors, so fiscal easing is less likely to create a disruptive bubble in the short term.

Using the dollar gold price, as most of us do, has disguised what is actually quite a powerful bull market. If my memory serves me right, we saw the same phenomenon - a stealth rally in minor currencies - ahead of the last major gold bull run (in dollars) in the late 1990’s. Arguably this may be a very good leading indicator.

Faulty yardsticks also takes us onto wealth management. Measuring our net worth in local currencies, we might be rather pleased with ourselves - smug even. However we chose to ignore the fact that the yardstick is not a constant … it is shrinking and sometimes really quite fast. It’s the natural corrosive effect of inflation. Knowing this, governments give us a gauge for yardstick shrinkage to use such as RPI or CPI, to reassure you that the shrinkage is minimal… and then lie about it.  

There are alternatives.

In the US, the Chapwood Index is highly regarded as it reflects the true cost-of-living increase. Plainly and simply, the Index shows that incomes can’t keep up with expenses, and it explains why people increasingly have to turn to the government for entitlements to bail them out. The basis of the Index is fully open to scrutiny and if correct suggests Americans have been losing roughly 10% of their wealth each year since 2014. Half of it gone. This compares with the official government figure of 1.9%. Ronald Reagan called inflation “the thief in the night” and it is built for times just as this. It gives the appearance of being wealthy (maintaining high nominal values) while eroding your actual position - which manifests itself in far higher costs on the other side. 

Interestingly, gold has seen an average year-on-year gain of about 10% compounded since 2000 - off-setting those real losses - which reaffirms in our mind that it continues as a reliable yardstick against which to measure costs or indeed wealth. In short, gold has maintained what economists call “purchasing power parity” for millennia. So not only is it an excellent yardstick - its actually quite a useful thing to own - especially if you fear wealth erosion. If you haven’t already read this, you must - see :Jastram’s Golden Constant

Many crises invariably start with stealth inflation and then follows currency weakness - so gold gets expensive and then it blows out significantly higher in your local currency. Then you realise that the lifeboat has sailed … the choo-choo train has left the station. 

Governments’ fetish for fiscal stimulus is once again being engaged on a global basis and that is raising the same old questions about the integrity of their currencies and the loss of purchasing power associated with efforts to inflate the debt away. Gold is not making new highs against all of the currencies mentioned in this article but it is certainly firming against many of them.

The 1.5 per cent figure suggests growth was positive in the fourth quarter after the economy contracted in the third quarter. “If there are no revisions to past data, then the 1.5 per cent suggests at least 0.3 per cent quarter on quarter,” said Jörg Krämer, chief economist at Commerzbank.

Fears of a technical recession, or two-straight quarters of economic contraction, had emerged last week after industrial production plunged between October and November, highlighting the problems facing the country’s manufacturers.

Gross domestic product had fallen 0.2 per cent in the third quarter from the second, according to official data. Fourth quarter figures are due next month.

Makers have been hit by poorer sales following signs of a world economic slowdown and political uncertainty surrounding Brexit and the trade war between the US and China. The UK, US and China are all among German makers’ biggest markets.

Export sales sank in the second half of the year on the back of weak external demand — leaving import growth outpacing them and placing the trade balance into negative territory for the year. Germany is the most reliant of all of the major global economies on trade and signs that the world economic cycle is past its peak has led to an outbreak of pessimism among the country’s manufacturers.

German growth disappointed but remained positive, subject to revisions of course. That’s positive but does little to hide the fact that Eurozone growth is waning at exactly the same time the ECB has ended its QE program.

Canopy Growth has been granted a license by New York state to process and produce hemp with the help of efforts by Gov. Andrew Cuomo and U.S. Sen. Charles Schumer.

Canopy Growth hopes to establish large-scale production capabilities focused on hemp extraction and product manufacturing within the United States. Depending on board approval of a specific site, Canopy plans to invest between $100 million and $150 million in its New York operations, "capable of producing tons of hemp" on an annual basis.

The company is currently evaluating a number of sites in the Southern Tier of New York, which will become one of its first extraction and processing facilities outside Canada. Management hopes to announce the specific location within 100 days.

The outlook for US Federal legalisation or reclassification of cannabis took a hit with Donald’s Trump’s electoral success, given his antipathy towards the sector. However, Canada went ahead and became the first major economy to legalise cannabis and its companies have a head start on possible US competitors in the event the political climate in the USA changes.

I promised last week I would experiment with dictation software so subscribers could have the benefit of the video in written format.

I’m trying to teach Dragon Professional 15 how to take down what I say, but the results are far from perfect. Here is the original transcript and the corrected version which took a couple of hours to amend. The software can purportedly learn from documents, so I am feeding it the corrected transcripts to try and teach it how I speak.

I’ll persist through the rest of the week and hopefully I will be able to get better results with more examples to customise the natural language processor. However, it is not practical to spend two hours correcting copy that takes twenty minutes to speak.

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

Some of the topics discussed include: Markets quiet as potential areas of resistance at tested. Natural gas rounds emphatically. gold miner M&A picking up, Pound is steady but testing the first area of resistance heading into the Brexit deal vote, emerging markets continue to outperform

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

The markets have quickly turned from giving credence to the Fed’s prognostication that they would raise rates as many as two times this year to pricing in none and a cut in 2020. However, it is also worth considering that for the moment, at least, the market is pricing in one cut not a succession of cuts. The extent of the decline seen to date, therefore, has been to price out any net positive from the tax cuts; netting off trade frictions now to the earlier, and possibly temporary, bump to consumer demand.

The cost to create the world’s largest gold company: A 17 percent premium for a $10 billion all-shares acquisition that faces some big-time challenges down the line.

Newmont Mining Corp.’s deal for Goldcorp Inc. stands in stark contrast to the recent zero-premium merger between Barrick Gold Corp. and Randgold Resources. The key question: Why? In October, Goldcorp shares fell to their lowest since 2002 after the miner reported lower output and higher costs than expected.

Since then the stock improved only marginally before today. The merged company will have the world’s largest production and reserve base, and the kind of liquidity and diversified assets required to attract institutional investors. At the same time, "Newmont has some difficult times ahead with drastic surgery needed at Goldcorp,” according to John Ing, an analyst at Maison Placements Canada.

"In the short term and medium term, the deal is not good for Newmont," Ing said in an interview with Bloomberg News on Monday.

When the price of both the acquirer and the target fall following an M&A announcement, that is generally a sign investors are not all that happy with the price being paid and/or the prospects for the merged entity. The market’s conclusion therefore is that shareholders are on the hook for the cost of the merger.

Chinese shipments are already under pressure from slowing demand from top trade partners -- Europe’s recovery is under question, with Germany triggering recession fears, Japan is facing a tougher 2019 and the U.S. itself forecast to see waning growth after a robust 2018. China’s exports to the U.S., European Union, Hong Kong, Japan and Taiwan all fell from a year earlier. South Korea’s exports--often viewed as a bellwether for world trade--fell in December.

"There is a clear downward trend," said Zhou Hao, an economist with Commerzbank in Singapore who was among the few to accurately forecast a December contraction in exports. "This is not just due to the trade war and tariffs. On top of those, the major drag is slowing global demand."

While China is no longer as dependent on trade, as the world’s largest exporter, factory output, profits and employment still hinge on demand from overseas. Its domestic appetite also affects production by commodity and machinery exporters around the world. Stabilizing trade is one of the goals the leadership set for 2019, on top of supporting employment, investment and the finance sector.

One of the primary reasons China was so willing to engage in outsized stimulus in response to the credit crisis was because of the impact the loss of demand in the USA and Europe has on the economy. The collapse in the oil price contributed to the loss of demand from the Middle East and other commodity producers. The loss so quickly of its traditional sources of foreign income both resulted in the stimulus and the commitment to support the growth of the domestic economy.

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

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

The Congressional Budget Office expects the US deficit to explode on the upside over the coming years. The US Treasury has hundreds of billions in bonds to sell and the Federal Reserve is inconveniently now a net seller. The rational investor is rightfully questioning where demand is going to come from.

Human progress is defined by the desire to take risk — whether that’s getting married, buying a home, having kids, getting on a plane, taking a new job, even moving to earthquake country (where this talk originally took place, in Los Angeles, as part of the a16z Summit 2018).

All of these decisions require evaluation under conditions of uncertainty, which is where insurance — really, distributed risk — comes in. So, in this talk, a16z general partner Angela Strange describes how pooling risk changes as we reinvent a legacy business like insurance through technology. What’s the impact at an individual, industry, and economy level? And how will new entrants finally disrupt the ultimate game of life

When I was thinking about buying life insurance, I saw HealthIQ advertising better rates for fit people on the MyFitnessPal app where I record all of my exercise and everything I eat.

That process is what I credit with controlling my seesaw weight over the last couple of years and I highly recommend the regimen for anyone with similar difficulties with their weight. I found that by being honest with myself and recording everything I ate, I naturally began to make better decisions; plus, I like the charts.  

In India, GSM/EDGE-only has remained the dominant technology during 2018, accounting for around 56 percent of total mobile subscriptions at the end of this year. However, the country has experienced strong growth in the number of LTE subscriptions over the last couple of years, and at the end of 2018 LTE will account for close to 30 percent of all mobile subscriptions. As the transformation toward more advanced technologies continues in India, LTE is forecast to represent 81 percent of all mobile subscriptions at the end of 2024. 5G subscriptions are expected to become available in 2022. The Middle East and Africa comprises over 70 countries and is a diverse region.  It varies from advanced markets which have mobile broadband subscription penetration of 100 percent, and emerging markets where around 40 percent of mobile subscriptions are for mobile broadband. At the end of 2018, more than 20 percent of all mobile subscriptions will be for LTE in the Middle East and North Africa, while in Sub-Saharan Africa, LTE will account for just over 7 percent of subscriptions. The region is anticipated to evolve over the forecast period and, by 2024, 90 percent of subscriptions are expected to be for mobile broadband. Driving factors behind this shift include a young and growing population with increasing digital skills, as well as more affordable smartphones. In the Middle East and North Africa, we anticipate commercial 5G deployments with leading communications service providers by 2019, and significant volumes in 2021. In Sub-Saharan Africa, 5G subscriptions in discernible volumes are expected from 2022.

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

India and Africa are the only regions in the world with less than 100% mobile phone penetration. The rollout of 4G in India two years ago is a major evolution for the economy but also represents a major opportunity for international companies seeking a direct route to the nation’s consumers. 4G is the gateway to mobile banking, internet access, online shopping, education and entertainment.

You have recently mentioned possible German fiscal easing. I am reading "Berlin Rules" by former UK ambassador to Germany, Paul Lever. On page 190 he wrote that German politicians perceive their country's interests in several ways, one of which is "the further development and enforcement of mechanisms for maintaining fiscal discipline in all eurozone states." Fiscal discipline is part of German DNA and this is supported by the new Hanseatic League of northern EU member states' governments. I fear that your suggestion for German fiscal easing is, if I might use the term, "wishful thinking."

 

Thank you for this email which highlights the clear desire of German citizens to generally abide by a strong fiscal regime. That is particularly easy to do when the country is running large surpluses and the savings rate is in the order of 10%. However, spending continues to increase and the surplus is shrinking as a result.

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

Some of the topics discussed include: liquidity conditions remain tight, 2-year yields test the MA, S&P500 at first area of potential resistance, signs of early upside leadership in biotech and cloud computing, gold eases, oil steady. 

The first TLTROII operations will have a residual maturity falling below one year this summer, which may lead to a liquidity squeeze for certain euro area banks within a few months. Therefore, we expect it to be quite certain that the ECB will have another longerterm liquidity operation, which we expect to be announced in March and implemented in June ahead of the implementation of the new NSFR in July 2019. 

The effectiveness of the operation will depend on the modalities and the devil will be in the detail. It is uncertain how the ECB will structure such an operation and consequently how large a take-up there will be. The crucial modalities include rate procedure, eligibility criteria, maturity. In ECB Research - TLTRO3: Italy to be main beneficiary, 9 November 2018, we argued that if the modalities were identical to the ‘carrot approach’ under TLTRO2, we could see an additional EUR100-150bn taken. However, with the recent comments from ECB President Mario Draghi at the December press conference, we are leaning towards similar terms as with the 2011/12 VLTRO operations

Step 2 – postpone the guidance on the first rate hike
The first easy choice indicating a change in policy direction is a postponement of the first rate hike beyond the current ‘at least through the summer of 2019’ language from the ECB. The ECB has been doing forward guidance in recent years, and so stronger guidance is not a new phenomenon or politically difficult to do. However, with the US slowing down and China likewise, a significant postponement of an ECB hike guidance could well also mean that the ECB will not be able to hike in this cycle – leaving less room for manoeuvre in a future recession. 

However, markets have already re-priced ECB expectations and this measure would be likely to have a limited impact. If the next step were communicated as a cut, however, a marked impact should be expected. 

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

The ECB had to abandon conventional Austrian doctrine and re-embark on quantitative easing in 2015, in large part to unwind the damage done to the region’s economy from withdrawing the first round of stimulus. The latest round of QE has just ended and the German economy is on the cusp of at least a technical recession, France and Italy are already embarking on fiscal stimulus and the banking sector is in a shambles. It is only a matter of time before another ECB volte face.

Remember back a half-dozen years ago when all the hedgies were bearish and David Tepper came out and said something to the effect of; “if the economy weakens, then the Fed will ease and stocks go up. If the economy strengthens, then stocks will go up because earnings will be rising. Therefore I am buying.”

Well, I think it’s almost the exact opposite situation today. If the economy strengthens then Powell will hike and stocks will fall from the liquidity withdrawal. If the economy weakens, then Powell has shown he is loathe to come to the market’s rescue and he will be slow to lower rates.

I don’t think you need to overthink this. The Fed has tightened into either a slowdown, or a recession. The market sniffed it out, but the Fed ignored the signals for a bit and made the sell-off worse. Now the market is in the process of correcting that overreaction by rallying.

But don’t forget that Powell has absolutely no stomach for frothy financial markets, so beware getting too excited about the Fed’s recent dovish talk. This is not Yellen or Bernanke’s Fed. Powell has a different set of beliefs, and although he has succumbed to market pressures for the moment, it won’t take much for the old tone-deaf Powell to return.

Powell reiterated his view today in expressing the Fed’s patience with interest rate hikes but committing to continued balance sheet run-off. The market has already priced in the opinion the Fed will not raise rates again and will probably be cutting rates in 2020.

Before Xmas I forwarded an article by EPB Macro Economics who assessed that the Fed had already tightened too much and that a marked slowing of the economy was inevitable.  The latest EPB report (see attached) highlights that there has already been an inversion in US Treasuries, and that the Fed interest rate cycle has now peaked, but deteriorating economic data will cause more volatility in equity markets.

A link to the full report and a section from it are posted in the Subscriber's Area.

I agree we are late in the cycle and that has been a constant theme in the Subscriber's video for the last 18 months. The inconsistency in the trends on Wall Street, with evidence of completed top formations until proven otherwise is a clear indication that this is a particularly important time to pay attention to liquidity and credit conditions. Here is a section from the report:

Eoin/Sarah, I think I've asked you before but are E's video's available in writing? I do find them somewhat tedious and long winded to listen to. And time consuming. I see my sub is up for renewal I'm not sure I'm going to continue anymore if I can't get more of his wisdom in writing. Perhaps I'm missing something? Please advise. Cheers

Thank you for this email which I thought would be worth sharing with subscribers. We provide this service at below cost and on a levelized basis to everyone from sovereign wealth funds to entrepreneurs, family offices to retirees and everyone in between on a global scale. It’s a vocation for both David and I but it’s always a challenge to keep up with the pace of communications technology and the service has morphed over the last 16 years from a print publication to being purely online and providing written, audio and video commentary as well as access to the Chart Library.

I started providing the videos more than two years ago and there is no doubt it takes longer to talk through a chart than to simply speak about the markets. The old audios seldom ran above 15 minutes but it seems to just take longer to cover the same topics while recording videos. Delegates at The Chart Seminar in Australia and the UK last year reported preferring the videos because they no longer have to pull up the charts by hand while listening.

I am willing to trial voice to text software but from what I have heard it is error prone so the transcripts are bound to have typos or be incomprehensible and I do not have the time to edit them in a timely manner for publication. Transcription services generally cost $5 per minute for express service, which is within 12 hours so it is doubtful I would get them back in a timely manner for a daily service.

I think the best thing is to cover the three most important points of the day in the first five minutes of the video and progress to bigger topics from there. I don’t plan on altering the Friday Big Picture format.

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

Some of the topics discussed include: short-term oversold condition replaced with short-term overbought condition so the real test of a significant lows will be if we see higher reaction lows and subsequently higher highs, Dollar weak, emerging markets, gold, oil and commodities firm, 

A link to the full report and a section from it are posted in the Subscriber's Area. 

The broad global adoption of fiscally stimulative policies is unlikely to be as coordinated as the monetary response to the credit crisis was. The big arbiters of how much liquidity is provided to the global economy and eventually the markets will be in which large countries adopt fiscal stimulus. Germany, China and Brazil are the big additional potential sources of stimulus so it is their political machinations that are most worth watching.

The consortium includes Bank of America Merrill Lynch (NYSE: BAC), E*TRADE Financial Corp. (NASDAQ: ETFC), Morgan Stanley (NYSE: MS), TD Ameritrade Holding Corp. (NASDAQ: AMTD), UBS AG (NYSE: AG), and Virtu Financial Inc. (NASDAQ: VIRT). Charles Schwab, Citadel Securities and Fidelity Investments are also on board with the project.

"The founding members of MEMX represent leading retail brokers, global banks and financial service firms, and market makers – a diverse array of market participants organizing for the common goal of improving markets for retail and institutional investors," said Douglas Cifu, chief executive officer of Virtu Financial. "The launching of MEMX is a testament to the market-wide demand for competition, innovation, and transparency." TD Ameritrade executive VP Steve Quirk also issued a statement.

"As a founding member of MEMX, we look forward to being part of an initiative we believe will transform markets for the better," he said. "All types of investors could benefit from this simplified investing experience that will foster competition and promote practices that put the needs of investors first."

The primary stock exchanges have been among the better performers in the financial sector over the course of the last decade as volume surged with the introduction algorithmic trading. The colocation services offered by the exchanges does however raise the question as to whose interests they are in fact serving.

Philippine bulls are on a roll, and who can blame them? The nation’s equities index has started the year beating many global peers, and foreign fund managers are putting back money in a market that was among Asia’s worst in 2018.

Traders at Rizal Commercial Banking Corp. and AB Capital & Investment Corp. are riding the rally by deploying their cash, rather than cutting their stock holdings as they did last year whenever equities went into high gear. The Philippine Stock Exchange Index has rallied more than 6 percent in the first
trading days of January, including a 2.8 percent gain Wednesday.

It closed at an eight-month high, breaking a key resistance level and moving closer to the 8,000 that traders say it could surpass this quarter.

“It’s a good strategy to ride the prevailing positive mood, even if only for the short term,” said Gerard Abad, who manages $380 million as chief investment officer at AB Capital. “We will see a continuation of the improvement in inflation, and it helps that the U.S. Fed has become dovish. That eases pressure on the central bank to raise rates.”

There is no one talking about a secular bull market in emerging markets anymore and that is a good thing from the perspective of a long-term investor. It means it is not a crowded trade.

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

Some of the topics discussed include: Wall Street close to the first area of potential resistance, Europe steady but still underpeforming, China unimpressive. High yield spreads rapidly unwinding oversold condition but also now at first area of resistance. The big question is where is the next source of liquidity going to come from.

The whiplash reversal in junk-bond spreads underlines the treacherous nature of markets at the moment. It's hard to find precedents for a reversal of sentiment on the scale we saw in the last couple of sessions. It's possible that the scale of the shift is justified by either the jobs data or Powell's put, but it seems likely that the Street's reduced capacity for making-markets is exaggerating the swing.

The last time we saw a two-day decline in U.S. high-yield spreads of this magnitude was in 2009, but that was in the context of a longer rally. There was a similar turnaround in late 2000, but in retrospect that just looks like a blip on the chart. The index in those days was less than a quarter of the size it is now and more susceptible to events in individual names.

It's not a lack of flow. Yesterday's volume of high-yield corporate trading was 67% above average, according to Trace data.

But trading isn't the same as liquidity. Market-making desks have much less capacity for assuming risk than they did before the crisis. They were never much help in a full-on panic, but if market-makers took down fewer bonds in the sell-off that would leave them less able to react when the market turns around. So, you can have a market in which too much money is scrambling after too little paper.

It's possible the culprit might be the growth in popularity of junk ETFs like HYG and JNK, but the assets in those two funds have fallen by one-third from the peak in 2017. Or you could just blame quants and algos. They seem to be the go-to scapegoat for everything hard to explain in the markets these days, just ask Cliff Asness (sarcasm alert).

Credit leads the stock market. Bond managers’ primary concern is default probability. Bonds don’t pay more if a company does well. Instead, the price of the bonds may rise which reduces their allure for new buyers on a yield to maturity basis. Unlike stocks, bonds have a clear end date, by which either gains have to be locked in or the issue redeems at par. That means bond investors are much more alert to credit conditions, default rates and the factors that can influence them which tend to affect bonds before stocks.

Since then, the hypothetical of a monthly subscription to All Things Apple has assumed an extremely unofficial name—Apple Prime—based on Amazon’s bundle of free shipping, movies, music, photos and various other services. Last week, the notion took on sudden urgency, as Cook sliced Apple’s sales outlook, sending the company’s stock plunging 8 percent for the week and nearly taking the rest of the stock market down with it.

Proponents of Apple Prime are now reading tea leaves and seeing puzzle pieces moving into place. In his note to shareholders last week, Apple’s chief executive officer wrote under the heading of “other initiatives to improve our results” that Apple was working on “making it simple to trade in a phone in our stores, finance the purchase over time, and get help transferring data from the current to the new phone.”

The idea is that instead of paying a cool grand for a new iPhone every year, devotees might pay Apple a monthly stipend for automatic access to the latest device. Apple already has an iPhone upgrade program that costs $37 a month, administered by Rhode Island-based Citizens One. Presumably Apple could then bundle this with access to music, storage, the AppleCare warranty program, and the much ballyhooed but still largely invisible stable of Apple-financed TV shows and films, like an upcoming animated movie. “This is Apple Prime. And it is coming,” tweeted investor and Apple watcher MG Siegler, after reading Cook’s letter.

The subscription business model is the tech industry’s answer to the cyclicality which has plagued it since its dawn. By creating products that are essential to modern living they have turned a boom to bust pattern into an easily modellable stream of cashflows that any fundamental value-oriented investor can justify having a position in.
 

The Telegraph newspaper cited three unidentified EU sources as saying British officials had been “putting out feelers” and “testing the waters” on an extension of Article 50, which sets out the conditions for leaving the EU.

Brexit Secretary Stephen Barclay denied the report and said London would not seek to extend the divorce while German Foreign Minister Heiko Maas said it was not time to discuss such a course. Ireland, though, said it would not stand in the way if Britain made such a request.

“Certainly from an Irish perspective, if such an ask happens, we won’t be standing in the way on that,” Irish Foreign Minister Simon Coveney told journalists after a meeting with Maas in Dublin.

“If it is the case that at some point in the future that the British government seeks an extension of Article 50, then that is something that will have to get consideration at an EU level,” Coveney said.

Ireland’s economy would be hit hard by a disorderly Brexit and the most contentious part of May’s deal is an insurance plan aimed at preventing a hard border between the Irish Republic and Northern Ireland.

May is said to intend to “move swiftly” if her deal is voted down in parliament, as seems likely. The UK is due to leave the EU on March 29th so 80 days from now. One is reminded of Phileas Fogg’s race around the world but perhaps the more appropriate literary comparison is with Don Quixote and tilting at windmills, but this time in the Low Countries.

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

Some of the topics discussed include: Dollar testing important support againsts the Euro, select emerging market currencies breaking out led by the Rupiah. China steady, oil firm, gold steady, sugar firms, grains and beans have base formation characteristics, high yield spreads start to contract.

I thought you may find this interesting. If we think we have a LT top on bond prices, the Powell put and fiscal excesses may just cause the next bull move and the move to higher inflation. I thought this FT chat on labor market was interesting ..best   

Thank you for this email which is timely considering the extent of the rally we have seen in bond prices over the last few months. The Merrill Lynch 10-year Treasury Futures Total Return Index has rallied impressively and is now testing the sequence of lower rally highs evident since the middle of 2016. A short-term overbought condition is now evident and this is a natural area where resistance might be expected.

The 40th anniversary of Deng Xiaoping’s opening up of the Chinese economy, and the end-of-year Central Economic Work Conference last month, suggest that Mr Xi is prepared to accede to change but not to anything that threatens China’s core interests. He cannot risk caving in to US pressure. Foreign companies and SOEs will still be required to buy and prioritise locally. Local governments and tech companies are bound to support the security, innovation, and industrial transformation of the state. Industrial policy designed to boost China’s technological and military capacity is not up for negotiation. Changes to intellectual property laws are aimed more at small businesses rather than SOEs and big technology companies. Changes in foreign ownership caps and technology transfer will have to go some way for foreign companies to back away from reconsidering supply chain strategies. So, while we can anticipate some flexibility in the optics of Mr Xi’s negotiating stance, no one really doubts that he is firmly in control, and remains committed to both the Made in China and Belt and Road strategies, which are enshrined in the party’s constitution.

Liu He, Xi’s top economic advisor, turned up at the talks between the US and China today despite the fact they were to be led by mid-level officials. That’s a signal China is taking these negotiations seriously.

The simple fact is that if China wants to achieve its ambitions of becoming a global super power in a military, economic, technological, political and cultural sense it needs to placate the USA today so that it can show its true strength later. That, in fact, was exactly the strategy Deng followed when he advised the Party to hide its strength and just play along with the global economy in opening up.

Indonesia is often seen as an emerging market bellwether with its high yields, strong economic growth and a reformist government, with foreign investors holding about 40 percent of local-currency bonds. The direction of its markets may provide clues as to whether the stress that swept developing nations last year may be coming to an end.

Federal Reserve Chairman Jerome Powell’s comments on Friday indicating a possible pause in rate hikes, an easing in China’s monetary policy, and hopes of improvement in trade tensions between Beijing and America have all combined to boost emerging markets on Monday.

“The rupiah looks to be on that nice catch-down trade given the Goldilocks’ moment that markets are reveling in,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank Ltd. in Singapore. “Fed’s Powell humming all the right notes out of the markets song book has gone a long way” in boosting the rupiah, he said.

Indonesia is a commodity exporter, has a large young population, an evolving manufacturing sector, and while now an energy importer is still an oil producer. With a reform minded administration it has exhibited relative strength this year not least because it got its currency devaluation done in 2015.

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

Federal Reserve Chairman Jerome Powell said the central bank can be patient as it assesses risks to a U.S
economy and will adjust policy quickly if needed, but made clear he would not resign if President Donald Trump asked him to step aside.

“With the muted inflation readings that we’ve seen, we will be patient as we watch to see how the economy evolves,” Powell said Friday on a panel with his predecessors Janet Yellen and Ben Bernanke at the American Economic Association’s annual meeting in Atlanta.

“We will be prepared to adjust policy quickly and flexibly and to use all of our tools to support the economy should that be appropriate to keep the expansion on track,” he said, adding “there is no pre-set path for policy.”

The financial markets have been busying pricing out the potential for additional rate hikes this year in the aftermath of the last Fed meeting. That was a clear message to policy makers that they were making a mistake in signaling a willingness to persist in raising rates and running off the balance sheet concurrently.

The above statement begins to suggests the Fed is alert to the message being sent by the markets. The stock market responded positively to this change of emphasis by Powell and rallied to countermand yesterday’s weakness; reinvigorating the reversionary rally hypothesis.  

The above statement begins to suggests the Fed is alert to the message being sent by the markets. The stock market responded positively to this change of emphasis by Powell and rallied to countermand yesterday’s weakness; reinvigorating the reversionary rally hypothesis.  

Is there a link to your updated list of Autonomies? I searched on site but could not find. Thank you and Happy New Year to you and David!

 

Happy New Year and thank you for this question which may be of interest to other subscribers. We have a section in the International Equity Library devoted to the 168 autonomies. What become obvious over the last decade is capitalism trends towards consolidation and there has been a continuing trend of mergers between the world’s largest companies. The result is that it has been a relatively dynamic list. 

“Underpinning this wave of buying is mounting evidence that Saudi Arabia has taken an axe to its oil production,” said Stephen Brennock, an analyst at PVM Oil Associates Ltd. Oil’s positive start to 2019 follows its worst quarter in four years and a 20 percent annual loss driven by panic over a growing glut of crude. While OPEC’s output plunged by the most in almost two years last month and producers have pledged to curb supplies through the first half of 2019, concerns about oversupply prevail as stockpiles at America’s main storage hub show signs of swelling.

And

The majority of oil executives surveyed by the Dallas Fed are still planning to boost spending in the next year, even after a plunge in prices. Saudi Arabia raised pricing for most crude grades to Asia and for all blends to buyers in the U.S. for delivery in February as the world’s biggest exporter cuts output to clear a global oil glut. As the new year begins, the oil market looks set to be dominated by big shifts in production. A few months ago, investors were struggling to comprehend just how much cash the largest oil companies were about to dump on them. Those mountains of money have now been reduced to mere hills.

Saudi Arabia following through and cutting supply is a positive development but the declining economic activity in Texas is also an important consideration since the unconventional supply is a big part of the reason for the glut which has seen prices decline so swiftly.

In normal times, it’s Canada’s turn to shine at this later stage in the cycle—typically benefitting from rising commodity prices and still-solid global growth. But the TSX was bludgeoned this year (down double-digits) by trade tensions, a housing slowdown and weak domestic oil prices. Next year’s growth outlook is dulled by oil production cuts, slower U.S. spending, slipping auto sales and the overhang of record consumer debt. Providing a mild offset will be the new LNG project, mildly stimulative fiscal policy in the lead-up to the October federal election, as well as (presumably) some certainty on the North American trade front. But with the big interest-sensitive sectors still gearing lower, we look for 2019 Canadian GDP growth to simmer down to a 1.8% pace following this year’s as-expected 2.1% advance. With population growth recently clocking in at 1.4% y/y, this points to quite modest per capita gains.

Even this more restrained GDP growth will tighten the labour market further, producing the lowest unemployment rate seen in Canada since the early 1970s. This will be the key ingredient convincing the Bank of Canada to tighten further in 2019, tempered somewhat by Governor Poloz’s view that there is still some hidden slack in job markets—surprisingly sluggish wage growth recently lends serious credence to that opinion. Overall, we look for the Bank to hike rates two times (50 bps) in 2019, following a year when policy actually met expectations to a T. Curiously, 10- and 30year Canadian bond yields are now only slightly above year-ago levels, and the GoC curve is even flatter than the flat Treasury curve; bonds clearly expect cooler Canadian growth next year as well. That view also appears to be built into the Canadian dollar, which spent most of the year on the defensive amid trade tensions and wobbly WCS prices. We look for only a mild recovery in 2019 for the loonie amid firmer oil prices and if/when the USMCA is ratified.  

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

Alberta is talking about secession. It’s never going to happen but the fact the province is even talking about it tells a tale of the ignorance the Ottawa government has for what helped Canada become a globally significant economy.

Happy New Year to you and your family in California

Thank you for responding to my question, directly on the daily commentary .

In that commentary you said that banks still prefer to hold a reserve at the FED in their balance sheet rather than holding Treasuries (as a result of the balance sheet reduction) , although both have same credit rating (i.e. the credit rating of the US government)

I don’t understand the last point. Why should banks prefer holding a lower yielding reserve asset  than a higher yielding Treasury bond, if we isolate the duration difference between the 2?  I am struggling to understand why balance sheet reduction is so bad a thing for banks (as liquidity providers as you point out) if they exchange one asset for the other. Their lending power is not impaired as a consequence. Or am I wrong? actually lending activity by commercial banks in the US has been picking up until end of 2018 notwithstanding the equity markets gyrations

Btw. I am attaching a link of chart showing the increase of Treasuries and Government agency papers + MBS by commercial banks in US. They are picking up.  They have accelerated in December so much that the new 10 years yield now discounts only one rate hike for 2019.  Very bearish an implicit scenario.

Thank you for this follow-up question. (The original was posted in the Comment of the Day on December 21st  )

The money the central bank pay banks for parking reserves is guaranteed but Treasuries change in value from day to day and therefore have more volatility. Any volatility represents more risk than none and therefore more uncertainty

This may in part be a reaction to the bad PMI data and the equity market sell-off we have seen," said Michelle Lam, a greater China economist at Societe Generale SA in Hong Kong.

“They’re trying to restore market confidence and need to ease credit conditions to boost lending to the private sector and because of high seasonal demand for cash.” China’s manufacturing purchasing managers index fell into the contraction territory last month, the weakest since early 2016. Early indicators for December signal the economic slowdown is deepening, after official data showed industrial production growth was the weakest in a decade and industrial profits fell
for the first time in almost three years in November.

Stimulus Pledge
Chinese financial stocks surged Friday as Premier Li Keqiang visited the nation’s biggest banks and pledged more support for the economy. Li said China will strengthen the scale of its counter-cyclical adjustments of macro policies and further cut taxes, while urging banks to take full advantage of tools including reserve ratio cuts, and to support private and small businesses’ financing needs.

“How much can this help the economy remains to be seen,” said Tao Dong, vice chairman for Greater China at Credit Suisse Private Banking in Hong Kong. “The central bank has been handing liquidity to the banks, but the banks are unwilling to lend. This is a classic case of banking disintermediation amid the
down cycle.”

China’s bank reserve requirements have been cut significantly over the last few years with little sign just yet that the banks are willing to voluntarily take on more risk. That is particularly true for the corporate sector now that defaults are a reality.

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

Some of the topics discussed include: Apple leads Wall Street lower, China remains under pressure, industrial metals trending down, safe havens conitnue to outperform, India, Indonesia and Brazil exhibit relative strength.

A link to the full report and a section from it are posted in the Subscriber's Area. 

“It looks more like a liquidity event with the move happening in the gap between the New York handover to Asia,” said Damien Loh, chief investment officer of hedge fund Ensemble Capital Pte., in Singapore. “It was exacerbated by a Japan holiday and retail stops getting filled on the way down
especially in yen crosses.”

As a result, the yen surged against every currency tracked by Bloomberg, and was up 1 percent against the dollar at 107.78 by 9:30 a.m. in London.

The haven asset has strengthened against all its major counterparts over the past 12 months as concerns over global economic growth mounted and stocks tumbled. It rose 2.7 percent against the dollar last year, the only G-10 currency to gain versus the greenback.

“Yen strength has been omnipresent since mid-December, cementing the status of the yen as the only true safe haven these days amid political risks elsewhere,” said Christin Tuxen, head of currency research at Danske Bank A/S.

The quiet time around the holidays is when algos have a particularly good opportunity to trigger stops and to enact outsized moves which have the scope to set the stage for trading for months afterwards.

In a speech at his swearing-in ceremony in Brasilia on Wednesday, Guedes promised a sweeping overhaul of the country’s state apparatus and business environment to unleash corporate potential and free future generations from debt.

"Private-sector pirates, corrupt bureaucrats and creatures from the political swamp have conspired against the Brazilian people," he said. "Excessive spending has corrupted Brazil." Bolsonaro has tapped Guedes, a graduate of the University of Chicago, to manage economic policy in a country hamstrung by rising debt, a gaping fiscal deficit and slow growth. Bolsonaro won the October election by a wide margin as part of a popular backlash against crime, corruption and economic malaise.

In his comments Wednesday, Guedes highlighted the urgency of the task ahead. "Our business class is chained down by interest rates, high taxes and labor costs," he said, adding that he believed the ideal tax burden would be around 20 percent of gross domestic product, rather than the current rate of 36
percent.

Earlier in the day, the new energy minister, Bento Albuquerque, said Brazil would deliver on plans to capitalize Eletrobras, prompting shares in the state-run company to jump as much as 9.7 percent. He added that he would seek a lower tax burden and few subsidies in the electricity sector.

Markets tend to reward the efforts of right-wing populists because they promise to streamline bureaucracy, cut regulation and boost economic growth; all of which tend to improve sentiment towards asset prices. Bolsonaro’s decision to appoint a University of Chicago economist as his finance minister is a signal, he has growth and employment as his first set of priorities and that is likely to be appreciated by investors.

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

Some of the topics discussed include: China remains weak, stock markets globally look increasingly likely to unwind short-term oversold conditions but credit conditions remains tight and safe haven assets continue to perform, 

A link to the full report and a section from it are posted in the Subscriber's Area.

When David and I came up with the idea of the Autonomies back in 2010 we were thinking of companies that could perform come hail or shine in the evolving secular bull market. There are three fundamental strands to that belief and one technical.

The rise of the global consumer is a euphemism for the spread of capitalism and improving standards of governance which have historically delivered improving standards of living and higher consumption of goods and services. As long as capitalism continues to spread and governance improves millions of people are likely to be lifted out of poverty and into the middle classes. Asia and Africa are ground zero for that trend to persist in the coming decades

The latest boardroom exits were prompted by the rejection of its rescue plan, Carige said. Its top management were replaced in late 2018 after Malacalza won a board battle to pursue a capital-raising rather than a merger.

Italy’s finance ministry is studying a plan under which Carige is bought for a symbolic price, possibly by UniCredit SpA, La Stampa reported Wednesday, without saying where it got the information. Such a deal might mirror Intesa Sanpaolo SpA’s takeover of two Veneto-based banks with state support in 2017.

The painful contraction and rationalisation of the Italian banking sector continues with Carige representing the latest in a litany of failed lenders which have been unable to write off loans despite the fact they have no chance of being paid back. The result is Italy will be left with a handful of large institutions and the rest will be allowed to fail which will further concentrate risk and strengthen the ties between the state and the banking sector.

Further evidence of slowing Chinese growth weighed as a closely-watched manufacturing gauge had its lowest reading since May 2017.

“There are a lot of uncertainties lying ahead,” said Banny Lam, head of research at CEB International Investment Corp. “The markets will likely be stuck in a downtrend over the next few
weeks.”

Property stocks were among Wednesday’s biggest decliners on the Hang Seng Index, with China Resources Land Ltd. and Country Garden Holdings Co. both falling more than 6 percent.

“Some funds are readjusting their positions for the new year and may be dumping stocks in sectors with an uncertain outlook like property and health care,” said Linus Yip, a Hong Kong-based strategist with First Shanghai Securities Ltd. “That’s why we’re seeing a sell-off.

Hong Kong has some of the highest property prices in the world which are a function of extraordinarily low interest rates, abundant and persistent demand from well-heeled mainland residents. Tightening liquidity is a significant threat to that trend persisting while ebbing demand from Chinese residents amid downward pressure on the domestic economy is also a concern.

Happy New Year!

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

Some of the topics discussed include: review of 2018, where are we in the cycle, what's going well now and what does that tell us, what can we expect from 2019. 

The big drawdown that began in January represented a major inconsistency for what had previously been an impressively consistent trend. The subsequent ranging belied the churning that was taking place inside the major Wall Street indices as leadership narrowed to focus on the mega-cap technology companies.  Facebook peaked in the summer and Apple in October and that was one of the causal factors in the ensuing sell-off as large cap underperformance weighed on ETFs.



The fact that Advanced Micro Devices was the best performing share on the S&P500 this year is a testament to the extraordinary volatility we have seen in single stock names. The share opened in January at $10.42, peaked in September at $34.14 and closed today close to $18.32.

Many thanks for another great year of top-class service. All the very best for 2019 and beyond. The following article in today's Observer gives on-the-ground evidence of the slowdown in the Chinese economy. 

Thanks for your well wishes, your kind words of encouragement and Happy New Year!

Here is a section from the article:

“People have started to reduce or even stop spending money because they don’t expect the economy will perform well,” said Ye Tan, an independent economist based in Shanghai. “Companies and individuals are wary about the economy.”

Going into 2019, China faces not just a slowing economy but also a protracted trade war with the US, a pile of debt that threatens the world economy along with the Chinese financial system, and a populace demanding better environmental, labour, and health protections.

Next year, China’s leaders face some of the most difficult policy decisions they have had to make in years. Analysts say they are confronting a choice between pushing headline growth through Beijing’s traditional levers of infrastructure spending funded by debt, or painful reforms that lower financial risk but raise the possibility of unemployment, and ultimately social instability.

Officially, China’s economy is humming along. Economic growth is expected to slow to 6.3% next year, after reaching 6.6% in 2018. The economy expanded by 6.5% in the third quarter, the country’s slowest quarter since 2009.

Yet economic indicators from auto sales to manufacturing activity are all flashing red. In November, growth in China’s manufacturing sector stalled for the first time in more than two years. Annual auto sales in the world’s largest car market are on track to contract for the first time since 1990.

Gold gained ground this quarter as world equities plunged and doubts stacked up about the pace of economic growth in 2019. A weakening dollar in December aided the rally amid expectations the Federal Reserve will dial back the pace of rate increases next year. That’s also helped to boost holdings in gold-backed exchange-traded funds.

“For gold prices, I think there is upside to be seen in 2019,” Jingyi Pan, market strategist at IG Asia Pte., told Bloomberg TV on Monday, citing prospects for fewer tightening moves from the U.S. central bank. “It does look like one where we will see a slackening of expectations in Fed hikes.”
 

The big picture is the world’s governments have a lot of debt and the rise of populism is burnishing the attraction of fiscal stimulus. That is likely to put downward pressure on fiat currencies, with no country wanting a strong one. For a monetary metal that cannot simply be lent into existence that’s potentially very good news.

 

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

Merry Christmas to you and your family. Thank you for all the hard work you have put in 2018 to produce such a valuable service. I'm sure that the Euro's travails are the last thing on your subscribers' minds this festive season but this YouTube video may be of interest to the Collective. It is a lecture given in fluent English) by German economist Dr. Oliver Hartwich last July, entitled 'Target 2 and the Euro Crisis'. He explains this arcane subject with great clarity and humour. 

Thank you for your kind words and this enlightening video which as you say offers a very useful exposition of the internal transfer mechanism that makes up the Euro. The simply fact is that the Euro was designed to be the currency of a pan European federal super state and has the transfer mechanisms appropriate for that objective without it in fact existing.

U.S. credit spreads widened to the highest levels since the summer of 2016 as funds saw outflows even as major American equity indexes posted a second day of gains.

Investment-grade bond spreads widened 2 basis points to 152 basis points on Thursday. The index has widened every day since Dec. 14 and most trading sessions this quarter

The junk bond index also rose Thursday, although the move was less pronounced. The index widened 1 basis point to 531 basis points, the highest level since Aug. 4, 2016. It’s risen 113 basis points this month
 

Investment-grade funds saw outflows of $4.4 billion for the week ended Dec. 26, the most since December 2015, according to Lipper. Junk bond funds registered the biggest outflows since October.

The stock market is short-term oversold and we have evidence of a short covering rally that began on the 26th. However, credit markets have not been the subject of bargain hunting and spreads continue to widen.

Gold is a monetary metal and therefore attracts the most interest when it is appreciating against most currencies. We have added charts for Gold in US Dollar, Euro, British Pounds, Japanese Yen, Australian Dollars, New Zealand Dollars, Swiss Francs, Indian Rupees, Chinese Renminbi, South African Rand, Brazilian Real, Turkish Lira, Swedish Krona, Singapore Dollars. These can be found using the Bloomberg ticker for gold XAU in the search or in the Metals section of the menu.

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

Some of the topics discussed include: Rebound on Wall Street is extended signally a low of near-term significance, Treasuries ease, gold steady, Dollar eases, Europe and China weak, 

For all of the previously described reasons, the period that we are now in looks a lot like 1937.

Tightenings never work perfectly, so downturns follow.  They are more difficult to reverse in the late stage of the long-term debt cycle because the abilities of central banks to lower interest rates and buy and push up financial assets are then limited.  When they can’t do that anymore, there is the end of the long-term debt cycle.  The proximity to the end can be measured by a) the proximity of interest rates to zero and b) the amount of remaining capacity of central banks to print money and buy assets and the capacity of these assets to rise in price.  

The limitation in the ability to print money and make purchases typically comes about when a) asset prices rise to levels that lower the expected returns of these assets relative to the expected return of cash, b) central banks have bought such a large percentage of what there was to sell that buying more is difficult, or c) political obstacles stand in the way of buying more.  We call the power of central banks to stimulate money and credit growth in these ways “the amount of fuel in the tank.” Right now, the world’s major central banks have the least fuel in their tanks since the late 1930s so are now in the later stages of the long-term debt cycle.  Because the key turning points in the long-term debt cycle come along so infrequently (once in a lifetime), they are typically not well understood and take people by surprise.  For a more complete explanation of the archetypical long-term debt cycle, see Part 1 of “Principles for Navigating Big Debt Crises” (link).

So, it appears to me that we are in the late stages of both the short-term and long-term debt cycles.  In other words, a) we are in the late-cycle phase of the short-term debt cycle when profit and earnings growth are still strong and the tightening of credit is causing asset prices to decline, and b) we are in the late-cycle phase of the long-term debt cycle when asset prices and economies are sensitive to tightenings and when central banks don’t have much power to ease credit.

Both the Dow Jones Industrials and the S&P500 posted large upside key day reversals yesterday to signal lows of at least near-term significance. Neither followed through on the upside today but they did hold the moves. Considering just how much they fell since early this month there is certainly scope for a rebound but the true test of whether more than near-term support has been found will be in the extent to which they hold their lows.

China has also said it will suspend additional tariffs on U.S.-made vehicles and auto parts for three months starting on Jan. 1, adding that it hopes both sides can speed up negotiations to remove all additional tariffs on each other’s goods.

Bloomberg, citing two people familiar with the matter, reported on Wednesday that a U.S. trade team will travel to Beijing the week of Jan. 7 for talks.

A person familiar with the matter told Reuters last week that talks were likely in early January.

In yet another reconciliatory sign, China issued on Tuesday a so-called negative list that specifies industries where investors - domestic or foreign - are either restricted or prohibited.

The unified list is seen as another effort to address concern among Western investors that there is no level-playing field in China. Investment in key Chinese sectors, however, is still prohibited.

Gao said China would “comprehensively” remove all market access restrictions for foreign investors by the end of March, in areas not included in a foreign investment “negative” list published in June.

China has a lot more to lose from a trade war than the USA. While it is difficult to get accurate statistics on the health of the economy the simple fact that car sales are declining at a rather rapid pace is a clear signal the Chinese consumer is at least holding off on making purchases. Here is a link to an article from the Wall Street Journal covering the story and here is a section: 

In the frenzy, some companies became complacent, assuming growth would be endless and easy to capture, according to Mr. Gong and other analysts. Then the growth evaporated. Sales grew 3% in 2017 and declined 2% in the first 11 months of 2018.

China now has enough factories to build 43 million cars but will produce fewer than 29 million this year, according to consulting firm PwC. While foreign and domestic auto makers alike find themselves under pressure, the slowdown has hit those that misread the market hardest of all.

Hope you are enjoying a well-earned Christmas break with lots of gourmet eating!

I have a very simple question.  What happens to the Euro banking index if Deutsche Bank gets nationalised?

Thank you for the well wishes. We enjoyed an eclectic mix of fare on Christmas Day foregoing a bird in favour of a 5lb lobster cooked Cantonese Style and complimented with a honey glazed ham. We washed it all down with Fortnum and Mason’s English Mint Tea which I can’t recommend highly enough. This was a landmark year for the family since my ten-year old has finally developed a taste for Mahjong so we had the requisite four to play for hours after dinner to much shouting, laughter and banter.  

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

The leaders pledged to cut taxes and fees “on a greater scale,” increase the issuance of special-purpose local government bonds by “a relatively large margin,” and strike a balance between monetary tightening and easing to ensure “reasonably ample liquidity,” as they promised to continue to take measures to address the financing difficulties faced by private and small companies. The measures are part of official efforts to “strengthen counter-cyclical policy adjustments,” which refers to government support to boost economic growth, according to Xinhua. Proceeds from sales of special-purpose local government bonds are often used to fund infrastructure investment, a key driver of economic expansion.

They noted that the world is facing a “once-in-a-century” change that entails both crisis and opportunities. They urged the nation to “turn crisis into opportunities” by improving its technology and innovation capabilities, deepening reforms and opening up further, participating in global economic governance system overhaul, and speeding up a transition to high-quality growth, the report said.

China has been weighing on the shadow banking sector for much the last two years in a bid to contain the risk that has been building in the regional banking sector. That curtailment of access to liquidity and enforcement of rules that have previously been ignored has been a major contributor to slowing growth.

I understand the problem about reducing the FED balance sheet and raising rates at the same time.

The impact on liquidity is however less intuitive to me. While the effect of interest rate hikes is clearer, the effect of a Balance Sheet reduction is less so.

Am I wrong to assume that what technically happens when the FED reduces i.e. sell bonds is that the private sector, through the banking system, receives these bonds? In exchange banks reduce the account balance that they hold at FED.

If banks get Treasuries in their book, they also receive more interest income (coupons) that goes into the system. This money was blocked in the book of the FED until then.

Why is this necessary bad?

Thanks for this question which I’m sure others have an interest in. Since the financial crisis banks have been paid interest on the excess reserves, they hold at the Fed. Against an uncertain environment in the real world they therefore had an incentive to park vast sums at the Fed. In return they received interest income on that money in line with the Fed’s Funds rate. 

“The rules create the worst possible situation,” said David Miller, a tax lawyer at Proskauer Rose LLP.

The impact on hedge funds is among the curve balls taxpayers are dealing with as the one-year anniversary of the tax overhaul nears and the IRS issues thousands of pages of regulations implementing the law. The cap also represents another hit for the industry from the GOP tax law. The overhaul eliminates the deduction for management expenses investors previously qualified for, and many New York managers are hurt by the new cap on state and local tax deductions.

Just what people owe on their taxes is going to become apparent when tax returns start to get turned in next year and it’s not going to be good news for the millions of people living in the USA’s highest population, highest taxed states California and New York.

India’s ascent on the global stage has claimed another victory after its stock market overtook Germany to become the seventh largest in the world.

The Asian giant edged past the equity market of Europe’s largest economy for the first time in seven years, according to data compiled by Bloomberg. That means, after the U.K. leaves the European Union in March, the bloc would have only one country -- France -- among the seven biggest markets.

The move reflects India’s positive returns this year as companies’ reliance on domestic demand enabled them to avoid the meltdown in other emerging markets spurred by Federal Reserve tightening and a trade war between the U.S. and China. It also highlights the challenges facing the EU, including its future relationship with the U.K., a standoff with Italy over budget allocations and separatist clashes in Spain.
 

India is benefitting right now from the decline in oil and other commodity prices as well as the fact its absence of a big export-oriented manufacturing sector insulates the economy from strife abroad.

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

Some of the topics discussed include: stock markets remain weak and while increasingly oversold a lot of technical damage has been sustained with an increasing number of completed top formations. Dollar and Treasuries ease, gold and yen strong, India and Indonesia exhibiting relative strength. 

The US market today is nothing like it was a century ago because of international earnings which skew the perspective of the economy the broad averages might have once been expected to deliver. Nevertheless, when the averages move in tandem it gives us a picture on what people are doing with their money.

If you look at outlooks published by the sell-side, I think that 80-85% percent of what I read is looking for a weaker dollar,” said Ed Al-Hussainy, currency strategist at Columbia Threadneedle Investments. “And in my experience, when all the forecasts are looking the same way, the currency generally doesn’t behave the way these forecasts predict it will.”

The narrative for dollar bears is roughly as follows: The U.S. can’t keep up its better-than-everyone-else economic performance. America’s growth rate will get closer to the rest of the world, the Fed will stop or slow interest-rate hikes and the advantage an investor gets from holding dollars will diminish.

However, this story of global growth convergence may sound familiar to those who have seen it trip up forecasters before.

Around this time last year, the prevailing view was bearish on the dollar for similar reasons, and the median forecaster in a Bloomberg survey thought the greenback would slide to $1.21 against the euro from $1.18, the spot price at the time.

Instead, the dollar rallied to $1.14. (For the record, Norddeutsche Landesbank and Sumitomo Mitsui Trust Bank predicted a move to $1.14 late last year.)

The Fed thinks it is going to be able to raise rates twice next year and continue on its balance sheet run off. That is the primary reason to be bullish of the Dollar. The stock and bond markets are signaling investors are unwilling to give much credence to that view.