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March 30 2017

Commentary by David Fuller

The Markets Now

We filled the Morrison Room on Monday with several people from overseas and far more delegates from across the UK than London.  We are fortunate to have experienced delegates and we all learn more thanks to their contributions.

March 30 2017

Commentary by Eoin Treacy

March 30 2017

Commentary by Eoin Treacy

Euro-Pound Hedging Costs Rise on Brexit Trigger, French Election

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

The premium on one-month options over the rate of actual market swings remains near a 10-week high set on Tuesday. It may increase further should Brexit-related negativity be less than feared in the near term, which would reduce realized volatility, and also as the implied rate should rise on capturing the second round of the French elections due May 7.

Realized volatility could find support as the euro-pound pair’s prospects look increasingly bearish on charts, with current market positioning significantly skewed toward sterling declines. Leveraged net short positions in the pound this month are at the highest level since November.

Not all investors have given up on the pound, with the British economy performing better than expected. BlackRock Inc., which reduced some of its exposure to sterling ahead of the triggering of Article 50, has said it is still marginally long as an expected slowdown of the U.K. hasn’t materialized.

With the latest reports suggesting that the European Central Bank isn’t anywhere close to reducing economic stimulus, a short-squeeze on the pound could materialize.

 

Eoin Treacy's view -

Now that Article 50 of the Nice Treaty has been triggered there are at least three big questions outstanding with regard to the Pound and the Euro. 

How willing is the Bank of England to run hot on inflation with the economy at full employment and economic growth continuing to surprise on the upside? 1-year notes yields pulled back today suggesting investors are less inclined to think an interest rate hike is anywhere on the horizon. 

 



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March 30 2017

Commentary by Eoin Treacy

As Britain Exits, India Gets Single-Market Religion

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

Currently, selling across the borders of India's 29 states means paying a central sales levy, which can't be set off against tax paid on raw materials procured from within a company's home jurisdiction. Those input credits will now be available under a GST.

This would do two things: One, given enough competition, most manufactured goods should get cheaper, stoking demand. Two, more companies will want to engage in interstate commerce, which they avoid at present by moving goods (without selling) to their own small, inefficient warehouses around the country.

Smaller Indian industrial firms -- those with less than $1 billion in revenue -- end up carrying more than five times their annual sales as inventory, compared with just 36 percent in China. A narrowing of this gap would boost profitability. More centralized warehousing would also boost demand for higher- tonnage trucks made by Tata Motors Ltd. and Volvo AB. 

But GST is also causing some anxiety. As Gadfly wrote last year, India is planning to employ Jeff Bezos of Amazon Inc. as its tax collector. All e-commerce marketplaces will deduct 2 percent from what they pay sellers of merchandise and deposit the money with the government. Sellers would then have to claim input-tax credits. The increase in working capital may be problematic for small businesses working on thin margins. Amazon India estimates that 180,000 jobs could be at risk.

 

Eoin Treacy's view -

India has a dismal record of collecting taxes which has led to all manner of levies on transactions to pad out state coffers. This has created an environment where business is penalised and interstate trade is less appealing than attempting to embark on overseas expansion. 



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March 30 2017

Commentary by Eoin Treacy

The Great Nevada Lithium Rush to Fuel the New Economy

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

Although electric vehicle adoption has been slower in the U.S. than expected, the price of battery packs has been dropping fast, to the point that auto industry observers see electric cars as poised to become cost-competitive with gas-powered vehicles—and thus to become popular outside the specialty markets of luxury buyers and those seeking green cred. Tesla’s soon-to-arrive Model 3 and the Chevy Bolt now in dealerships are priced at about $30,000 after subsidies, but a battery assembly that a few years ago might have cost Tesla $300 per kilowatt hour (a Model S uses 60 to 90 kilowatt hours’ worth of lithium ion batteries) today costs General Motors $145 per kilowatt hour for its Bolt. And the figure is hurtling toward $100, the number that HSBC Securities (USA) Inc. and consultant Wood Mackenzie Ltd. agree will make electric vehicles as cheap as gas-powered cars, freeing mass-market EVs from their current dependence on subsidies.

Eoin Treacy's view -

Lithium represents a “supply inelasticity meets rising demand” market. Higher prices are having the anticipated effect of encouraging investment in new supply but it takes time to build a brine or mining operation and the vagaries of developing operations in Argentina, Chile and Bolivia represent challenges for newcomers to the sector. That is why some smaller companies are focusing on more expensive plays closer to home such as in Nevada. China is also the fourth largest producer of lithium and its ability to achieve scale quickly in terms of manufacturing represents a significant wild card for the sector. 



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March 29 2017

Commentary by David Fuller

Britain is the Least of European Problems

The European Union is encircled on the outside, split three ways on the inside, and is saddled with a corrosive currency union that is still not established on workable foundations and is likely to lurch from crisis to crisis until patience is exhausted.

Europe’s economic “Lost Decade”, and the strategic consequences that stem partly from this failure, have emboldened enemies and turned the Continent into a dangerous neighbourhood. The EU now badly needs a friend on its Atlantic flank.

While it would be undignified for any British government to exploit these circumstances (and Theresa May is certainly not doing so) this is the diplomatic and military reality as Britain triggers Article 50.

Along an expanding arc across the East, the EU faces a pact of autocrats. Russia and Turkey are moving closer to an outright alliance - an ideological hybrid like Molotov-Ribbentrop - that cuts at the heart of Nato. Both are openly at war with the post-Second World War liberal order.

The Kremlin is meddling in the Baltics, the Balkans, and the EU’s internal democracies. Vladimir Putin acquired a military edge during the energy boom - when the EU was disarming to meet austerity targets - and now enjoys a window of opportunity to extract maximum advantage.

In the West, the EU faces Donald Trump. This is a US president who refused to shake the hand of German Chancellor Angela Merkel. For the first time since the launch of the European project in the 1950s, the US no longer sees the EU as an asset in the diplomatic equation. Many in the White House would happily see it broken up.

This means that Washington will no longer allow the eurozone to use, or misuse, the International Monetary Fund for its own internal purposes. The implications are already apparent in talks over Greece, but they do not stop there.

It would be lamentable statecraft for EU leaders to pick a fight with Britain in these circumstances. For all the noise over Brexit, the UK is really the least of their problems. A clash would be worse than futile, as Italian premier Paulo Gentiloni said in London. Key figures in Germany, Poland, and Spain have repeatedly made the same point.

As the initial bitterness over Brexit fades, EU leaders are pleasantly surprised to learn that they, like many, misunderstood the referendum. Britain is not resiling in any way from Western liberal principles. It upholds all its strategic commitments to Europe through Nato, and is stepping up its defence EU’s eastern border with infantry and aircraft; it remains a champion of global free trade (more so than the EU itself); it has stuck by its climate pledges.

The country does not have a populist government. The Prime Minister could hardly be more cautious and proper, a child of the vicarage. She has defended the European cause in US Republican circles, almost as if she were its ambassador. Her cordial overtures have for the most part been received well in EU capitals and the upper echelons of the Commission.

The constitutional caveat, of course, is that Britain will act as an independent nation. It cannot accept the permanent jurisdiction of the European Court over almost all areas of UK law and policy, the baneful and masked consequence of the Lisbon Treaty.

It was always on the cards that the UK would have to extract itself from a venture that spends most of its energy trying to hold the euro together. Monetary union must evolve into a full-fledged federal state, with a single EMU treasury, fiscal system, and government, if it is to survive. Britain obviously cannot be part of such a structure. Trying to obfuscate this constitutional fact helps nobody.

In short, nine months after the referendum, Europe’s leaders are reconciled to the necessity of separation. The debate has moved beyond the false dichotomy of soft and hard Brexits. Most welcome the clarity of British withdrawal from the single market, recognising that it may be healthier for both sides than a messy fudge based on the hybrid Norwegian model. Scotland’s Nicola Sturgeon is barking up the wrong tree if she really thinks that the EU is pushing hard for Brexit Britain to stay in the single market.

There are, of course, discordant notes, especially in France, where much of the political elite is stuck in a time-warp. Emmanuel Macron, the electoral boy-wonder, offers little beyond ideological pedantry and the old EU Catechism when it comes to Brexit.

He is apt to dictate absolutist terms with an imperial tone. No such terms are imposed on Canada in its trade pact with the EU, and for obvious reasons: Canada is an independent state.

I doubt he will succeed in trying to chastise Britain since he also wants an unbreakable “Franco-German position” on Article 50 talks, and Germany has different interests. The old Rhineland axis was in any case rendered obsolete by the fall of the Berlin Wall. Any attempt to reconstitute it will merely underscore France’s painfully subordinate role in what has become (to the dismay of the German people) a German Europe. Better for France to hang on to the tight Franco-British defence and security pact for a little strategic ballast.

With or without Brexit, the EU has to keep living with the error of monetary union, so destructive that one leading voice of the French establishment has written a book, La Fin du Rêve Européen, calling for the euro to be broken up in order to save what remains of the European project.

The eurozone is horribly split into the creditor and debtors blocs, each with clashing macro-economic interests, and each clinging to their own narrative of what happened in the debt crisis. Quantitative easing by the European Central Bank and a cyclical economic upturn have masked the tension over the past two years, but the underlying North-South rift is still there.

The ECB will have to taper and ultimately end its bond purchases as global reflation builds. The markets know that once Frankfurt rolls back emergency stimulus, as it must do to avert a political storm in Germany over rising prices, Italy, Portugal, and Spain will lose a buyer-of-last-resort for their debt.

The core problem remains: the conflicting needs of Germany and the South cannot be reconciled within EMU. The gap in competitiveness and debt burdens is too great. They should not be sharing a currency union at all.

As matters now stand, Italy’s anti-EU Five Star movement leads the polls by a six-point margin with 32pc of the vote. The four anti-euro parties are likely to win over 50pc of the seats between them in the Italian parliament in the elections early next year.

David Fuller's view -

This is one of the most realistic and comprehensive assessments of the European Union’s political situation that we are likely to see, in my opinion.  Moreover, it is discussed in the context of the Western world. 

What is not mentioned in this fine article above, is the credit which the European Union has been generously given by other commentators, not least from across the Atlantic, for maintaining post WWII peace throughout much of Europe. 

I will quibble with this because the EU was not actually created before 1993, following the Maastricht Treaty, otherwise known as the Treaty on the European Union.  Considerably earlier, The European Economic Community (EEC) was created in 1957.  It was more familiarly known as the Common Market and also the European Free Trade Association (EFTA).

Peace within Europe or any other global region, I suggest, is more likely maintained by independent, democratic governments with successful economies.  This is what the European Common Market / EEC / EFTA, actually achieved, to their considerable credit. 

Sadly, the Maastricht Treaty’s creation of the EU in 1993 marked the beginning of the end for Continental Europe’s self-governing and mostly economically successful countries, which were being homogenised in what became the biggest bureaucracy ever created. 

The introduction of the Euro in 1999, purely for political reasons, has been nothing short of a tragedy in term of declining economic performance and rising unemployment.  Moreover, this failing system has become fractious, not only among European countries but also within individual nations, leading to populist uprisings.

What about Europe’s financial markets?

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



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March 29 2017

Commentary by David Fuller

The Markets Now

We filled the Morrison Room on Monday with several people from overseas and far more delegates from across the UK than London.  We are fortunate to have experienced delegates and we all learn more thanks to their contributions.

March 29 2017

Commentary by Eoin Treacy

March 29 2017

Commentary by Eoin Treacy

Britain's Article 50 letter: The full text of the Brexit trigger

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

The United Kingdom wants to agree with the European Union a deep and special partnership that takes in both economic and security cooperation. To achieve this, we believe it is necessary to agree the terms of our future partnership alongside those of our withdrawal from the EU.

If, however, we leave the European Union without an agreement the default position is that we would have to trade on World Trade Organisation terms. In security terms a failure to reach agreement would mean our cooperation in the fight against crime and terrorism would be weakened. In this kind of scenario, both the United Kingdom and the European Union would of course cope with the change, but it is not the outcome that either side should seek. We must therefore work hard to avoid that outcome.

It is for these reasons that we want to be able to agree a deep and special partnership, taking in both economic and security cooperation, but it is also because we want to play our part in making sure that Europe remains strong and prosperous and able to lead in the world, projecting its values and defending itself from security threats. And we want the United Kingdom to play its full part in realising that vision for our continent.

Eoin Treacy's view -

The UK is not applying for membership of the EEA and is going for a free trade agreement with the EU. That’s a bold step and will require active engagement from the EU if it is to have any hope of being achieved. The question of money is going to be front and centre. The EU now has a hole in its budget in the order of €15 billion a year. Germany wants the UK to commit to paying up before negotiations start. It would be lunacy for the UK to agree to that since the issue of the EU budget is one of its trump cards (pardon the pun). 



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March 29 2017

Commentary by Eoin Treacy

Email of the day on hydrogen versus electric vehicles

I hope you are well. I was wondering what you thought of this article (Japan gambles on Toyota’s hydrogen powered car) about Toyota’s lack of faith in electric vehicles because 'a battery breakthrough is not in prospect'

Eoin Treacy's view -

Thank you for this email raising an important issue regarding energy density. Here is a section from the article:

Fuel cell vehicles, by contrast, need all the manufacturing skills of a car company. “From the industrial strategy point of view, fuel cell technology is extremely difficult, it’s in the world of chemistry not machinery,” says Hiroshi Katayama at the advanced energy systems and structure division of the ministry of economy, trade and industry (METI). If auto technology goes down the hydrogen path, Japan will be well placed. But if it doesn’t, Tokyo will have made a major miscalculation.

Toyota’s faith in hydrogen is best understood by looking at a car it never made: a pure electric vehicle. For the 20 years since it invented the Prius hybrid, Toyota has been the carmaker best-placed to launch a fully electric vehicle. It had the batteries, the motors and the power electronics but chose not to deploy them because of concerns about range limits, refuelling time and the risk of batteries degrading as they age.

It has announced plans for its own electric vehicle to exploit the demand from the premium segment opened up by Tesla and to meet emissions standards in the US and China. Yet Toyota’s fundamental doubts about battery-powered vehicles have not gone away.

The long dreamt-of Sakichi battery would store energy at the same density as the chemical bonds in petrol: roughly 10,000 watt-hours per litre — enough to power a family car for hundreds of kilometres on a single tank. The low energy density of the best batteries, about one-twentieth that of petrol, is why today’s electric cars have limited range.



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March 29 2017

Commentary by Eoin Treacy

Erdogan Races Against the Dollar in Campaign for Unrivaled Power

This article by Selcan Hacaoglu and Onur Ant for Bloomberg may be of interest to subscribers. Here is a section:

Turkish President Recep Tayyip Erdogan has lambasted friend and foe alike in a campaign for vast new powers, but his political fate may hang on the one thing he’s stopped carping about: the price of money.

With the April 16 vote on strengthening the presidency too close for pollsters to call, Erdogan is no longer berating the central bank and commercial lenders over borrowing costs they’ve pushed to a five-year high. He’s betting any measures taken to arrest the lira’s plunge will pay off at the ballot box.

The lira’s value versus the dollar is more than just a pocketbook issue in Turkey, where millions of voters still remember the abrupt devaluations that ravaged their livelihoods in past decades and view the exchange rate as the most important indicator of the nation’s economic health.

Turkey’s trade deficit is the biggest of all top 50 economies relative to output and most of its imports and foreign debt are priced in dollars, so sharp declines in the lira can be ruinous for legions of entrepreneurs like Ramazan Saglam, who owns a print shop in a working-class neighborhood of Ankara.

“I bitterly recall when the dollar jumped in 1994 and 2001 -- my business collapsed both times,” Saglam said. “I’m supporting the new presidential system wholeheartedly because I don’t want to go bankrupt again.”

Eoin Treacy's view -

Turkey is a NATO member, it controls the Bosphorus so it’s in a strategic position geopolitically and it is flirting with becoming an outright dictatorship. That represents an uncomfortable problem for its NATO allies who will be all too aware that allowing Turkey to migrate towards Russia’s sphere of influence would be a serious loss. In addition, refugees represent an election catalyst for half a dozen European countries to which Turkey holds the key. That means there is little the EU can do but protest at the trend toward despotism. 



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March 28 2017

Commentary by Eoin Treacy

March 28 2017

Commentary by Eoin Treacy

Six Impossible Things Before Breakfast

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

It appears that asset markets are priced as if secular stagnation were a certainty. Certainty is a particularly dangerous assumption when it comes to investing. As Voltaire stated, “Doubt is not a pleasant condition, but certainty is absurd.”

In order to believe that asset market pricing makes sense, I think you need to hold any number of “impossible” (by which I mean at best improbable, and at worst truly impossible) things to be true. This is certainly a different sort of experience from the bubble manias that Ben mentioned in the opening quotation, which are parsimoniously captured by Jeremy’s definition of bubbles – “excellent fundamentals, irrationally extrapolated.” This isn’t a mania in that sense. We aren’t seeing the insane behaviour that we saw during episodes like the Japanese land and equity bubble of the late 1980s, or the TMT bubble of the late 90s, at least not at the micro level. However, investors shouldn’t forget that the S&P 500 currently stands at a Shiller P/E of just over 28x – the third highest in history (see Exhibit 17).

The only two times that level was surpassed occurred in 1929 and in the run-up to the TMT bubble. Strangely enough, we aren’t hearing many exhortations to buy equities because it is just like 1929 or 1999. Today’s “believers” are more “sophisticated” than the “simple-minded maniacs” who drove some of the other well-known bubbles of history. But it would be foolish to conflate sophistication with correctness. Current arguments as to why this time is different are cloaked in the economics of secular stagnation and standard finance work horses like the equity risk premium model. Whilst these may lend a veneer of respectability to those dangerous words, taking arguments at face value without considering the evidence seems to me, at least, to be a common link with previous bubbles.  

 

Eoin Treacy's view -

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

I find myself agreeing with a great deal of what James Montier is arguing. I believe that it does not make sense to take a secular trend which is obviously at a highly developed stage and extrapolate it into infinity. That is just not how markets work. Yet that is exactly what we see in the bond markets. 



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March 28 2017

Commentary by Eoin Treacy

The next move after a weak March could be a useful rally

Thanks to a subscriber for this report by Warwick Grigor for Far East Capital Limited focusing on Australia. Here is a section on the property market:

Have you noticed how much debate there is over so many issues that we confront? It is usually a face-off between those who can see an issue clearly in one corner, and those with vested interests in the other. As an example, the global warming debate is one that has been ongoing for a long time largely due to the inability to achieve consensus amongst scientists and the complications of obtaining meaningful measurements. But something that should be less controversial is the state of the property market in Australia. Do we have a bubble or don't we?

We do have an extraordinarily strong market that cannot go on forever. The bigger the cycle upturn the harder the fall on the other end. The collapse of the mining and resources boom was proof of that. After every party there is a hangover. We are seeing many initiatives being proposed, and some undertaken, that are designed to take the heat out of the market. Yet there will still be pain in due course especially for the inexperienced property investors who have been dragged into euphoria of booming property prices.

In the meantime we see arguments for and against a bubble and an impending collapse. Perhaps we should be focusing on sensible measures rather than trying to do a King Canute. You don't have to wait for direction from the government or the regulators in order to think ahead. Start getting your finances in order now so you can weather the storm.

 

Eoin Treacy's view -

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

Australian government bond yields might not be as low as those in Europe, Japan or the USA but they have been trending lower for just as long. Relative seclusion from the credit crisis in the USA and sovereign debt and banking crisis in Europe as well as proximity to the commodity demand growth markets of Asia has allowed Australia to go a long time without a recession. That suggests what happens in China is likely to have much greater influence on Australia than anything that goes on in North America or Europe. 



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March 28 2017

Commentary by Eoin Treacy

A startup says it can now produce enough for 4 million meatless burgers a month

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

Brown and his team will have plenty of competition. In restaurants alone, more than 5 billion lb of ground beef are consumed every year. And then there’s the other meat-alternative companies that have charged into the space. Beyond Meat is another high-profile faux-beef company that’s looking to make inroads into the retail market, and Memphis Meats announced last week it created the world’s first meatless chicken tenders made from self-reproducing cells.

Until now, Impossible Foods has slowly entered the market by popping up in high-profile restaurants in New York City and San Francisco. The goal, though, is to get in front of the most devout meat lovers. In fact, that’s part of Brown’s metric for success. Forget the people obsessed with vegetables.

“Our definition of success is: we score zero points if a vegan or vegetarian buys our burger,” Brown says. “The more of a meat lover they are, the more they are our target customer.”

The company’s market research has shown that even the most devoted American meat eaters will never stop wanting it—but they would be interested in a product that tastes just as good and is also made of plants, Brown says. In other words, a product that comes from an animal is not part of the intrinsic value of a burger. It’s more about how delicious, nutritious, and affordable that product is.

 

Eoin Treacy's view -

Meat is big business but it is also highly water intensive and over consumption can contribute to a number of health issues. If every burger is a quarter-pounder then Impossible Burger is going after about 1% of the restaurant meat market in its first year. That’s an ambitious target and the company’s success will come down to both taste and cost. If the new breeds of veggie burgers have the same taste and texture as beef and are also cheaper, that represents a significant threat to the farming sector quite apart from the trend towards veganism. 



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March 27 2017

Commentary by Eoin Treacy

March 27 2017

Commentary by Eoin Treacy

Decarbonisation

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

Investors should be particularly sensitive to indicators that are associated with being in a misaligned world. This analysis can be applied both to sunk capital and new investment. For companies with low growth capex, margins on existing production will clearly be more important than incremental value creation or destruction on new investment. For high growth companies, returns relative to the cost of capital on new investment will be more critical. 

Investors should be wary of high-carbon companies where decarbonisation is likely to be demand driven (for example coal generators facing lower production as subsidised renewable production is built). However there may be value opportunities where decarbonisation is supply driven (for example restrictions on coal production, or forced coal closures could increase margins on remaining capacity even while overall volumes drop). 

Investors should look for low carbon companies in sectors where supply constraints are likely to be more significant than demand constraints as volumes grow. They should be wary of sectors where the mechanisms for growth are likely to drive down returns (for example long asset lives with technological progress and short-term market pricing). 

By understanding the positioning of companies in the matrix of volume and value, investors can make an informed judgment. Market valuations can be set against current opportunities and future expectations. Shareholder engagement can help ensure the right corporate strategy

Eoin Treacy's view -

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

Governments need revenue so regardless of what one’s feelings are with regard to climate there is a strong potential for higher taxes, particularly in Europe which is a major fossil fuel importer. The impetus for similar taxes in energy producing nations, not least the USA, is less compelling.  



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March 27 2017

Commentary by Eoin Treacy

Growing International Opportunity for Drug Development

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

We believe estimated prevalence is the best measure of the overall cancer market’s size. We have estimated future prevalence for 2014-2018 (Tables 3, 6, 9). To arrive at these estimates, we used the 2012 or 2013 estimate and added estimated incidence (Tables 1, 4, 7) and subtracted estimated deaths (Tables 2, 5, 8) for each year. Exceptions included cancers that did not have prevalence data for 2012 or 2013. In cases where 2013 prevalence was not available for US patients, we used the 2009 prevalence estimate for 2013 or the incidence estimate. For these same exceptions outside the United States, we estimated 2012 or 2013 prevalence as a ratio to incidence that was consistent with US data.

Based on prevalence, we estimate the overall market for cancer therapies in the United States is slightly over 14 million patients growing at 7% per year. In Europe, we estimate the overall market is composed of 8 million patients and is growing at 16% per year. In Japan, we estimate the market is nearly 2 million patients and is growing 13% per year. We believe incidence is the best measure of front-line (newly treated) cancer market’s size (Tables 1, 4, 7). Therefore, we conclude the market for front-line therapies in the US is currently 2 million patients and is decreasing at 8% per year. In Europe, we estimate the market for front-line therapies is approximately 3.1 million patients and is growing at 4.5% per year. In Japan, we estimate the market for front-line therapies is currently 680,000 patients and is growing at 2% per year.

We believe the best measure of the market size for second-line and greater (relapsed/refractory) therapies is prevalence less incidence, which should account for all living patients who are not newly diagnosed. Therefore, we conclude the market for relapsed therapies in the US is currently 15 million patients and is growing at 10% per year. In Europe, we estimate the market for relapsed therapies is approximately 10.8 million patients and is growing at 11% per year. In Japan, we estimate the market for relapsed therapies is currently 2.1 million patients and is growing at 8% per year. 

Eoin Treacy's view -

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

Cancer is a blight on humanity. Because it is based on what is in many respects a random mutation of genes, it avoids notice by the body’s immune system. The net result is that there are many different types of cancer but even within individual groups no two are the same. That represents an acute challenge for drug therapies because while the total market is large, individual therapies are required to treat every patient. Therefore personalised medicine is likely to emerge first in cancer treatment which means oncology represents an important market to monitor. 



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March 27 2017

Commentary by Eoin Treacy

Citigroup Canary in the Coal Mine

Thanks to a subscriber for this article by Christopher Whalen for theinstitutionalriskanalyst.com which may be of interest. Here is a section:

Citi’s equally large credit card book – in nominal terms the most profitable part of the business – has a gross spread of almost 1,100bp, but also reported over 300bp in defaults in 2016.  Still, with a 800bp net margin before SG&A, credit cards are Citi’s best business.  Indeed, Citi’s payment processing and credit card business are the crown jewels of the franchise.  If there were some way to sell the rest of the Citi operations, the payments processing and credit card business could be worth a multiple of Citi’s current equity market valuation. 

The trouble with Citi and many other US banks is that their business are dominated by consumer credit and real estate exposures, with little in the way of pure C&I loans.  When you look at most US banks, the vast majority of the exposures are related to real estate, directly or indirectly.  Thus when the Fed manipulates asset prices in a desperate effort to fuel economic growth, they create future credit problems for banks.  As our friend Alex Pollock of R Street Institute wrote in American Banker last year:

“[T]he biggest banking change during the last 60 years is… the dramatic shift to real estate finance and thus real estate risk, as the dominant factor in the balance sheet of the entire banking system. It is the evolution of the banking system from being principally business banks to being principally real estate banks.”

So whether a bank calls the exposure C&I or commercial real estate, at the end of the day most of the loans on the books of US banks have a large degree of correlation to the US real estate market.  And thanks to Janet Yellen and the folks at the FOMC, the US market is now poised for a substantial credit correction as inflated prices for commercial real estate and related C&I exposures come back into alignment with the underlying economics of the properties.  Net charge offs for the $1.9 trillion in C&I loans held by all US banks reached 0.5% at the end of 2016, the highest rate since 2012.

 

Eoin Treacy's view -

Commercial real estate has been directly influenced by the extraordinary monetary policies employed by the Fed and other central banks. I don’t think it is an exaggeration to conclude that rising rents have been a contributing factor in the migration of businesses online and the denuding of the high street and malls of active businesses. 



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March 24 2017

Commentary by David Fuller

Time for Trump to Learn From Reagan

It’s crunch time in America. The financial markets surged on Donald Trump’s election, on the assumption that his economic policies would, on balance, be pro-growth. Yes, Wall Street rightly loathes protectionism and the tech industry in particular is opposed to proposed restrictions on immigration – but business as a whole hopes that the President’s policies on tax, healthcare, spending, banking, regulation, energy, infrastructure and, maybe even in time, monetary policy would be neo-Reaganite.

It’s still too soon to tell how all of this will pan out, but time is running out for the Trump administration on the economic front. It needs to get a lot more done a lot more quickly. There is, of course, healthcare reform. But the first real, tangible piece of good news has come from a very different area: there has now been some genuine movement on energy, with the Keystone pipeline authorisation. That is good news: the US needs to embrace all kinds of domestic energy production, and other countries should follow suit. The shale revolution 
has already transformed the US economy, which would be in a far weaker place without it.

But while Trump has delivered on energy, he will need to turbocharge the rest of his agenda if he wants to keep on side those in business and Wall Street who thought that, despite his many downsides, the new president would end up improving the US economy overall.

Reagan ought to be the Republican role model: a true believer in free market economics, he was a brilliant, lucid and powerful advocate for individual liberty. He cut marginal tax rates and simplified the tax system, while slashing the number of pages in the Federal Register from 70,000 in 1980 to 45,000 in 1986, as a note by Adam Slater from Oxford Economics reminds us.

He did what very few politicians manage: he genuinely took an axe to red tape, deregulated extensively and simplified what rules remained. By contrast, the regulatory burden rocketed under Barack Obama. The Fraser Institute’s index of economic freedom confirms that America became a more free-market and economically liberal economy during the 1980s; in recent years, it has fallen back drastically.

David Fuller's view -

Many of Trump’s economic policies are not that different from Reagan’s.  However, Trump should have prioritised economic policies from the first days of his administration, rather than wasting his initiative on political disputes and repealing Obama’s healthcare programme.  This has been politically divisive, while policies for economic stimulus would have had much more cross-party support.  They may be harder to pass in future.     

Ironically, perhaps today’s realisation by Trump and Paul Ryan that they do not currently have sufficient support to repeal the Affordable Care Act cause them to refocus on policies for increasing GDP.



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March 24 2017

Commentary by David Fuller

AP Analysis: Trump Young Presidency Perilously Adrift

Here is the opening of this assessment by The Associated Press:

WASHINGTON — Just two months in, Donald Trump's presidency is perilously adrift.

His first major foray into legislating imploded Friday when House Republicans abandoned a White House-backed health care bill, resisting days of cajoling and arm-twisting from Trump himself. Aides who had confidently touted Trump as the deal's "closer" were left bemoaning the limits of the presidency.

"At the end of the day, you can't force somebody to do something," White House spokesman Sean Spicer said.

On its own, the health care bill's collapse was a stunning rejection of a new president by his own party. And for Trump, the defeat comes with an especially strong sting. The president who campaigned by promising "so much winning," has so far been beset by a steady parade of the opposite. With each setback and sidetrack, comes more concern about whether Trump, the outsider turned president, is capable of governing.

"You can't just come in and steamroll everybody," said Bruce Miroff, a professor of American politics and the presidency at the State University of New York at Albany. "Most people have a modest understanding of how complicated the presidency is. They think leadership is giving orders and being bold. But the federal government is much more complicated, above all because the Constitution set it up that way."

David Fuller's view -

This latest article is very good and expands on some of the points made in response to earlier reports above.

The US economy is well known for performing despite the background of ineffective central governance. Nevertheless, it would be better if this was not put to the test too frequently. US GDP growth would be easier to increase and sustain with an economically savvy White House which also had a chance of uniting the country, as we saw with Ronald Reagan.   



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March 24 2017

Commentary by David Fuller

Moodys Warns Scotland Exit Could Leave Country Facing Junk Rating

Here is a brief section of this story from Investment Week:

Commenting on the potential for Scotland to become independent, Colin Ellis, chief credit officer for EMEA at Moody's, has warned the country would face "downward pressure" on its finances in the event of independence, according to The Times.

The warning comes as lower oil price, currently sitting at around $55 a barrel, have left Scotland facing a large budget deficit and worse off financially than before the previous referendum in September 2014. 

Back in 2014, when the oil price was above $100, an independent Scotland could have received a rating between A and Baa, placing it within the investment grade bracket.

However, Moody's Ellis said current circumstances could see Scotland's rating drop to Ba, a junk status (also known as sub-investment grade), which would place it on a par with Azerbaijan and Guatemala.

David Fuller's view -

Governance is Everything has long been a mantra at this service.  Unfortunately for Scotland, it has the worst governance in the UK, evidenced by everything from its weak economic performance, rising debt and deteriorating educational system, documented in earlier articles posted on this site. 

That will eventually change through the democratic process, although not as quickly as it might with stronger opposition.



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March 24 2017

Commentary by David Fuller

The Markets Now

Monday’s seminar in The Caledonian Club’s excellent Morrison Room on the ground floor is now fully booked.

David Fuller's view -

We have another interesting list of experienced delegates and certainly not just from London. In fact, they are attending from far and wide. 

I am looking forward to another lively and enjoyable evening, which will now include a short presentation from a fourth speaker well known to Iain Little.

Among markets, technology has never been more interesting in our lifetime so Charles Elliott’s latest comments will be most welcome. 

 

Please note: I will be away on Monday with The Markets Now preparations and also on Tuesday for a minor corrective medical procedure. 



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March 24 2017

Commentary by David Fuller

GOP Health-Care Bill: House Republican Leaders Abruptly Pull Their Rewrite of the Health-Care Law

House Republican leaders abruptly pulled a Republican rewrite of the nation’s health-care system from consideration on Friday, a dramatic acknowledgment that they are so far unable to repeal the Affordable Care Act.

“We just pulled it,” President Trump told the Washington Post in a telephone interview.

The decision came a day after Trump delivered an ultimatum to lawmakers — and represented multiple failures for the new president and House Speaker Paul D. Ryan (R-Wis.).

The decision means the Affordable Care Act remains in place, at least for now, and a major GOP campaign promise goes unfulfilled. It also casts doubt on the GOP’s ability to govern and to advance other high-stakes agenda items, including tax reform and infrastructure spending. Ryan is still without a signature achievement as speaker — and the defeat undermines Trump’s image as a skilled dealmaker willing to strike compromises to push his agenda forward.

“I don’t blame Paul,” Trump said, referring to Ryan.

Rep. Bradley Byrne (R-Ala.), who planned to vote for the legislation, said that Friday would have been the “first big vote in the presidency of Donald Trump. I think it’s a statement, not just about him and the administration, but about the Republican Party and where we’re headed.”

“So much about political power is about perception. And if the perception is that you can’t get your first big initiative done, then that hurts the perceptions down the road about your ability to get other big things done,” Byrne said in an interview before the decision.

The decision came hours after Ryan visited the White House to warn Trump that despite days of intense negotiations and sales pitches to skeptical members, the legislation lacked the votes to pass.

Trump had personally lobbied 120 lawmakers, either in person or on the phone, White House press secretary Sean Spicer reminded reporters on Friday. The president had “left everything on the field,” Spicer said.

David Fuller's view -

Trump has a steep learning curve as President.  This is not surprising as he has never held public office before.  He needs to learn how to be a better politician, including trying to reverse his declining ratings with the public. That will not be easy, although it is very important.  He also needs to ensure that his next important bill passes. 



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March 24 2017

Commentary by Eoin Treacy

March 24 2017

Commentary by Eoin Treacy

Populism: The Phenomenon

Thanks to a subscriber for this report by Ray Dalio for Bridgewater which expounds on a number of examples of populism over the last century. Here is a section:

Populism is a political and social phenomenon that arises from the common man, typically not well-educated, being fed up with 1) wealth and opportunity gaps, 2) perceived cultural threats from those with different values in the country and from outsiders, 3) the “establishment elites” in positions of power, and 4) government not working effectively for them. These sentiments lead that constituency to put strong leaders in power. Populist leaders are typically confrontational rather than collaborative and exclusive rather than inclusive. As a result, conflicts typically occur between opposing factions (usually the economic and socially left versus the right), both within the country and between countries. These conflicts typically become progressively more forceful in selfreinforcing ways.

Within countries, conflicts often lead to disorder (e.g., strikes and protests) that prompt stronger reactions and the growing pressure to more forcefully regain order by suppressing the other side. Influencing and, in some cases, controlling the media typically becomes an important aspect of engaging in the conflicts. In some cases, these conflicts have led to civil wars. Such conflicts have led a number of democracies to become dictatorships to bring order to the disorder that results from these conflicts. Between countries, conflicts typically occur because populist leaders’ natures are more confrontational than cooperative and because conflicts with other countries help to unify support for the leadership within their countries. 

In other words, populism is a rebellion of the common man against the elites and, to some extent, against the system. The rebellion and the conflict that comes with it occur in varying degrees. Sometimes the system bends with it and sometimes the system breaks. Whether it bends or breaks in response to this rebellion and conflict depends on how flexible and well established the system is. It also seems to depend on how reasonable and respectful of the system the populists who gain power are. 

In monitoring the early-stage development of populist regimes, the most important thing to watch is how conflict is handled—whether the opposing forces can coexist to make progress or whether they increasingly “go to war” to block and hurt each other and cause gridlock.

Classic populist economic policies include protectionism, nationalism, increased infrastructure building, increased military spending, greater budget deficits, and, quite often, capital controls.
In the period between the two great wars (i.e., the 1920s-30s), most major countries were swept away by populism, and it drove world history more than any other force. The previously mentioned sentiments by the common man put into power populist leaders in all major countries except the United States and the UK (though we’d consider Franklin D. Roosevelt to be a quasi-populist, for reasons described below). Disorder and conflict between the left and the right (e.g., strikes that shut down operations, policies meant to undermine the opposition and the press, etc.) prompted democracies in Italy, Germany, Spain, and Japan to choose dictatorships because collective/inclusive decision making was perceived as tolerance for behaviors that undermined order, so autocratic leaders were given dictatorial powers to gain control. In some cases (like Spain), strife between those of conflicting ideologies led to civil war. In the US and UK, prominent populist leaders emerged as national figures (Oswald Mosley, Father Charles Coughlin, Huey Long), though they didn’t take control from mainstream parties. 

 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area. Fiscal austerity is a hard pill to swallow. Whether it is for people who lost their homes during the USA’s credit crisis or those who had wages and benefits slashed as a result of the EU’s banking and associated sovereign debt crisis. 

Generally speaking the best outcomes arise when fiscal austerity is associated with a major currency devaluation. That way the boost to competitiveness softens the economic blow while the austerity bred reforms cement the potential for future growth. 



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March 24 2017

Commentary by Eoin Treacy

Juncker Puts Price on Brexit as Italy Offers Early Trade Talks

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

“We have to calculate scientifically what the British commitments were and then the bill has to be paid,” he said.

Asked if the bill will be 50 billion pounds, which is about 58 billion euros, Juncker replied: “It’s around that.”

May plans to launch Britain on a two-year process of negotiations to quit the EU on March 29, by triggering Article 50 of the bloc’s Lisbon Treaty. The size of Britain’s exit bill will be among the first -- and most contentious -- topics for discussion, with British ministers indicating they do not believe the U.K. is liable for such a large sum.

Juncker’s statement is the clearest indication from the commission of the size of the bill, and is in line with an estimate cited by Austrian Chancellor Christian Kern last month.

So far, the EU’s chief Brexit negotiator, Michel Barnier, has argued that the terms of the divorce, including the size of the bill, must be settled first, before any negotiations over the new trading relationship between the U.K. and the EU can begin.

Britain wants talks on the exit and a new free trade deal to run simultaneously -- and its argument received a boost on Friday when the Italian government said the two sets of talks could “overlap” to some extent.

“We will be at the end of the exit negotiation and at the same time we can start the new deals on trade, and we hope also for example on security,” Italian junior minister for European Affairs Sandro Gozi said in a Bloomberg TV interview.

 

Eoin Treacy's view -

As far as I can make out the net figure for what the UK contributes to the EU every year is less than £10 billion, at least according to the figures quoted here.   Therefore, the £50 billion the EU is hoping for represents between five and seven years lost income. 



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March 24 2017

Commentary by Eoin Treacy

Email of the day on lengthy bond market top formations

We may not be done with the bull market in bonds, or at least a very extended period of ranging if this article has merit. It is publicly available so ok to post. Would appreciate your comments 

Eoin Treacy's view -

Thank you for this article which may be of interest to subscribers. I too think of the declining velocity of money as a headwind to inflationary pressures getting out of control. However this image of what they consider low interest rates, as below 4.5% is an average level over the last century rather than what might be considered low. 



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March 24 2017

Commentary by Eoin Treacy

Mubarak, Egypt's toppled Pharaoh, is free after final charges dropped

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

The overthrow of Mubarak, one of a series of military men to rule Egypt since the 1952 abolition of the monarchy, embodied the hopes of the Arab Spring uprisings that shook autocrats from Tunisia to the Gulf and briefly raised hopes of a new era of democracy and social justice.

His release takes that journey full circle, marking what his critics say is the return of the old order to Egypt, where authorities have crushed Mubarak's enemies in the Muslim Brotherhood, killing hundreds and jailing thousands, while his allies regain influence.

Another military man, Abdel Fattah al-Sisi, stepped into Mubarak's shoes in 2013 when he overthrew Mohamed Mursi, the Brotherhood official who won Egypt's first free election after the uprising.

A year later, Sisi won a presidential election in which the Brotherhood, now banned, could not participate. The liberal and leftist opposition, at the forefront of the 2011 protests in Cairo's Tahrir Square, is under pressure and in disarray.

Years of political tumult and worsening security have hit the economy, just as Mubarak always warned. Egyptians complain of empty pockets and rumbling bellies as inflation exceeds 30 percent and the government tightens its belt in return for loans from the International Monetary Fund.

 

Eoin Treacy's view -

Egypt might not have oil but it is strategically important and has a large young population. The release of Mubarak and return to a business as usual stance by the Al-Sisi administration is unlikely to do anything to quell the disaffection of protestors and it would appear to be only a matter of time before they regroup. 



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March 23 2017

Commentary by David Fuller

American Strategic Decline Is a Myth Donald Trump Continues to Peddle

Contrary to widespread belief, the US is not facing economic and strategic decline in any foreseeable future.

It had already reclaimed its superpower lead before Donald Trump swept into office vowing to make America great again. With hindsight we can see ever more clearly that the Lehman crisis was a false alarm.

Loss of dominance has long been a staple of US discourse. John Kennedy decried the ballistic "missile gap" with the Soviet Union before the 1960 election, when Russia had just four missiles and the US had thousands with explosive power equal to 1.3 million Hiroshima-sized bombs.

Ever since I began covering the US as a journalist in the early Reagan years, there have been bouts of soul-searching.  Paul Kennedy's theory of imperial over-stretch in Rise and Fall of the Great Powers was all the rage in the late 1980s, when the Washington clerisy thought Japan destined for economic leadership.

Edward Luttwack upped the ante in 1994 with Endangered American Dream, warning that the US was turning into a third world nation. This was just as the US was about establish its undisputed hegemony over the digital age.

US decline was a myth then, and remains a myth today. Putative rivals have all run into trouble or face structural limits that will be obvious within a decade. India's time has not yet come.

And:

A decade ago the US was preparing to import liquefied natural gas (LNG) on a large scale. The terminals have since switched into export hubs. American shale gas is being shipped to Europe.

The effect is to force down the market price of gas in EU, depriving Russia's Gazprom of its lockhold on prices. Lithuania's "Independence" terminal can now import LNG, eliminating dependence on the Kremlin. Poland is following suit. That strategic implications are profound.

As Goldman Sachs said this week, US shale oil can go from zero to peak output within six to nine months. It can do so on a big enough scale to hold down global crude prices, and for long enough to bleed OPEC and the Kremlin almost white.

The Permian Basin in West Texas alone could match Saudi Arabia's Ghawar field within five years, topping 5m barrels a day. Fracking technology has cut break-even costs so fast that old "super-basins" are poised for stunning revivals. It is no longer a question of whether the US will become a net oil exporter, but how soon.

While the US "manufacturing renaissance" has been patchy, cheap gas has restored the fortunes of the plastics, chemical, and glass industries. The American Chemistry Council is tracking $130bn of new investment along the Gulf Coast, expected to create 460,000 jobs by 2022. The US unemployment rate is 4.7pc, near a  half-century low

This is the recovery that Donald Trump managed to turn into a landscape of “rusted-out factories scattered like tombstones” in his dystopian inaugural address.

It is of course standard fare for opposition candidates to decry the decline of America during campaigns. What is different about President Trump is that he continues to push this line after taking office, presumably because he believes his own wild claims.

We all have to reach our own conclusions about Donald Trump. My view is that he matters less than we now think. His presidency may prove no more than a four-year embarrassment, leaving few traces.

His plans to slash science and technology funding by 20pc would indeed risk the sort of decline he rails against. But his budget is dead on arrival in Congress.

His contempt for allies and the multilateral bodies that vastly lever America's strategic power is folly but the US Senate is likely to take charge and run foreign policy on traditional lines. Grown-ups at the helm of the State, Defence, and Treasury departments will navigate the reefs. America's institutions and courts will contain Mr Trump.

David Fuller's view -

Donald Trump won the US Presidential election for two very different reasons.

1) He recognised that vast stretches of America between the East and West Coasts contained plenty of angry voters, who Hillary Clinton once described unwisely as “the deplorables”. Job losses due to accelerating technological innovation were a big problem, especially for less skilled workers.  For instance, people were working at Walmart for $9 an hour, while a little over a generation earlier their ancestors earned $30 an hour in steel mills.  That was before globalisation and competition from developing Asian economies led to many of the US’s rust belts.   

2) Most of the financial community and a considerable number of Republican business people were fed up with onerous financial regulations, high taxation and limited economic growth. The Lehman crisis was no “false alarm”, as stated above, because it could have triggered a depression without a massive monetary stimulus from the Federal Reserve and also central banks in other countries.  Unfortunately, Barack Obama was far more interested in regulation than economic stimulus.

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



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March 23 2017

Commentary by David Fuller

Europe Has Forgotten What It Means for a Nation to Govern Itself. Article 50 Will Remind Them

So it begins. This is either going to be the most tedious two years of argy-bargy, mind-numbing detail, procrastination, futile grandstanding, and empty threats ending with something that looks remarkably like the present arrangements... or it isn’t.

What could and should happen is that the UK creates not just a stunning precedent in the modern European era of a country leaving what was supposed to be an everlasting relationship, but an entirely new model of the nation state fit for the 21st century.

Europe has almost forgotten – sometimes with good historical reasons – what pride in nationality might mean, and how democratically responsive governments in touch with their populations might have something valuable to offer the world.

Ironically, the idea of the self-governing state directly answerable to its own people was lost in the terrible shame of the twentieth century’s nationalist crimes.

But the EU now finds itself harbouring a return to just the kind of populist nativism which it was designed to prevent. Will this generation of British politicians have the vision and the strength of character to re-invent nationhood? Who knows?

Until this moment, I suspect that at least some of the EU establishment doubted that Theresa May would go through with it. Presumably this is why Donald Tusk has to be given forty-eight hours to make a formal response to the announcement of the actual date: he and his colleagues must be allowed to come to terms with the reality that some political leaders mean what they say.

Yes, this is really happening. March 29th will be the first day of the rest of our lives.

David Fuller's view -

I’ve said it many times – don’t play the expensive and frustrating EU delaying game.  Leave the EU politely but quickly and without an agreement, if necessary, which can come later. 

The alternative, described by Janet Daley in her opening sentences above, would be like spending two years on a tiny desert island with Jean-Claude Junker. 



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March 23 2017

Commentary by David Fuller

The Markets Now

This seminar on Monday 27th March in The Caledonian Club’s excellent Morrison Room on the ground floor is now fully booked.

David Fuller's view -

We have another interesting list of experienced delegates and certainly not just from London. In fact, they are attending from far and wide. 

I am looking forward to another lively and enjoyable evening, which will now include a short presentation from a fourth speaker well known to Iain Little.

Among markets, technology has never been more interesting in our lifetime so Charles Elliott’s latest comments will be most welcome. 



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March 23 2017

Commentary by Eoin Treacy

March 23 2017

Commentary by Eoin Treacy

Energy Stat: Are Electric and Autonomous Vehicles Heading Down the Road to Peak Oil Demand?

Thanks to a subscriber for this fascinating report by Pavel Mulchanov for Raymond James which may be of interest. Here is a section:

There is no law of nature that dictates that global oil demand must eventually reach a peak and then begin an irreversible decline. The well-known “law” of Hubbert’s Peak applies to supply, not demand, and the advent of modern technology (fracking, horizontal drilling, enhanced recovery, etc.) has led to a fundamental rethink of whether oil supply will peak after all. In this context, we see comments such as the one from Shell, suggesting that peak demand will come first, rendering peak supply a moot point.

There is no direct historical precedent for worldwide demand for a major energy commodity to peak on a sustained basis. (Sorry, whale oil doesn’t count.) Despite all of the regulatory and other headwinds, for example, global consumption of coal is still growing. But it is true that there is precedent for national and even regional demand to peak. Coal demand in Europe peaked in the 1960s, and has since fallen to substantially lower levels. Oil demand in Japan peaked in the 1990s. Oil demand in Europe peaked more recently, in 2006, one year after the U.S. By definition, a peak is something that can only be known in retrospect, but with a decade having passed, it seems abundantly clear that European oil demand will never get back to its pre-2006 levels. With regard to the U.S., the situation is less clear-cut because of the demand recovery in recent years, but 2005 may well be the all-time peak. The theory of peak global oil demand holds that when enough parts of the world reach a peak, a global peak will result, because the few places still growing will not be enough to offset the decliners. In this sense, the theory is conceptually valid. Thus, we would not argue with the notion that peak oil demand is a matter of time. The real question is: how much time?

 

Eoin Treacy's view -

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

I had not previously seen the statistics about peak demand for Europe and Japan so I found this report enlightening and commend it to subscribers. Peak demand is an important theme and explains why Saudi Arabia guards its Asian markets so jealously; offering discounts again as recently as two weeks ago. Asia and Africa represent the two big growth markets for international oil products just as they represent the major growth areas for coal consumption. 



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March 23 2017

Commentary by Eoin Treacy

Dow's Merck Swipes Immuno-Oncology Share From Heavyweight Rivals

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

Four immuno-oncology drugs from Merck, Bristol-Myers and Roche brought in $464 million in February, declining 4% from $483 million in January, Leerink analyst Seamus Fernandez said, citing data from tracker Symphony Health.

But February was a shorter month, which could be partly responsible for the decrease, Fernandez said in a research report. Despite the slowdown, Merck's Keytruda sales grew 2% in February vs. the prior month.

Meanwhile, Bristol-Myers' drugs Opdivo and Yervoy held on to a collective 69% market share, falling 1% vs. January. Merck's Keytruda now has 24% of the market, up from 23% the prior month. Roche's Tecentriq was flat at 7% share.

Immuno-oncology drugs fight cancer by teaching the body's immune system to identify cancer cells hiding behind specific proteins. Those proteins are called checkpoints.

 

Eoin Treacy's view -

CRISPR-Cas9 gene editing is quickly revolutionising the genetics sector by reducing the cost and increasing the speed of innovation. That is particularly good news for cancer treatments because there are so many different mutations and each needs a tailored approach. In fact the end point of research and another area receiving a great deal of interest is the synthetic biology sector where custom viruses can be written to attack a patient’s personal cancer. 



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March 23 2017

Commentary by Eoin Treacy

Not So Fast on India Stock Rally as UBS Sees Profit Bar Too High

This article by Nupur Acharya and Ameya Karve for Bloomberg reiterates an argument more than a few institutional investors have made about India. Here is a section:

“The markets are trading at all-time-high multiples and are pricing in a lot, or expecting reforms to continue and growth to come back fairly quickly,”  Chhaochharia said. “The risk-reward is definitely not attractive.”

Skeptics like Chhaochharia are becoming harder to find as foreign and local investors pile into equities and analysts predict further gains. The S&P BSE Sensex will climb to 32,000 by year-end, up 10 percent from current levels, according to a survey of traders and investors by Bloomberg News on March 14, three days after Modi won the state polls. Citibank, which previously forecast the Sensex to reach 30,000 by September, now sees the gauge at 31,500 in December.

Overseas investors have plowed a net $3 billion into Indian equities in March, the biggest monthly inflow in a year, while mutual funds have been buyers for seven months through February.

The liquidity-aided euphoria saw a department store chain double in its trading debut on Tuesday, and an exchange-traded fund of state companies on Friday got bids for about four times the target.

 

Eoin Treacy's view -

10-year local currency Indian government bonds yield 6.82%. That’s well below the 9% which was on offer in 2014 but the question of the currency is much less pressing today than it was then. More than any other factors, the combined trends of the currency and the bond market offer a window into how large foreign investors view the prospects for India. 



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March 22 2017

Commentary by Eoin Treacy

March 22 2017

Commentary by Eoin Treacy

Email of the day on Chinese liquidity

Is this the beginning of a liquidity crisis in China which I have long suspected? 

Eoin Treacy's view -

Thank you for the above article which raises some interesting points about the Chinese shadow banking system and liquidity in the financial sector generally. Here is a section:

China’s smaller lenders faced tighter liquidity this week as benchmark money market rates climbed to the highest level since April 2015, reflecting a mix of technical factors including cash hoarding for quarter-end regulatory checks. By letting borrowing costs rise, the People’s Bank of China may have been sending a warning to over-leveraged lenders, according to Banco Bilbao Vizcaya Argentaria SA. The central bank has been known to allow short-term jumps in money market rates to discourage excessive borrowing.

“The PBOC wants to warn the smaller lenders not to play the leverage game excessively,” said Xia Le, chief economist at BBVA in Hong Kong. “It’s a tug of war between the central bank and the financial institutions.”

 



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March 22 2017

Commentary by Eoin Treacy

Email of the day on choosing which instrument to short

I hope this email finds you and your family well. Unfortunately I'm again not able to attend The Chart Seminar but plan to when it arrives back here in the States. Question, could you please comment on why you got short equity futures using Nasdaq futures instead of a much weaker market like Russell. I usually sell weakness and buy strength. Kind regards

Eoin Treacy's view -

Thank you for this question which may be of interest to subscribers and I look forward to meeting up again at a future venue for The Chart Seminar. I agree that when one is looking for the end of a trend it is generally better to short the market which represents the epicentre of risk and is therefore the weakest. 

 



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March 22 2017

Commentary by Eoin Treacy

Update for Customers With Bitcoin Stored on Coinbase

This article from Coinbase arrived in my inbox yesterday and I thought it might be of interest to subscribers. Here is a section:

We wanted to provide customers notice of how a possible hard fork of the Bitcoin protocol into Bitcoin Core and Bitcoin Unlimited will affect Coinbase accounts.

The only version of Bitcoin supported on the Coinbase platform today is Bitcoin Core, currently represented by the symbol BTC.

We may provide support for Bitcoin Unlimited in the future depending on market conditions and stability of the protocol, but we cannot guarantee whether or when such support may be available. Customers who wish to access both blockchains at the time of the hard fork should withdraw their BTC from Coinbase since we cannot guarantee what will happen during the hard fork or when this access may be available.

If one chain receives an overwhelming majority of support from miners, users, and exchanges, we reserve the right to alter the names of chains or discontinue support for certain chains in the future.

 

Eoin Treacy's view -

This is not exactly great news for investors in bitcoin since the essence of the platform is that the blockchain is inalienable and now they find that there are going to be two blockchains. 



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March 22 2017

Commentary by Eoin Treacy

Nike Sinks After Sales Slowdown Suggests It's Losing Share

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

Nike Inc. tumbled the most in 19 months after third-quarter sales missed estimates, renewing concern that the long-dominant athletic brand is losing market share to Adidas AG and Under Armour Inc.

Revenue rose 5 percent to $8.43 billion, the Beaverton, Oregon-based company said after the market closed on Tuesday. Analysts estimated $8.47 billion, on average.

Under Armour and a resurgent Adidas have been grabbing market share from Nike, especially in the U.S. That’s led investors to sour on the stock, which had its first annual decline in eight years last year. And last quarter’s results only reinforced Nike’s woes as North American sales rose just 3 percent. Executives on a conference call didn’t provide much reason for optimism, either. Worldwide futures orders, excluding the effects of currency fluctuations, fell 1 percent, the first drop since 2009. Analysts had predicted a 3.4 percent gain.

 

Eoin Treacy's view -

Nike produces great products and has a dominant position in the apparel sector which makes it a target. With Adidas moving to a fast fashion model, Nike is under pressure to innovate and most particularly by moving to an online presence. Under Armor might be grabbing market share but it has also struggled to boost its online offering and as a customer of all three, I personally find the online shopping experience far from compelling with all their sites. 



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March 21 2017

Commentary by David Fuller

Big Oil Plan to Buy Into the Shale Boom

American shale with gusto, planning to spend a combined $10 billion this year, up from next to nothing only a few years ago.

The giants are gaining a foothold in West Texas with such projects as Bongo 76-43, a well which is being drilled 10,000 feet beneath the table-flat, sage-scented desert, and which then extends horizontally for a mile, blasting through rock to capture light crude from the sprawling Permian Basin.

While the first chapter of the U.S. shale revolution belonged to wildcatters such as Harold Hamm and the late Aubrey McClendon, who parlayed borrowed money into billions, Bongo 76-43 is financed by Shell.

If the big boys are successful, they’ll scramble the U.S. energy business, boost American oil production, keep prices low, and steal influence from big producers, such as Saudi Arabia. And even with their enviable balance sheets, the majors have been as relentless in transforming shale drilling into a more economical operation as the pioneering wildcatters before them.

“We’ve turned shale drilling from art into science,” Cindy Taff, Shell’s vice president of unconventional wells, said on a recent visit to Bongo 76-43, about 100 miles (160 kilometers) west of Midland, Texas, capital of the Permian.

Bongo 76-43, named after an African antelope, is an example of a leaner, faster industry nicknamed “Shale 2.0” after the 2014 oil-price crash. Traditionally, oil companies drilled one well per pad—the flat area they clear to put in the rig. At Bongo 76-43, Shell is drilling five wells in a single pad for the first time, each about 20 feet apart. That saves money otherwise spent moving rigs from site to site. Shell said it’s now able to drill 16 wells with a single rig every year, up from six in 2013.

With multiple wells on the same pad, a single fracking crew can work several weeks consecutively without having to travel from one pad to other. At Bongo 76-43, Shell is using three times more sand and fluids to break up the shale, a process called fracking, than it did four years ago. The company said it spends about $5.5 million per well today in the Permian, down nearly 60 percent from 2013.

“We’re literally down to measuring efficiency in minutes, rather than hours or days,” said Bryan Boyles, Bongo 76-43’s manager.

Exxon, Shell, and Chevron will be able to spend more than independents can for service contracts and prime drilling acreage. But if the majors pursue acquisition deals, as they’ve done before, the wildcatters stand to reap the benefits.

Exxon invested big in shale in 2010 when it bought XTO Energy Inc. in a deal valued at $41 billion. For years, however, the major companies spent little on shale, instead focusing on their traditional turf: multibillion-dollar engineering marvels in the middle of nowhere that took years to build. The wells that Big Oil drilled were mostly in deep water, where a single hole could cost $100 million, rather than shale wells that can be set up for as little as $5 million each.

And:

Chevron said it estimates its shale output will increase as much as 30 percent per year for the next decade, with production expanding to 500,000 barrels a day by 2020, from about 100,000 now. “We can see production above 700,000 barrels a day within a decade,” Chevron Chief Executive Officer John Watson told investors this month.

Exxon said it plans to spend one-third of its drilling budget this year on shale, with a goal to lift output to nearly 800,000 barrels a day by 2025, up from less than 200,000 barrels now. The company doubled its Permian footprint with a $6.6 billion acquisition of properties from the billionaire Bass family. Darren Woods, Exxon’s new CEO, said shale isn’t “on a discovery mode, it’s in an extraction mode.”

David Fuller's view -

The US is now the swing producer of crude oil, increasing output in the Permian Basin and other sites when prices are attractive relative to production costs, while cutting back domestic supplies and buying in oil when they are much lower. 

Prices of WTI Crude oil have fallen back from $55 this month, mainly because US production has increased sharply and some OPEC producers are quietly abandoning their previously announced ‘cutbacks’.  Russia promised OPEC that it would lower production but that was mainly due to the freezing weather in Siberia during January and February, and they have been increasing production subsequently. 

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March 21 2017

Commentary by David Fuller

IEA Warn $1.3 Trillion of Oil and Gas Could be Left Stranded

The International Energy Agency (IEA) has warned oil and gas companies that failing to adapt to the lower carbon energy agenda could lead to over a trillion dollars worth of assets being abandoned by 2050.

The IEA estimates that a step-change in climate policy away from fossil fuels and towards cleaner sources of energy would leave a total of $1 trillion of oil assets and $300bn in natural gas assets stranded.

The report, undertaken in partnership with the International Renewable Energy Agency, said the move to reduce global greenhouse gases could hold “significant consequences for the energy industry” if companies fail to adapt their portfolios in the wake of the Paris Agreement.

Oil majors including BP and Shell are already adjusting the balance of future investment with a bias towards gas rather oil.

In the past BP’s has focused on oil for 60pc of its portfolio while gas has made by the difference, but last year this ratio flipped in favour of gas. Shell has made moves towards gas production and transport with last year’s £35bn acquisition of BG Group, a leader in producing and shipping cargoes of liquefied natural gas in the global market.

The agency warned that keeping to the Paris deal would require carbon emissions from the energy sector to peak before 2020 and fall by more than 70pc from today’s levels by 2050.

This would require the share of fossil fuels used to create energy to halve between 2014 and 2050 while the share of low-carbon sources - such as renewables, nuclear and carbon capture - would more than triple worldwide to make up 70pc of energy demand in 2050.

David Fuller's view -

The IEA makes a good point although I think its estimates are too low.  There is vastly more oil and natural gas around the globe and most of the potential shale sites have yet to be touched.  Additionally, with technological improvements continuing, consider the adage: If you want to produce more oil, just go back to where you found it before because the supply has not been depleted.    

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



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March 21 2017

Commentary by David Fuller

Europe Likes to Huff and Puff, but It Will Agree a Sensible Brexit Deal in the End

Here is the opening and another section from this mostly common sense article by Ben Kelly for The Telegraph:

The triggering of Article 50 is almost upon us and we are hurtling haplessly towards a “hard Brexit”, at least according to many Remainers who still believe that the EU is about to give the UK a two year punishment beating.

As we lay battered and bruised on the ground, the EU will then - so the narrative of the sweaty palmed cynics goes - refuse to safeguard our trade links and instead grasp us in a death grip and irrationally leap off a cliff, because this would apparently show the world the benefits of EU membership.

The SNP call it a “hard Tory Brexit” for good measure, pushing the lie that the evil Westminster bogeyman is actively seeking a “hard Brexit”, even though the Government’s clearly stated objective is to negotiate a comprehensive trade agreement. They calculate that the negotiations will fail or be abandoned; leading us towards an economic crash that will ensure the Scots finally cut the cord for the supposed safety of separatism and being a one party state.

Meanwhile, a hardcore contingent in the Brexiteer camp believes that we should either refuse to negotiate at all or flounce away as soon as we dislike a demand. I’ve argued before on these pages that this would be a needless act of self-harm, automatically putting us behind a bleak wall of tariffs and non-tariff barriers that would cause very real disruption and economic turmoil. The truth is this isn’t really a viable option.

And:

The truth is that both sides desperately need to minimise disruption and clear the way towards a reasonable, amicable and mutually beneficial “divorce”. By the end of Article 50 negotiations there will be an agreement upon a transitional arrangement to allow trade continuity and we will have a blueprint of our future relationship. Then, talks will continue until we have concluded a full trade and cooperation agreement which will leave the UK outside the EU but with strong ties and close cooperation.

This is, of course, the very definition of something being easier said than done. There will be ups and downs and frustrations and protestations, but in the end a mutually beneficial deal will be concluded. Nobody will get everything they want and everyone will boast to their domestic audience about the concessions they won. After all is said and done and all the threats have been issued, this is the necessary political and economic outcome.

Hang on, why, the Remainers will ask - as they have asked for the last 18 months – will the EU agree to such a thing? ‘Why is it in the EU’s interests to give the UK a good deal?’ The answer is obvious. The principle of Mutually Assured Destruction applies. The UK cannot afford to carry out its bluff about walking away from negotiations; but the EU cannot afford it either.  

 

David Fuller's view -

I do not agree with all of this. Whose interest is it in to haggle for two years on the assumption that the principle of Mutually Assured Destruction will lead to a last minute satisfactory agreement? 

Theresa May’s cautious, constructive approach may end in a mutually satisfactory agreement but that is not certain.  Playing by the EU’s rules will be expensive for another two years. It would also be a masochistic exercise and it would delay the development of trade agreements with other countries outside the EU.

Psychologically, during a two year negotiation EU representatives would be trying to limit their losses while ensuring that other countries are unlikely to follow the UK’s painful path. 

However, if the UK pushes for a quick, cooperative agreement suitable for both parties but the EU stalls, if only for the UK’s continued financial contributions, I think we should just cancel further negotiations and payments, and leave.  That would concentrate political and especially corporate EU leaders’ attention. They would have every incentive to quickly negotiate mutually sensible agreements with the UK.    

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



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March 21 2017

Commentary by David Fuller

The Markets Now

Here is the current brochure.  I am pleased to say that as in January, we will once again be in the excellent Morrison Room, which is spacious and conveniently on the ground floor.

David Fuller's view -

We have another interesting list of experienced delegates, currently up to 25 and certainly not just from London. In fact, they are attending from far and wide. 

I am looking forward to another lively and enjoyable evening, which will now include a short presentation from a fourth speaker well known to Iain Little.

Among markets, technology has never been more interesting in our lifetime so Charles Elliott’s latest comments will be most welcome. 

Whatever your investments, we will need to keep an eye on these two charts as the year progresses – Dollar Index and US 10-Yr T-Bond Yields.



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March 21 2017

Commentary by Eoin Treacy

March 21 2017

Commentary by Eoin Treacy

Email of the day on trading/investing in volatility

Following yesterday's mention of the VIX Index how can a private investor buy it and put it away at this relatively low level? It seems to me that one can only purchase it on a very short term basis.

Eoin Treacy's view -

Thank you for this question and it’s not an easy one to answer. ETFs are doomed to lose money until the brief time volatility spikes higher specifically because of the time value of money arguments discussed yesterday. They suffer from exactly the same problem as the commodity futures ETFs which fall because the contango is realised whenever the contracts roll. 



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March 21 2017

Commentary by Eoin Treacy

March 21 2017

Commentary by Eoin Treacy

Taiwan Dollar Gains on Apple-Related Stock Inflows: Inside Asia

This bulletin by Kartik Goyal for Bloomberg may be of interest to subscribers. Here is a section:

Taiwan dollar advances 0.3% after closing at the strongest level in more than two years Monday

TWSE climbs 0.6%; inflows into stocks exceed $3.8 billion for 2017, the third-biggest in Asia, according to data as of Monday

Stocks including Wistron gain on Apple-related optimism, with Fubon Securities raising rating on the stock

Ten-year bond yield rises 2bps to 1.14%

 

Eoin Treacy's view -

The Taiwan Dollar has appreciated by more than 10% against the US dollar over the last 12 months and extended that advance today. It is overbought in the short-term but its recent strength has broken the Dollar’s five-year progression of higher reaction lows suggesting a medium-term change to the relationship between supply and demand. 



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March 21 2017

Commentary by Eoin Treacy

Musings from the Oil Patch March 21st 2017

Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report for PPHB. Here is a section comparing the efficiency of a Tesla to a BMW 7 Series:

“Liberals frequently care more about feelings than facts, and your smug Tesla-owning frenemy will never admit it, but in day to day usage, the big BMW is actually 18% more efficient, and 18% kinder to the planet. (Don’t get too cocky, Mr. 7 Series: at a US average 12 cents per KwH, the electricity cost to the Tesla owner for 1000 miles works out in total to about $81, as opposed to $98 for the gasoline. The reason the Tesla is less efficient, but still cheaper to run, is that the power company pays a lot less for fuel than the automobile driver does. But when the issue is green impact, not greenbacks, the BMW wins handily.)

And

“Of course, no self-respecting Green Weenie would settle for powering his car by the sun, but his house by Con Edison. And with the average efficient house using 1 KwH per hour, i.e., 24 KwH per day, the house needs 4.8 KwH capacity, and considering efficiency losses and reserve requirements, that means 6.9 KwH for the house. So to power both the Tesla and the house, Green Man needs at least 1,443 square feet of power production, at a cost of $115,000. But even using a Tesla-only setup, $60k would buy 25,641 gallons of gasoline (at the current US average price of $2.34 per gallon). The Big BMW could travel, on that much fuel, 24,000 x 24 MPG = 615,384 miles. Game, set and match – Munich and Detroit. Sad!” 

While we didn’t do the analysis, all of Mr. Karo’s numbers were sourced, which was not a surprise, given that he is a Philadelphia lawyer, and the math works. Although Mr. Karo expresses disdain for braggadocios Tesla owners, presumably because of his experiences with some owners he has encountered, the economics in this analysis suggest that gasoline-powered vehicles will have a longer future than EV-proponents suggest, or would like to see happen. Tesla owners will not be swayed by Mr. Karo’s analysis. Instead, they will declare that with falling battery and solar panel costs coupled with their improving efficiencies, the cost advantage will soon swing in favor of EVs. However, the inability of EVs to be swapped for gasoline-powered vehicles in a one-to-one exchange for all applications means there is an extensive convincing period ahead before the public fully embraces them. Just how long that convincing period will be is anyone’s guess. 

Eoin Treacy's view -

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

There are four major themes in transportation at the present time. These are electric vehicles, automation, connectivity and sharing. Let’s for a moment take the environmental question out of the argument for electric vehicles. Many people buy them because they are cheaper to run and have fewer moving parts so they tend to be reasonably reliable. 



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March 20 2017

Commentary by David Fuller

French Election Polls Ahead of First Debate Show Le Pen, Macron Extending Lead

Here is the opening of this article from Newsweek:

Marine Le Pen and Emmanuel Macron have pulled further in front in opinion polls for next month’s French presidential election ahead of the first televised debate Monday. Macron, a centrist independent, and Le Pen, the far-right leader of the National Front, have extended their advantage over Republican François Fillon, whose campaign has been dogged by an investigation into alleged fraud.

Macron and Le Pen were tied with 26 percent of the vote, with Fillon falling back to 17 percent, in a poll conducted by Kantar Sofres released Sunday. There was a setback, too, for the candidate for the governing Socialist party, Benoît Hamon, who fell back to 12 percent, level with left-wing former Socialist party member Jean-Luc Mélenchon.

Current President François  Hollande announced in December that he will not seek a second term.

French voters will go to the polls for the first round of the election on April 23, with the top two candidates then going onto a second round run-off on May 7.

It would take a major swing in the final month of the campaign for the run-off not to be between Macron and Le Pen. And it would take a similar momentum switch for Macron not to ultimately emerge victorious. Polls have consistently shown Macron beating Le Pen in the second round with around two-thirds of the vote.

However, Monday’s first debate is significant. The latest poll indicated that 30 percent of voters remained undecided. And the poll showed that those indicating that they would vote for Le Pen are far more steadfast in their commitment compared with those voicing a preference for Macron. While 75 percent of Le Pen supporters said they would not change their minds, only 51 percent of potential voters for Macron said the same.

Although Fillon has seen himself go from election favorite to longshot following an investigation into charges that he paid family members for jobs they didn’t perform, Le Pen appears to have emerged unscathed from a similar “fake jobs” scandal.

David Fuller's view -

Today, there is little evidence of any popular, dominant presidential candidate in France.  However, candidates with a chance of winning have moved towards the right, as we also saw in The Netherlands after a similarly acrimonious campaign.

For Emmanuel Macron, this amounts to a move from the left to a centrist independent position, at least so far.  I assume he will certainly move further to the right if he and Marine Le Pen move through to the second round.  She really is the protest vote candidate but cannot escape the shadow of her father, despite considerable efforts to do so over a number of years.  



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March 20 2017

Commentary by David Fuller

Email of the day 1

On changing priorities at 80:

Dear David In a few days my longstanding subscription to your service will expire. May I say how much I have appreciated the excellent opinions and advice you have provided over the years. Furthermore, having completed a night-class in technical analysis in Sydney during the frenzied mining boom of the 1960's, I have really enjoyed your superb chart library, which must be without peer. Your personal touch was also always appreciated. As a fellow music and cricket/sport lover, I always enjoyed your music reviews and sporting comments. With 80 rapidly approaching I have been forced to re-focus my investment priorities on reliable income generation and capital preservation. I believe this is best achieved by concentrating on the local market which offers both an above-average return and remarkable tax credits for seniors. My best wishes for the future.

David Fuller's view -

I am fortunate to have had many long-term subscribers who shared the same enthusiasm for markets and also price charts, which allow us to see and sometimes understand so much in terms of what is going on.  Your appreciation of my sporting comments and earlier attempts at music reviews certainly brought a smile to my face.  They were a sign of my fervour rather than knowledge and subscribers were generous in their tolerance. 

May you continue to live long, enjoying and learning from your many interests.



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March 20 2017

Commentary by David Fuller

By Refusing Nicola Sturgeon Theresa May is Speaking for the Majority of Scottish People

Eight months ago, the First Minister stood at the same podium in Bute House with the same flags, the same urns and the same mantelpiece as Monday’s announcement. It was the morning after the Brexit vote and a bleary-eyed nation was coming to terms with the momentous result. In that context – without hesitation or reflection – Ms Sturgeon announced that she’d already instructed civil servants to draw up the necessary legislation for another independence referendum.

She put Scotland on high alert. She indicated then what her end-game would be. No Brexit discussion would truly be conducted in good faith, as Brexit itself was only a lever to the primary goal of her political career: the break-up of Britain.

She tried to co-opt the Remain votes of thousands of Scots like myself as ciphers for support for independence when they were nothing of the sort. She turned a deaf ear to the million Scots who voted Leave, nearly 400,000 of whom were her own SNP supporters. And, by signalling her intent so far in advance, she allowed discussions and decisions to be made on how to present the response when she finally, inevitably, pulled the trigger.

The majority of the people of Scotland don’t want independence. They don’t want the decision they already made to be overturned. They don’t want to be told that their original answer was wrong and it’s time to do it all again. They don’t want to be dragged back to the uncertainty and division that binary referenda entail. Ms Sturgeon may also find that they don’t want a First Minister who acts only for her own narrow party interests and not those of the nation as a whole.  

No wonder the former Labour minister Brian Wilson was moved to write: “Nicola Sturgeon’s unlikely success in allowing a Tory Prime Minister to speak for the great Scottish majority...is unlikely to be looked back on as her finest hour.”

David Fuller's view -

Does Nicola Sturgeon remind you of any other politician? 

How about Donald Trump, although more articulate but with less charm.

I will leave FTM’s last word today on this emotive subject to this Letter to the Editor, sparked by Ruth Davidson’s article above:

“Impressed with Ruth Davidson. Seems like she is the only one in Scotland with the nerve and political nouse to take on Sturgeon. It's about time she was given the same air play, particularly by the BBC who seem to positively wet themselves whenever Sturgeon speaks.

It's about time somebody really pressed home the killer questions to Sturgeon.

1) Currency, 2) Budget Deficit, 3) UK Trade outside the Union, 4) Defence spending in Scotland, 5) Trident 6). The majority don't want another bloody referendum anyway.

She shouldn't be allowed to keep back heeling the questions to some imaginary SNP experts who are supposedly looking into this.

Keep up the good work Ruth!”

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



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March 20 2017

Commentary by David Fuller

Email of the day 2

On Wheat prices and Markets Now

I would be grateful if you would pass on a question to David Fuller about wheat.

While breakfasting in my local cafe this morning, the owner mentioned that he was finding it increasingly difficult to buy flour - just could not get what he needed.

Having time to look into the excellent Comment of the Day archive while breakfasting I leaned something completely new to me - the influence of Saudi Arabia and its declining wheat production (previously enough to meet its own and several neighbouring country's needs) and now, due to dwindling water supplies, a massive importer of wheat.

I note that London Wheat prices are up significantly since last year. 

A few years ago David cut back on his wheat futures. So, is it time to load up again? I see from the chart that there has been a recent pull back.

I can fill my car fuel tank less expensively than I did a while back, but am I now going to have one less slice of toast! 

I look forward to another excellent presentation at the next Markets Now Seminar on 27th March. That really is 'value for money'', especially the presenters sharing their topical and timely insight as to what is driving the markets. 
Best wishes

David Fuller's view -

Thanks for your toast report which reminds me that one never knows where the next seed or kernel of interesting information will come from. 

Saudi Arabia’s wheat was heavily subsidised, so I think the problem was not just about insufficient water.  It was an amazing achievement, as these pictures show, but not sustainable when cutbacks are required with oil trading around $50 a barrel. 

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March 20 2017

Commentary by David Fuller

The Markets Now

Here is the current brochure.  I am pleased to say that as in January, we will once again be in the excellent Morrison Room, which is spacious and conveniently on the ground floor.

David Fuller's view -

We have another interesting list of experienced delegates, currently up to 25 and certainly not just from London. In fact, they are attending from far and wide. 

I am looking forward to another lively and enjoyable evening, which will now include a short presentation from a fourth speaker well known to Iain Little.

Among markets, technology has never been more interesting in our lifetime so Charles Elliott’s latest comments will be most welcome. 

Whatever your investments, we will need to keep an eye on these two charts as the year progresses – Dollar Index and US 10-Yr T-Bond Yields.



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March 20 2017

Commentary by Eoin Treacy

March 20 2017

Commentary by Eoin Treacy

American Association of Professional Technical Analysts Conference 2017

It was a pleasure to meet up with a number of other US based analysts at this year’s conference in Kansas City last Friday and I thought subscribers might be interested in my observations. 

Eoin Treacy's view -

My presentation focused on my belief that we might be in the latter stages of a medium-term expansion but are very likely to be in the early stages of a secular expansion. That informs my additional belief that we are not about to have a crash and that the Wall Street leash effect is an important characteristic which is gaining credence once more, following what has been a long hiatus. 

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



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March 20 2017

Commentary by Eoin Treacy

Google Might Run the Power Grid More Efficiently

This article by Diego Marquina and Jahn Olsen for Bloomberg may be of interest to subscribers. Here is a section:

The best way to send the right economic signals that reflect constraints is through locational marginal pricing – having different power prices in different parts of the grid.

This is a politically unpopular mechanism, as it would see prices go up in zones of large demand – potentially industrial areas.

The alternative is grid investment. But the costs are huge, as is the case for the bottleneck between Scottish wind farms and English demand centers. The 2.2 gigawatt HVDC cable currently being built there has an estimated cost of 1 billion pounds. Yet National Grid estimates as much as 8GW of additional transmission capacity could be required by 2030, on that particular border alone.

Less human involvement might be part of the solution. Google’s DeepMind recently announced they are exploring opportunities to collaborate with National Grid. It has been successful elsewhere -- DeepMind demonstrated its immense potential by reducing cooling costs in an already human- optimized datacenter by 40 percent.

Setting it loose on the extremely complex and quite probably over-engineered National Grid, with its many overlapping services and mechanisms, its rules of thumb and its safety margins, could provide novel ways to ensure system reliability cheaply and efficiently. DeepMind’s CEO conservatively hinted that it might be able to save up to 10 percent of the U.K.’s energy usage without any new infrastructure. Step aside, humans.

 

Eoin Treacy's view -

Artificial Intelligence (AI) is rapidly finding its way into systems which had previously always been managed by humans. You might have heard of the Google Deep Mind team’s victory against the Go world champion. It represented a landmark not so much because it overcame a human; we’ve seen that in chess before. It was the manner in which the victory was achieved that is so important. 



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March 20 2017

Commentary by Eoin Treacy

Porsche Pockets $17,250 Profit on Every Car

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

In short, every time Porsche sells a 911 sports car or one of its Cayenne SUVs, it could take the profit alone and go buy a brand new Chevy Cruze.

Its Teutonic peers don’t have nearly as much profit punch. Daimler AG pocketed about $5,000 a vehicle last year, roughly the same margin Bayerische Motoren Werke AG (BMW) has been managing. Part of the money magic is simply price. Porsche doesn’t make cheap cars. Even luxury players like Mercedes occasionally offer more pedestrian versions at narrower margins to get aspiring buyers into the family. And make no mistake, Porsche customers are paying a premium for the brand’s reputation.

Ferrari knows this game well. Its operating profit equates to almost $90,000 a vehicle. But about 30 percent of Ferrari’s business comes from engines, key chains, amusement parks, and other things that don’t have wheels. What’s more, the company makes only about 8,000 cars a year, scrimping on supply to keep prices high.

 

Eoin Treacy's view -

Porsche might be making significant profits on every car it sells but the company is also among the largest shareholders in Volkswagen. It was far from immune to the fallout from the diesel scandal which saw the stock plummet from €95 to €35 and it has been heavily influenced by its parent’s performance since. 



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March 17 2017

Commentary by David Fuller

The US Federal Reserve is Riding a Tiger by Raising Interest Rates

Here is the opening of this controversial column by Ambrose Evans-Pritchard for The Telegraph:

On three separate occasions since 2013 the US Federal Reserve sent shock waves through the global financial system when it tried to tighten monetary policy, and each time it was forced into partial retreat to halt the mayhem.

The Fed has since come to terms with its unwelcome role as the world's central bank, a monetary superpower that cannot set liquidity conditions for the US alone. The international blow-back into the US economy from any mistake is instant and brutal.

Over recent months the Federal Open Market Committee has been careful to take the global pulse before acting. It now hopes the coast is clear. Today's quarter point rise in the federal funds rate to 1pc has been so loudly signalled in advance that investors have already adjusted.

Emerging markets seem better prepared, so far able to shrug it off. China has restored confidence in its exchange rate regime. Capital flight appears to be under control. Europe's shift towards bond tapering reduces the risk of a rocketing dollar. "We're not overly worried about downside shocks," said Janet Yellen, the Fed chairman.

Yet nobody really knows whether the world can handle a total of six rate rises over the course of 2017 and 2018 as sketched in the Fed's 'dot plots' scenario.

"Our highly levered financial system is like a truckload of nitroglycerin on a bumpy road. Don't be allured by the Trump mirage of 3pc to 4pc growth and the magical benefits of tax cuts and deregulation," says bond guru Bill Gross from Janus. This is a year to hold onto your money, he tells clients, not to seek a return on money.

On the face of it, a 1pc rate is risibly low a full eight years into the economic expansion. It is deeply negative in real terms. Savings are being whittled away.

But we are not dealing with normal circumstances. The Atlanta Fed's Wu-Xia 'shadow rate'  suggests that the combined tightening so far this cycle is equivalent to thirteen rate rises, once you include the withdrawal of stimulus from quantitative easing and dovish forward guidance. If so, we may be near the end-game.

The Wu-Xia model and others like it show a relentless fall in the natural rate of interest over the decades. Each peak and each trough is lower. It is the deflationary consequence of a deformed world of over-capacity (China), under-consumption (Europe), excess savings (inequality), and lack of demand.  

Former US treasury secretary Larry Summers thinks the natural rate has dropped to minus 3pc in his grim vision of secular stagnation. Is he wrong? Have we put this episode behind us at last? We don't know.  

David Fuller's view -

Do I believe these forecasts?  No, at least not in the near term. Nevertheless, AEP is a formidable financial journalist with great contacts and he can be prescient.  Therefore, why don’t I agree?  Because I don’t see bearish forecasts in the price charts, at least not yet.  Meanwhile, and I don’t mean this arrogantly, bearish forecasts from high-profile financial experts have been one of the most reliable indicators over the last eight years and counting. 

If stock markets are climbing a ‘wall of worry’, you know everyone is not long.  In fact, they may be trying to talk the markets down.  There are a lot of wobbly bears out there, only this time it is not due to global warming. Will the bears eventually be right?  Of course, but we all know that timing is crucially important.  

So, which charts am I talking about and what am I looking for?

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



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March 17 2017

Commentary by David Fuller

The Key Lesson From OmNICShambles is How Urgently the Government Needs a Reboot

There are your traditional U-turns, and then there are vicious, extraordinary punishment beatings of the sort Philip Hammond has just had to submit himself to. The Government ought to be congratulated for abandoning its absurd, manifesto-defying tax hike on the self-employed. But the way in which good sense has prevailed has been shocking, and casts grave doubt on the Chancellor’s political future.

His fall from grace has been astonishingly swift. No Budget in living memory has disintegrated so fast; no Prime Minister has resorted to forcing a Chancellor to confess in writing to having got it so utterly wrong. His tax plan had already been kicked into the long grass, and the spotlight had moved on to Scotland; and yet No 10 still felt the need to distance itself further from Mr Hammond’s omNICshambolic Budget, even at the cost of exposing a terminal breakdown in the relationships at the heart of government.

Listening to the Chancellor humiliate himself on Monday, one could almost begin to feel sorry for him: he sounded like a dissident who, after several rounds of torture in a sordid cell, realised that he would be forced to repudiate his core beliefs to avoid a full auto-da-fé.

Yet still he remained stubbornly defiant, clinging to the delusion that he would in time be able to reinstate his beloved tax increase, and even claiming, laughably, that nobody in officialdom or government had noticed that the policy was in breach of the manifesto.

His performance bore the tell-tale signs of a lame-duck Chancellor who has been assured that his job is safe but who in fact is now already on his way out, a mere eight months after being appointed.

Never mind that Theresa May had signed off on Hammond’s plans, and that it was she who hired Matthew Taylor, the Blairite, to shake up self-employment rules and taxes; the Chancellor has been ruthlessly sacrificed. The brutality of the put-down suggests that tensions over other aspects of policy were coming to a head, and that patience had been running ever thinner on both sides.

His relationship with the Prime Minister may thus never recover, an insurmountable problem in any administration but an especially dangerous and untenable one in a Government that is preparing to embark on the most complex project since the Second World War.

And:

Mr Hammond may bounce back, but the fundamental problem is that his economic policy is disastrously misaligned with the Government’s central mission of extricating the country from the EU. The Chancellor’s immediate, lethal mistake was to wage war on the Tory base; but his more profound error was to produce a Budget fit for a very different, pre-Brexit era.

Full Treasury buy-in is required for Brexit to work, yet the Chancellor’s support has continued to be half-hearted, and his Budget was a head-in-the-sand exercise, pretending that nothing was about to change. It wasn’t worth the paper it was printed on even before yesterday’s U-turn.

The first problem has been fixed but not the second. If he is to survive, he will need to change course radically. He will need to respond swiftly to events during the negotiations, reassuring and placating the financial markets and deploying a mix of carrots and sticks.

If banks threaten to leave, he should dangle massive tax and regulatory cuts; if car firms say they will up sticks because of the possibility of tariffs, he will need to promise to compensate them in other ways, while reminding them that protectionism cuts both ways. It will require toughness, skill, a permanent campaign and even a permanent Budget process: the full powers of fiscal and tax policy will have to be put behind the Brexit negotiating team.

David Fuller's view -

The UK needs a Chancellor who is fully committed to Brexit, as I said earlier this week.  Mrs May has done a commendable job in winning over some former Labour supporters.  Mrs Thatcher did the same, while remaining our most effective Tory Prime Minister.  Mrs May will have a more successful Brexit if she shows from the outset that she a strong Conservative Prime Minister. 

A PDF of Allister Heath’s column is posted in the Subscriber’s Area.



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March 17 2017

Commentary by David Fuller

Narendra Modi Succeeds and the Failure of Liberal Politics in India

“I can see the glimmer of a New India” proclaimed a triumphant Indian Prime Minister Narendra Modi a day after last week’s election victory in the country’s most politically significant state; at 200 million people, Uttar Pradesh has as many people as United Kingdom, France and Germany combined. If it were a country, it would be the world’s fifth most populous.

Modi is right. Not since the 1970s and (former prime minister) Indira Gandhi — of whom it was said “India is Indira and Indira is India” — has an individual defined and dominated politics in this manner, defying all conventional assumptions, disrupting politics-as-usual and permanently smashing the elitism of India’s erstwhile liberal consensus. Above all, and bypassing the mainstream media for the most part, he has emerged as a supreme communicator.

Even his most contentious and audacious decisions — like the move to ban 86 percent of India’s cash overnight last November have come at no political cost; instead, the big gains in India’s heartland prove that his decision to ‘demonetize’ high-value currency notes ultimately played out as a distinct advantage. In the cinematic plot of the Uttar Pradesh elections, Modi was cast as the vigilante action-hero, a sort of Robin Hood figure whose uncompromising toughness forced the rich and powerful to queue up at banks and suffer discomfort just like the poor. Unfazed by criticism — from opposition parties, eminent economists and large sections of the global and national media (I am on record as a skeptic of the move’s economic wisdom) — the prime minister positioned the currency ban as a patriotic purge of toxins from the body politic.

As elsewhere in the world, from the Washington, D.C., Beltway to Brexit, the spectacular consolidation of Modi’s hold over India — as well as how Indians think — underlines the equally spectacular failure of liberal politics, its echo chambers and its elitism trap.

His enormous victory in Uttar Pradesh has been touted as his Indira moment; not just for the complete command he enjoys three years into his term, but for his commonality with the former prime minister as an absolutist strongman. But if Indira was the daughter who inherited power from India’s first prime minister, Jawaharlal Nehru, Narendra Modi is the son of a tea vendor who rose from abject poverty and hardship to earn his influence. His success in pushing back against India’s old liberal elites catches the global anti-liberal undercurrent. That he is entirely self-made — unlike Indira Gandhi and the dynastic lineage her family spawned — empowers him to mock the pedigree of liberal elites, public intellectuals and the institutions they represent. During the recent election campaign Modi could not resist taking a swipe at Harvard, which he said mattered a whole lot less than hard work. At the same time, Modi referenced himself as a “poor mother’s son” in a speech widely believed to be a dig at the lofty criticism of his demonetization policy by Nobel Laureate Amartya Sen, among others.

Yet, Narendra Modi exemplifies how the old labels of ‘Left’ and ‘Right’ do not apply. There is no doubt that among the many different elements that won Uttar Pradesh for Modi were state subsidies such as those for cooking gas (hugely popular among woman voters) and microfinance loans — all of which helped the prime minister cement his pro-poor credentials. In many ways he is not a free-market reformist — as fiscal conservatives may have imagined — but rather a new-age welfare-capitalist for the country’s poor, who believes that the government is the vehicle for change.

David Fuller's view -

Governance is Everything and Narendra Modi remains one of the most capable and tireless politicians on the planet.  His victory in Uttar Pradesh is hugely significant and he is also popular with millions of ex-pat Indians living and working all over the world.  They don’t vote in their native country but they can be a useful asset as India’s economy continues to develop. 



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March 17 2017

Commentary by David Fuller

The Markets Now

Here is the current brochure.  I am pleased to say that as in January, we will once again be in the excellent Morrison Room, which is spacious and conveniently on the ground floor.

David Fuller's view -

We have another interesting list of experienced delegates and certainly not just from London. In fact, they are attending from far and wide. 

There are a few seats left, so come along and join us if you can, for another very lively and enjoyable evening, which will now include an introduction from a fourth speaker well known to Iain Little.

Meanwhile, Trump has generated plenty of political and economic controversy. Among markets, technology has never been more interesting in our lifetime so Charles Elliott’s latest comments will be most welcome. 

Whatever your investments, we will need to keep an eye on these two charts as the year progresses – Dollar Index and US 10-Yr T-Bond Yields.



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March 16 2017

Commentary by David Fuller

We Are More Likely to Get a Better Brexit If we Do Not Ask

Here is the opening and a further section of this informative column by Matthew Lynn for The Telegraph:

Our access to Europe’s markets will come to an end. Our powerful finance industry will lose the passport that enables it to sell its services across the Continent. Immigration will comes to a sudden stop, leaving fruit rotting on the trees, and, even more seriously, double mocha lattes unwhipped at Prêt, as companies struggle to find the staff to do the jobs that need doing.

With the Prime Minister, Theresa May, preparing to finally trigger Article 50, and start the process of leaving the European Union, we can expect to hear a lot of warnings about a cliff-edge Brexit, with the looming threat that no deal will lead to a car crash for the British economy.

Understandably, companies are going to feel nervous about that. Sterling is going to wobble on the currency markets – it is already down this week. The FTSE 100 is going to get hit if a deal seems to be falling apart. At many points over the next two years, the British negotiators are going to threaten to walk away with nothing, and every time, there will be a collapse in confidence.

In fact, however, much of that will be nonsense. Paradoxically, the less we ask for from the EU, and the closer we get to walking away from the table empty-handed, the more we are likely to get a good deal in the end. Why? Because sometimes asking for nothing is the best negotiating position. The markets are going to be jittery, but investors and traders should keep in mind that the final outcome is likely to be a lot better than it looks right now.

Don’t ask economists for any insights, however. The views of just about anyone (dentists, say, or actuaries, or, come to think of it, children’s party entertainers) would be more useful that a group of so-called professionals who disgraced themselves with absurdly over-the-top scaremongering in the run-up to the referendum, and even more hysterical predictions of imminent collapse in its immediate aftermath.

And:

Then imagine a different scenario. Our negotiators sit down and say, actually there is nothing we want from the EU. We are happy to operate under World Trade Organisation rules, we will make sure our market is completely open to European companies, and we have no plans to impose any tariffs of any sort. And, er, that’s it. The Brits then start looking at their watches, and asking if the team on the other side of the table knows anywhere good for lunch.

At that point, the EU side will have to start thinking about all the things they want from Britain.

The importance of these should not be dismissed. The UK makes a total contribution to the EU budget of £13bn. It gets £4.5bn back, so the net contribution is around £8.5bn. The UK, with Germany, is one of only two major net contributors, although countries such as France now also chip in a little as well. The expenditure of the EU is £123bn, so that £13bn is about 10pc of the total, and the net figure is about 7pc of the total. Once we have left, that money will have to come from somewhere. Several countries will have to become net contributors for the first time; plenty more will have to step up from trivial contributions to major ones. That will be neither easy, nor popular.

We also have a massive trade deficit with the EU. Britain is the largest market for German cars, which also happens to be that country’s largest industry. It is a huge export market for the Netherlands, Belgium, and most of all Ireland (36pc of Irish exports by volume go the UK). Tariffs hurt everyone. But they hurt the surplus country more than the deficit country. The EU is going to want access to our market. If it loses that, or if we impose tariffs, then it will hit jobs and investment across the Continent.

David Fuller's view -

Matthew Lynn has emotional intelligence and I hope the UK’s Brexit negotiators read his column very carefully.  The big initial danger, I suspect, is that the UK finds itself negotiating with unelected EU commissioners and their appointees, who will be focussed on political rather than economic issues.  The next danger will occur if the UK has to negotiate with the 27 remaining EU countries.  Special interests and unproductive groupthink would dominate that awkward environment. 

UK negotiators do not need to be experts on every aspect of an EU obstacle course designed to deter countries from even contemplating leaving. Keep discussions to a minimum and remember these words from Margaret Thatcher: “If you set out to be liked, you would be prepared to compromise on anything at any time, and you would achieve nothing.”  

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



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March 16 2017

Commentary by David Fuller

The Real Problem Is We Are All Over-Taxed

Here is the latter part of an excellent, common sense column by Allister Heath for The Telegraph.

The great economist Ronald Coase taught us that corporations are only the best vehicle for economic activity when the transaction costs of working in a hierarchical, closely managed organisation is lower than the costs involved in getting freelancers or independent agents to cooperate. But tech means that the economics have tilted at least a little away from the corporation, and more towards smaller firms, contractors and freelancers advertising their wares via platforms, and this is panicking our social-democratic establishment, who fear losing the last levers they still retain over our society and economy.

So they have enrolled the Government – including Philip Hammond, the Chancellor – in their quest to slow down change. Their strategy has been to point out the inconsistencies in current rules. Take the jobs market: some people are obviously employees, and others are pure self-employed freelancers.

But what of workers who rely primarily for their income on a platform like Uber? The drivers own their own cars, pay for their own operating expenses and choose their own hours; almost all of them are happy. But are they really, fully self-employed, or are they part of some third way which isn’t (yet) recognised in law and in the tax code?

It is obviously true that the present classification makes little sense. But sometimes it’s best not to change a broken system, for fear of making it even worse, and that is exactly what Hammond should have realised before he decided to raid the self-employed. The problem isn’t that the self-employed are “under-taxed” to the tune of £5.1bn a year, as many establishment economists have been saying. The problem is that employees are over-taxed to the tune of many more billions – overtaxed in the sense that a much lower overall tax rate, accompanied by a much smaller state, is, in my view, the only way Britain will prosper and thrive as an independent, free trading economy in the 21st century.

But until the day that the Government can drastically slash taxes at the same time as it radically simplifies the system – the model recommended by the 2020 Tax Commission, which I chaired – it would be better for it to do nothing. It should certainly not seek to undermine or campaign against self-employment, on the spurious grounds that it’s an “inferior” form of employment.

It should not seek to extend the welfare state’s net ever wider, showering the self-employed with more benefits. And the last thing it should do is plot to whack the likes of Uber with a 13.8pc payroll tax, which would be the logical (but job destroying and price raising) outcome of any system that sought to tax “platform workers” like the employed. This is a Tory government, and it is high time it began behaving like one.

David Fuller's view -

This is one of the most sensible comments on our fast moving, technology driven economies (not just the UK) that I have seen.

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



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March 16 2017

Commentary by David Fuller

Email of the day

On Sturgeon submersion:

Dear David,

Allister Heath has recently written another article in the Telegraph entitled – Why Scotland’s dire economy is falling further behind the UK. It is well worth a read. For Sturgeon to get a motion through the Scottish Parliament to hold a Referendum, she will probably have to invoke the support of the Greens, as was done recently in order for the SNP to get their dire budget through. The point is that if the Green’s manifesto was to be enacted Scotland would be back in the 19th century in short order. I find it difficult to believe that even Sturgeon would stoop so low to get a vote as important as the right to hold a Referendum to drag the country away from its successful resting place of 300 years. I would have thought that was political suicide.

David Fuller's view -

Thanks for your latest update from Scotland, and I agree with your conclusion.  Here is Allister Heath’s article which you mention above: Why Scotland’s dire economy is falling further behind the UK.

Aggressive, narcissistic and destructive politicians such as Sturgeon have always been a political hazard.  Fortunately, in democracies we have opportunities to vote them out over time.  Sturgeon was sufficiently shrewd to survive longer than most and she had little opposition. Consequently, it may take a little longer before she resigns or you can vote her out.  However, I maintain that her popularity peaked early last year and will never recover. 

The SNP’s utopian socialism is now seen to have undermined Scotland’s economy. Ancient claims of England’s “yoke” are no longer credible and Scotland has been increasingly subsidised by the UK. Sturgeon’s credibility is now accelerating lower following her opportunist intervention in the Brexit process.

The answer to Scotland’s problems, in my opinion, is to get rid of Nicola Sturgeon and the SNP’s sole vision which is to break up the United Kingdom.  The people to do that are impressive Ruth Davidson, leader of the Scottish Conservative and Unionist Party.  They won 31 seats last year and are the second largest party in Scotland, and closing on the Scottish National Party which has seen its once overwhelming lead shrink to 63 seats in the Scottish Parliament.   

 (See also: ‘Get back to the day job!’ Sturgeon’s independence threat ripped apart during heated FMQs)



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March 16 2017

Commentary by David Fuller

The Markets Now

Here is the current brochure.  I am pleased to say that as in January, we will once again be in the excellent Morrison Room, which is spacious and conveniently on the ground floor.

David Fuller's view -

We have another interesting list of experienced delegates and certainly not just from London. In fact, they are attending from far and wide. 

There are a few seats left, so come along and join us if you can, for another very lively and enjoyable evening, which will now include an introduction from a fourth speaker well known to Iain Little.

Meanwhile, Trump has generated plenty of political and economic controversy. Among markets, technology has never been more interesting in our lifetime so Charles Elliott’s latest comments will be most welcome. 

Whatever your investments, we will need to keep an eye on these two charts as the year progresses – Dollar Index and US 10-Yr T-Bond Yields.



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March 16 2017

Commentary by Eoin Treacy

India's Nifty Index Rises to Record as Fed Keeps Rate Outlook

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

“The U.S. Fed action was in line with market expectations and allayed concerns that the outlook comments might turn hawkish,” Hemant Kanawala, head of equities at Mumbai-based Kotak Mahindra Old Mutual Life Insurance Ltd., said on phone.

“This is positive for emerging-market flows and overseas inflows to Indian stocks will resume,” he said.

Resumption of foreign inflows and seven straight months of net purchases by local funds have boosted the valuations of Indian stocks to their highest level in more than six years. The Sensex traded at 17.3 times estimated 12-month earnings, the highest since November 2010.

Foreign funds have purchased $3.5 billion of local shares so far this year after a record $4.6 billion outflow in the three months through December. Domestic funds have been buyers for seven straight months through February, including a record 138 billion rupees ($2.1 billion) in November.

“In an environment where earnings haven’t been so exciting the valuations from the price-to-earnings perspective will always look expensive,” Kanawala said. “Price-to-book ratio is a better parameter in such cases.”

 

Eoin Treacy's view -

India has been making headlines for all the right reasons of late. The country has just moved from 2G to 4G mobile speeds which has the potential to unleash economies of scale in online business that were not previously possible. Efforts to boost manufacturing are paying dividends with Apple opening a factory in the country. Meanwhile Modi’s emphatic victory in, Congress Party dominated, Uttar Pradesh signals widespread public support for his administration’s reform and anti-corruption mandates. 



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March 16 2017

Commentary by Eoin Treacy

Hong Kong Stocks Jump to 2015 High as Fed, China Energize Bulls

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

Hong Kong equities are back at heights unseen since China devalued its currency in August 2015.
A dovish Federal Reserve, China growth optimism and steady mainland inflows combined to fuel a 2.1 percent rally in the Hang Seng Index on Thursday, the biggest advance in almost 10 months. The gain also pushed the gauge firmly above the 24,000 level -- an effective ceiling for the past seven years. China Unicom Hong Kong Ltd. and Link REIT were among the day’s best performers, while Cathay Pacific Airways Ltd. was one of only two decliners after posting a loss on Wednesday.

Hong Kong-listed equities are particularly vulnerable to shifts in sentiment toward U.S. monetary policy thanks to a currency peg with the greenback, while the increasing dominance of Chinese companies on the city’s benchmarks means national economic indicators have a powerful pull. With investors relieved the Fed didn’t increase the projected pace of rate hikes and fears of a Chinese hard landing receding, the serially under-performing Hang Seng Index may have room to rally further.

 

Eoin Treacy's view -

With a pegged currency the Hong Kong market is heavily influenced by Fed policy but that effect is exacerbated by the Renminbi’s relative weakness versus the Dollar which makes Hong Kong a more attractive destination for mainland flows.



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March 16 2017

Commentary by Eoin Treacy

March 15 2017

Commentary by Eoin Treacy

March 15 2017

Commentary by Eoin Treacy

Treasuries Surge After Fed Maintains Forecasts for 2017, 2018

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

Treasuries surged after the Federal Open Market Committee raised interest rates as expected and maintained forecasts for additional increases for the next two years, dashing expectations it might signal a quicker pace of hikes.

Yields were lower by five to 10 basis points at 2:45 p.m. in New York, with the five-year lower by 10 basis points at about 2.03 percent. Yields had risen to their highest levels in at least a year in the past week as market-implied expectations for a quarter-point increase in the fed funds rate approached certainty. Market focus was on any new language in FOMC statement, changes to member forecasts for the funds rate, or both. Most economists and strategists saw more risk of an increase to the 2018 median than to the 2017 median.

Median forecast for 2019 rose to 3% from 2.875%, while 2017 and 2018 medians remained at 1.375% and 2.125%; 5Y yields reacted most sharply, falling as much as 11bp, and the 5s30s curve rebounded from 102bp to 109bp within minutes

 

Eoin Treacy's view -

Today’s rally across assets class against a background where the Dollar gave up some of its recent strength represents a clear example of the buy the rumour sell the news.

Investors had priced in a rate hike and two more this year. They were looking for an even more hawkish tone from the Fed to justify higher yields and a stronger Dollar. They didn’t get it so positions were reversed. 

 



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March 15 2017

Commentary by Eoin Treacy

March 15 2017

Commentary by Eoin Treacy

Round Two still much more to come

Thanks to a subscriber for this report from Deutsche Bank focusing on the oil marketing companies' sector in India. Here is a section:

Although there is understandable scepticism given the government’s track record, our confidence on the implementation of free pricing for petroleum products stems from the following measures that the government has already taken: 

The extinguishing of the diesel subsidy in October 2014 and the revision of prices in line with changes in international prices without any government intervention; 

The increase in LPG and kerosene prices each month since June 2016; 

Increases in the auto fuel price even during elections and in times of sharp price increases for crude; 

The aggressive implementation of Direct Benefit Transfer (DBT) to LPG and kerosene to contain subsidies. 

FCF yield improves by up to 280 bps over FY17-20 
Operating cash flow for OMCs will likely be driven by improvement in marketing margins, rising refining margins and higher volumes. Over FY17-20, the FCF yield of state-owned OMCs should improve dramatically, by more than 280bps for IOC and BPCL. HPCL, with capex starting from FY18, will likely see its FCF yield decline by 130 bps. We expect the OMCs to generate robust free cash flows of about USD10bn over FY18-22E. We also estimate net debt/equity of OMCs to decrease further over FY16-22E – HPCL from 1.6x in FY16 to 0.6x in FY22, IOC from 0.6x in FY16 to 0.2x in FY22, and BPCL from 0.7x in FY16 to 0.1x in FY22.

Eoin Treacy's view -

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

India is a quickly growing economy that needs to take the greatest possible advantage of its democratic dividend before that massive young population ages. Smoothening out what has often been a distinctly anti-business regulatory regime with a reputation for fickle decisions has been one of Modi’s ambitions in taking on the bureaucracy. Therefore there is reason for some optimism that policy continuity can be achieved in more sectors. 



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March 15 2017

Commentary by Eoin Treacy

Credit Reports to Exclude Certain Negative Information, Boosting FICO Scores

This article by AnneMaria Andriotis for the Wall Street Journal appeared in Yahoo Finance and may be of interest to subscribers. Here is a section:

The state settlements already had prompted the credit-reporting firms to remove several negative data sets from reports. These included non-loan related items that were sent to collections firms, such as gym memberships, library fines and traffic tickets. The firms also will have to remove medical-debt collections that have been paid by a patient’s insurance company from credit reports by 2018.

Such changes might help borrowers and could spur additional lending, possibly boosting economic activity. But it could potentially increase risks for lenders who might not be able to accurately assess borrowers’ default risk.

Consumers with liens or judgments are twice as likely to default on loan payments, according to LexisNexis Risk Solutions, a unit of RELX Group that supplies public-record information to the big three credit bureaus and lenders.

“It’s going to make someone who has poor credit look better than they should,” said John Ulzheimer, a credit specialist and former manager at Experian and credit-score creator FICO. “Just because the lien or judgment information has been removed and someone’s score has improved doesn’t mean they’ll magically become a better credit risk.”

 

Eoin Treacy's view -

Credit affects just about every large purchase. This is especially true for the USA, where possession of a credit card is practically a necessity for daily life and not least because of the substantial points programs they offer. 



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March 15 2017

Commentary by Eoin Treacy

Zara Owner's Margin Shrinks to Eight-Year Low on Currencies

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

Inditex put greater emphasis on online expansion last year, cutting its target for new brick-and-mortar stores. The retailer is also making changes to some of its brands to gain market share, with the most recent example being February’s foray into men’s clothing by the Stradivarius brand, which has focused on women.

After starting online sales in Singapore and Malaysia this month, the company plans to add such services in Thailand and Vietnam in the next few weeks and also in India this year.

“India is a very attractive market for us,” Isla said on a conference call with analysts. This year Zara will open a 5,000 square-meter flagship store in Mumbai, which will be its largest store in the country. Inditex has 21 stores in that market.

 

Eoin Treacy's view -

Fast fashion is a major business but is also highly competitive and gaining access to consumers is the key to unlocking growth potential. Moving into high population countries with expanding middle classes is one solution to that challenge and expanding online is another. Creating multiple product lines in a short period of time and getting them to market instantaneously is what has allowed companies like Inditex, H&M and more recently Primark to expand globally but it’s a ruthless sector with clear winners and losers.  



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March 14 2017

Commentary by David Fuller

SNP Leftist Vision for Scotland Will End In Tears

It’s not exactly great timing: on the very same day that Nicola Sturgeon called for another Scottish referendum, the price of oil tumbled again, falling to a fresh three month low.

Given that Scottish nationalism is still predicated on the idea of using petrodollars to fund a big welfare state, this is bad news for the movement to break up the UK. Politics isn’t just about economics, of course, but the SNP’s case for an independent, socialist Scotland is even weaker today than it was when it was last defeated in 2014.

There is little hope of the price of oil recovering in a game-changing way any time soon. Brent crude futures were trading at under $51 a barrel at one point yesterday: the rush for shale in the US and other global forces have devastated Opec’s ability to keep prices high. The cartel, together with the likes of Russia, has been trying to cut back on output, but it’s all been for nothing. Prices are down by 8pc in a week, with more to come, and the US industry has been adding rigs for the past eight weeks in a row.

This is good news for inflation and for consumers – Asda was one retailer that announced a 2p cut in the price of petrol and diesel yesterday, for example – but not for the SNP. Scotland’s budget deficit was already a crippling 9.5pc of GDP in 2015-16, roughly as bad as the UK’s was at the height of the financial crisis. Thanks to the rest of the country’s generosity, the devolved government is able to get away with spending far more than the economy could possibly afford – yet Sturgeon is committed to more of the same, forever. Public spending per capita in Scotland was £12,800 in 2015-16, compared with £11,500 for the UK.

The sums don’t add up - and if Scotland were to retain either the pound or adopt the euro, it wouldn’t even be able to print money to pay the bills. Sturgeon, like Jeremy Corbyn and the political left across the UK, still believes in the myth of the magic money tree. She still thinks that, post-independence, she would simply be able to click her fingers to conjure up the vast subsidies her government currently receives from England. It’s preposterous, dangerous nonsense, as is the view that Scotland would be able to tap the EU for massive transfers instead. Scotland is relatively wealthy by global standards and Brussels will find itself facing a fiscal crisis after the UK, a key net contributor, leaves.

David Fuller's view -

Nicola Sturgeon has plenty of chutzpah, which some admire but I have always felt that she was a divisive influence within the UK and a disaster for Scotland.  

However, for a critical analysis, which is also entertaining, I tip my hat to Allison Pearson of The Telegraph for this article: Nicola Sturgeon is a liar and a traitor – off with her head!

A PDF of  Allister Heath's column is posted in the Subscriber's Area.



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March 14 2017

Commentary by David Fuller

Nicola Sturgeon Timing: A Cynical Ploy to Take Advantage of Brexit Uncertainty

The risk that Scotland would leave the UK was one of the main reasons I voted Remain last June, despite my lack of enthusiasm for many aspects of the European Union. Entirely predictably, in both Scotland and Northern Ireland, an attempt to pull the UK apart as we negotiate our exit from the EU has now begun.

There can be no going back on the decision nevertheless taken by the British people as a whole to leave. But the Government will now have to fight a war on two fronts, with each making an impact on the other. Every time EU negotiators warn there might be no deal or complain of British intransigence, they will be adding grist to the mill of the Scottish nationalists. And with each demand for special treatment for Scotland, those nationalists will weaken the ability of UK ministers to maintain tough positions that will lead to the best deal for the whole of the United Kingdom.

Nicola Sturgeon’s speech on Monday morning showed that she has identified the seizing of this moment of extreme pressure on the Westminster government as the one best hope of destroying the UK. It also demonstrated that she will use any argument to achieve her ends – even complaining that Scotland faces ‘‘the prospect of a centralisation of power at Westminster’’ when the Scottish parliament has in fact acquired major additional powers, some of which it has not even used.

David Fuller's view -

Perhaps I am an incurable optimist but I think (hope) William Hague is too pessimistic in this column.  Yes, the UK Government faces some very tough negotiations and the Jean-Claude Juncker school of thought may be more interested in “punishing” Britain if only to deter similar exit moves from other EU countries.  That would be a desperate, intellectually bankrupt strategy. 

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



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March 14 2017

Commentary by David Fuller

The Markets Now

Here is the current brochure.  I am pleased to say that as in January, we will once again be in the excellent Morrison Room, which is spacious and conveniently on the ground floor.

David Fuller's view -

We have another interesting list of experienced delegates and certainly not just from London. In fact, they are attending from far and wide. 

There are a few seats left, so come along and join us if you can, for another very lively and enjoyable evening, which will now include an introduction from a fourth speaker well known to Iain Little.

Meanwhile, Trump has generated plenty of political and economic controversy. Among markets, technology has never been more interesting in our lifetime so Charles Elliott’s latest comments will be most welcome. 

Whatever your investments, we will need to keep an eye on these two charts as the year progresses – Dollar Index and US 10-Yr T-Bond Yields.



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March 14 2017

Commentary by Eoin Treacy

March 14 2017

Commentary by Eoin Treacy

China H-Shares Advance as Industrial Output Rises, Inflows Climb

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

China’s industrial output and fixed-asset investment beat estimates for the first two months of the year, adding to recent data suggesting that the nation’s economic recovery is holding up. Depreciation pressures on the yuan have prompted Shanghai investors to buy Hong Kong stocks as well, with net southbound purchases in the past eight sessions rising to 9.8 billion yuan ($1.4 billion). The odds of a Federal Reserve interest-rate increase this week have climbed to 100 percent.

“The market is extending a rebound after some consolidation in the past two weeks and as mainland funds continue to pile in to hedge against the risk of yuan depreciation after a possible Fed rate hike," said Linus Yip, a strategist at First Shanghai Securities in Hong Kong.

 

Eoin Treacy's view -

The Hong Kong listed China Enterprises Index has some of the lowest valuations for a major index in the world, at an historic P/E of 8.5 and a yield of 3.5%. Investors are nonetheless fearful it is a value trap because there are so many concerns about the quality of earnings, how long stimulus will be sustained; the trajectory of the Yuan and the outcome of the Party Congress which is taking place this week. 



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March 14 2017

Commentary by Eoin Treacy

Email of the day on stretched valuation metrics:

Yes, I know that prices can remain stretched a lot longer than you can imagine and we need to watch price action but.....
 

 

Eoin Treacy's view -

Thank you for these illuminating charts. This article focusing on some of the points raised by Robert Shiller may be also be of interest. Both these articles highlight what might be considered the inflationary effects extraordinary monetary policy have had on asset prices.  



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March 14 2017

Commentary by Eoin Treacy

Email of the day - on vapes and e-cigarettes

Hope you are keeping well.

We are getting loads of orders for Vape labels at the moment and talking to other guys in our industry they are all getting the same - we are talking millions of labels. The industry is seriously expanding, at this time it appears to be multi small to medium players but there must be some serious money to be made somewhere!

The label, bottle, liquid etc. can't come to more than £1.50 so potential profit is there.
I know you've probably already had a look but thought I'd mention it!

 

Eoin Treacy's view -

Thank you for this insightful email. The market for e-cigarettes has been somewhat overshadowed by the hoopla surrounding the evolution of the cannabis industry in the USA. Part of the reason for this is because there has been considerable controversy about the safety of the chemicals used in the vapourising process and the fact that some of the flavours such as bubble gum appear to be directly aimed at children. That resulted in related shares initially surging but subsequently collapsing because the cost of getting new products approved by regulatory authorities surged. 



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March 13 2017

Commentary by David Fuller

Self-Employed? This Government is Determined to Punish You

Here is the opening of this topical column by Janet Daley for The Telegraph - note; there have been several different titles for this article.  I have used a slightly shortened version of the original title from the newspaper's printed edition:

Let’s stop pretending that the storm over Philip Hammond’s Budget and the self-employed is all about white van men. Not that I have anything against white van men. We have a clutch of faithful local tradesmen who have come out to rescue our household from disasters so often that they are now cherished family friends. Indeed, our actual extended family includes a cohort of white van men.

But the issue at hand is about a huge range of vocations and occupations which do not involve spanners. As well as all the self-employed creative types I listed on this page last week — writers, artists, actors and musicians — there are the IT consultants, the web designers and the digital start-ups leading the technological revolution.

And then there are the artisan bakers, the small farms reviving traditional British cheeses, and the mothers who create kitchen table businesses so they can work from home instead of being economically idle: all those innovative ventures which have introduced such vitality into the work culture. These are the people the Chancellor has chosen to clobber.

The Chancellor has attacked enterprise

Let’s not pretend either that this is only about putting up National Insurance contributions. That is only one front in what is clearly an organised campaign against the self-employed and small business owners who are among the most productive, self-reliant and progressive in the true sense of the word (meaning “encouraging progress”) participants in the workforce.

There is a pattern here which it is now impossible to miss. The two measures I wrote about last week — the introduction of quarterly tax returns and the effective abolition of the flat-rate Vat system — are going to be devastating. The first of these is deranging and apparently pointless: in future, all self-employed individuals and small businesses will be required to file four income tax returns per year instead of one. These will have to be done digitally using specially designated software. This will, of course, quadruple their accountancy charges at a stroke and require access to online facilities.

Even more damagingly, this change will oblige them to pay income tax at the end of each quarter rather than, as now, in one or two yearly instalments.

So if your business is seasonally affected: if you have a healthy quarter (say, in the run-up to Christmas if you produce gifts, or the summer if you are a gardener), you will not be able to spread the cash flow from that good period to cover the fallow one that follows. It will not be possible any longer to even out your good and bad times over the course of the year.

Of course, your next quarterly return will reflect the loss of business and your tax payment will be adjusted but that will take three months or more to come through. By that time, as almost anyone who runs on a tight margin will know, you could either have gone broke or found it necessary to borrow more to remain afloat.

David Fuller's view -

Although I watched Philip Hammond’s budget delivery on Wednesday the 8th, while multi-tasking in the home gym, I confess to not fully understanding the tax hikes at the time.  Apparently, Ben Wright, Group Business Editor at The Telegraph was in a similar position, as I posted his article: With little room to manoeuvre, Philip Hammond delivers a stead-as-she-goes Budget, a few hours later. However, Janet Daley’s Sunday column above is much more detailed and captures the outrage expressed by many Conservative Party voters.   

I am now trusting that this reaction will represent a warning shot across the bows for both Chancellor Hammond and Prime Minister May, as they declare Article 50 and commence Brexit negotiations in earnest next month. 

The Conservative Government does not need to move further to the Left. Instead, it needs to both encourage and incentivise taxpayers in the UK, while also attracting businesses from Europe, the USA and other prosperous regions of the globe, because (hopefully) the UK will be providing both stability and opportunities in a competitive environment.

It would be a mistake, I believe, for the Government to assume that it has to pay back Gordon Brown’s reckless spending deficit, before it can once again act like a Conservative administration.  Instead, it needs to encourage strong economic growth, which it will be in a position to do now that the global economy is improving and the UK is leaving the EU.  A strong economy will reduce the deficit while also improving the UK’s standard of living over the longer term. 

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



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March 13 2017

Commentary by David Fuller

Needed: A Radical Vision That Brings In Lower and Simpler Taxes for All

It has been widely remarked that our Chancellor of the Exchequer doesn’t appear to have a vision for the tax system. Does this matter? It assuredly does.

I have often asked why it is that many small countries are so economically successful. The answer, I think, is that their vulnerability makes it essential to get public policy right.

They simply have no leeway to indulge in grossly incompetent government. That applies, amongst other things, to the three key fiscal questions: how large the government should be; what it should spend money on; and how it should raise the money to pay for whatever it decides to do.

My favourite example is Singapore, which could have become a 
basket case. Instead, its economic performance has been marvellous, to the point where it now has a higher per capita GDP than its former colonial master, namely us. This is largely thanks to superbly effective government.

Getting the economic contribution of government right first demands that the governing party is clear about what the state does best and, relatedly, what it is that only the state can do. Making the tax system work effectively clearly falls into the latter category. That is what makes Mr Hammond’s lack of vision so damaging.

What should he be aiming to do? You could argue that the tax system should be sufficiently simple that anyone and everyone can readily comprehend it and accordingly be aware of the influence of tax on their after-tax returns from different activities.

Actually, in my view, in an ideal world, the tax system would be so simple and the tax rate so low that people might as well be ignorant of these details. Other than where the public interest is deemed to lie in restricting the production or consumption of “bads”, such as pollution, or the production of public goods or things that have externalities, the best result is achieved when no economic decisions are determined by the influence of tax. Effectively people can just ignore it.

Admittedly, in practice, British chancellors are seldom in a position to follow such an agenda. They are usually left scrabbling around to find money from any old source, while simultaneously feeling obliged by political forces to dish out much of it to supposedly deserving causes. The result is plain for all to see – a hotch-potch of a tax system with gross distortions to incentives.

The way to tackle this issue is to think through in advance what you want to achieve with the tax system and to lay out a plan. When the Chancellor has some available fiscal resources to dispose of, he should then use these to make progress towards the desired goals.

This is critically important because moving to a rational system of tax always creates losers as well as winners and it is important to be able somehow to buy out or compensate the losers. Last week’s shambles over raising national insurance contributions for the self-employed was a clear example of fiscal policy-making without vision.

National insurance is a tax by another name. It needs to be integrated with income tax. But getting this right, and avoiding the imposition of heavy losses on groups such as the self-employed and pensioners (who don’t pay national insurance), is a mammoth task.

I believe that the Chancellor should have as his objective the abolition of national insurance. He should make a start by gradually lowering the standard rate, thereby reducing the gap between the effective overall tax rate paid by the employed and self-employed.

Admittedly, for the next few years the Chancellor is bound to be absorbed with getting the deficit down and it seems unthinkable that there could at some stage be a different agenda.

Yet, in the 1980s the public finances moved from huge deficit to significant surplus – before the recession of 1990-92 brought the deficit back with a vengeance. Nigel (now Lord) Lawson, the Chancellor during the key part of the 1980s, knew what to do with the room for manoeuvre that the improving public finances afforded him. He believed in lower taxes and a simpler tax system. That is what he delivered.

David Fuller's view -

One could be forgiven for thinking that chancellors and other tax providers are wonkish complicators rather than simplifiers. I hope this does not apply to Philip Hammond in future and that in addition to significantly lowering corporate and particularly personal taxes in his next budget, he simplifies an unnecessarily complex system.  After all, that is what practically everyone wants. Even more importantly, it would be good for GDP growth.

A PDF of Roger Bootle’s column is posted in the Subscriber’s Area.



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March 13 2017

Commentary by David Fuller

Indian PM Modi Wins Sweeping Victory in Crucial State

Here is the opening of this informative report from VOA:

NEW DELHI — 

Indian Prime Minister Narendra Modi's Bharatiya Janata Party won a landslide victory in the politically crucial northern state of Uttar Pradesh, giving the Indian leader a huge boost half way through his term.

The country’s most populous state, where the BJP swept away the ruling regional Samajwadi Party, was the biggest electoral prize of the five states which went to the polls in recent weeks.

"I give my heartfelt thanks to the people of Uttar Pradesh. This is a historic victory for the BJP; a victory for development and good governance," Modi said.

Modi personally led his party’s campaign in Uttar Pradesh, promising growth and defending his controversial ban on high value currency notes, which many had feared would alienate poor voters in an impoverished state.

But in a ringing endorsement of the Indian leader, the BJP won the biggest victory secured by any party in recent decades in the battleground state. According to the Election Commission, it was ahead in more than 320 seats in the 403-member state assembly.

BJP’s chief strategist in the polls, Amit Shah, attributed the huge win to Modi’s pro-poor policies and the “politics of performance.” Calling it a historic mandate, he said that “The country’s poor people have put their faith in a big way in Mr. Modi.”

Party workers held raucous celebrations outside the party office in New Delhi and Uttar Pradesh’s capital, Lucknow, setting off fire crackers and dancing.

Political analysts said the resounding victory in Uttar Pradesh puts the BJP in a commanding position ahead of the 2019 general elections and enhances Modi’s reputation as a strong leader who can make politically risky decisions.

David Fuller's view -

I have long maintained that Narendra Modi was easily one of the world’s most astute and successful political leaders.  He needs to be because he also has the most difficult job within any democracy, in leading India’s huge, promising but also chaotic and diverse culture.

India has been a GDP growth leader since Modi’s landslide election victory two and a half years ago.  Were he to comfortably win a second five-year term in 2019, possible but probably a best-case scenario, India’s rapid economic development would continue.

This item continues in the Subscriber’s Area. 



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March 13 2017

Commentary by David Fuller

Rutte, Wilders Swap Jibes in Debate 36 Hours Before Dutch Vote

Here is the opening of this topical article from Bloomberg:

Dutch Prime Minister Mark Rutte and populist Freedom Party leader Geert Wilders questioned each other’s credibility and integrity as they faced off on live national television for the first time in the country’s election campaign, just 36 hours before the polls open.

The Liberal premier said he will not trust Wilders again after the Freedom Party walked away from supporting Rutte’s first minority cabinet in 2012 amid an economic crisis. “I’m not going to work with such a party again,” Rutte said at the end of the debate in Rotterdam Monday. “Not in a cabinet, and not even relying on you for support outside the government. No, never ever.”

Wilders accused Rutte of breaking promises he made before the elections in 2012. “Who still believes Rutte? I still see him standing there,” the Freedom Party leader said. “We would get tax cuts, a tougher policy on immigration, we would get 1,000 euros. And what came out of these promises? We had record after record immigration. And taxes only increased.”’

Three opinion polls Monday showed little change in the overall situation in the final stretch before the election. Two showed Rutte’s Liberals ahead of the anti-Islam, anti-European Union Freedom Party by a margin of three to four seats, with the other showing the two parties in a tie. Rutte has overtaken Wilders in most surveys as polling day approaches.

No party is set to win more than a fifth of the seats in the 150-member lower house, so a multiparty coalition will be needed. All the other major parties have ruled out working with Wilders.

David Fuller's view -

Even if Wilders were to come first in this multi-party election, it would be very difficult for him to form a government.  Currently running second in the popular vote, should Wilders manage to do better it is still very unlikely that he could gain more than 30 seats, which is the top end of his performance in the polls. However, he would need to form a coalition of 76 seats to have a simple majority in the 150-member house.  Currently, other parties say they would not work with Wilders.  This would probably change if he were to handily beat Prime Minister Rutte.  Nevertheless, gathering sufficient seats to form a majority government would still be very difficult. 

Overall, governance will remain difficult within many EU countries, not least because of disillusioned, angry and divided voters.



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March 13 2017

Commentary by David Fuller

The Markets Now

Here is the current brochure.  I am pleased to say that as in January, we will once again be in the excellent Morrison Room, which is spacious and conveniently on the ground floor.

David Fuller's view -

We have another interesting list of experienced delegates and certainly not just from London. In fact, they are attending from far and wide. 

There are a few seats left, so come along and join us if you can, for another very lively and enjoyable evening, which will now include an introduction from a fourth speaker well known to Iain Little.

Meanwhile, Trump has generated plenty of political and economic controversy. Among markets, technology has never been more interesting in our lifetime so Charles Elliott’s latest comments will be most welcome. 

Whatever your investments, we will need to keep an eye on these two charts as the year progresses – Dollar Index and US 10-Yr T-Bond Yields.



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March 13 2017

Commentary by Eoin Treacy

March 13 2017

Commentary by Eoin Treacy

Modi Win Spurs Jump in Indian Stock Futures, Rupee Forwards

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

India’s stock futures and currency forwards jumped after Prime Minister Narendra Modi’s bigger-than-expected win in state elections increased expectations for a continuation of his reform agenda.

Modi’s Bharatiya Janata Party won 312 seats in the 403- member assembly of Uttar Pradesh, according to the Election Commission of India, up from 47 in 2012. The results of the race in India’s largest state were seen as a litmus test of Modi’s popularity and reforms, including opening up the country to more foreign investment and seeking to introduce a goods and services tax, ahead of general elections in 2019.

“Though markets expected the BJP to do well in polls, the ultimate result surpassed even the most optimistic assumptions,” said Vivek Rajpal, a rates strategist at Nomura Holdings Inc. in Singapore. “These election results increase the expectation toward further reforms” and will be treated “very positively,” by markets, he said.

 

Eoin Treacy's view -

The surprise demonetisation announced by Modi on the same day as the US Presidential election introduced a calculated bet that the inconvenience it introduced for many regular people would be outweighed by the perception that large holders of cash would feel even more pain. It was a risky bet which has paid off considering how wide the BJP’s lead was in the Uttar Pradesh election. Modi should now be emboldened to step up his push for reform which to date has been relatively modest. 



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March 13 2017

Commentary by Eoin Treacy

Intel to Acquire Mobileye

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

“As cars progress from assisted driving to fully autonomous, they are increasingly becoming data centers on wheels. Intel expects that by 2020, autonomous vehicles will generate 4,000 GB of data per day, which plays to Intel’s strengths in high-performance computing and network connectivity. The complexity and computing power of highly and fully autonomous cars creates large-scale opportunities for high-end Intel® Xeon® processors and high-performance EyeQ®4 and EyeQ®5 SoCs, high-performance FPGAs, memory, high-bandwidth connectivity, and computer vision technology.

Eoin Treacy's view -

Intel missed a trick when mobile phones took off. It had simply ignored the market for years, preferring instead to concentrate on desktops where it has a strong lead in what is a declining market. When mobile phone demand exploded in popularity companies like ARM Holdings and Qualcomm took the initiative and the bulk of the profits. Since the market for desktop computers is shrinking Intel can’t afford to miss out on the evolution of autonomous vehicles since it is likely to become a major destination for both chips and sensors over the next decades. 



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March 13 2017

Commentary by Eoin Treacy

SEC Decision on the proposed Winklevoss bitcoin ETF

Thanks to a subscriber for this link to the full text of the SEC’s decision to disallow the bitcoin ETF. Here is a key section:

As discussed further below, the Commission is disapproving this proposed rule change because it does not find the proposal to be consistent with Section 6(b)(5) of the Exchange Act, which requires, among other things, that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices and to protect investors and the public interest.

The Commission believes that, in order to meet this standard, an exchange that lists and trades shares of commodity-trust exchange-traded products (“ETPs”) must, in addition to other applicable requirements, satisfy two requirements that are dispositive in this matter. First, the exchange must have surveillance-sharing agreements with significant markets for trading the underlying commodity or derivatives on that commodity. And second, those markets must be regulated

 

Eoin Treacy's view -

Bitcoin was subject to quite acute volatility in the aftermath of the decision; falling from $1300 to below $1000 before recovering somewhat and rallying rather impressively today. 



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March 10 2017

Commentary by David Fuller

China Should Deal With North Korea

Here is the opening of this Editorial from Bloomberg:

Chinese President Xi Jinping seems interested in embracing the role of global steward -- champion of the liberal political and economic order the U.S. administration seems uninterested in promoting. Now is his moment to prove he’s serious.

China’s erstwhile client North Korea has become an urgent threat to stability -- Xi’s stated top priority -- from one end of Asia to the other. Japan’s military is now on its highest state of alert, after the North’s latest round of missile tests landed in Japanese waters. The first elements of a powerful U.S. missile defense system, known as Terminal High-Altitude Area Defense (THAAD), have landed in South Korea; the system, which China fiercely opposes, could be operational by next month. In Malaysia, meanwhile, North Korean agents allegedly used a banned nerve agent to assassinate dictator Kim Jong Un’s half-brother, who had reportedly been under Chinese protection. Kim’s regime is now holding Malaysians in North Korea hostage, while Malaysia is preventing North Korean diplomats from leaving the country.

After the assassination, China cut off any further coal imports from North Korea this year. But the impact of the move remains uncertain. And, as a recent United Nations report makes clear, North Korean agents are continuing to use Chinese middlemen to fund the regime’s illicit missile and nuclear programs.

Wednesday’s proposal from Chinese Foreign Minister Wang Yi for North Korea and the U.S. to back down simultaneously -- the former by halting nuclear and missile tests, the latter by suspending joint military exercises with South Korea-- is constructive. But it’s been raised before and has little chance now: The U.S. has already ruled out any actions that might reward Kim for bad behavior.

China may have legitimate reasons for not wanting to go further and risk destabilizing the Pyongyang regime. The mainland would bear the brunt of any refugee exodus from the North and faces the unsettling prospect of a unified Korea -- and U.S. troops -- along its border. Chinese leaders may also be right that the U.S. needs to find a way to sit down and negotiate with North Korea, even if talks don’t lead to the elimination of its nuclear arsenal. Left unchecked, the North could within a few years deploy a nuclear-tipped ballistic missile capable of reaching the U.S. mainland. If talks can halt its progress before then, they are worth pursuing.

David Fuller's view -

While regional conflicts remain, a serious international war has been a declining risk since Fidel Castro invited Nikita Khrushchev to turn Cuba into a nuclear missile base in 1962.  I remember it well because I was in the 101st Airborne Division at the time and we thought we might be parachuted into Cuba.  Fortunately, Khrushchev and President Kennedy backed down from that very tense situation.

I reckon that was the closest we have ever been to WW3.  Subsequently the risk of another World War declined, not least because it would have been an act of mutual self-destruction. 

Needless to say, that reality is far greater today.  If most of the nuclear weapons currently on the planet were detonated in conflict, it would most likely cause the end of human civilisation.  Hopefully, WW3 remains a tiny risk but it has increased somewhat.

The prospect of mutual self-destruction would presumably deter any leader other than a madman from launching a first nuclear strike from China, Russia or the United States.  However, that could more readily happen in a small rogue state, if it had the capability. 

There have always been a number of rogue states but few had either the capability or the protection to start a nuclear war.  North Korea does not quite have the capability but it certainly is a rogue state and it has long been protected by China.  Moreover, North Korean dictator Kim Jong Un is clearly obsessed with developing nuclear weapons and the long-distance missiles to launch them.      

China could solve the North Korean problem very quickly and effectively, in the interests of most North Koreans and everyone else.  Xi Jinping is China’s most powerful leader since Mao Zedong, but does he have the character to halt North Korea’s nuclear programme?

(See also: US Ambassador to UN: Kim Jong Un ‘Is not rational’, from CNN Politics)



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March 10 2017

Commentary by David Fuller

Race to Bottom on Costs May Cause Oil to Choke on Supplies

Here is the opening of this topical article by Bloomberg:

Houston hosted two events this week: the nation’s largest energy conference and the town’s famous rodeo. They have more in common than you’d think.

In both cases, the key for top performers is how efficiently they perform. For cowboys, it means tightly controlling every muscle to stick on a bucking bronco. For energy executives, it means controlling every cost to lower the break-even price and survive what’s been a wild ride on the oil market.

When companies can lower the price at which they break-even, it means they can approve more projects and produce more oil, keeping dividends safe and investors happy. The risk: By drilling up their share price, they can also end up drilling down the price of oil. Welcome to 2017, the year after a two-year market rout made companies more efficient. At the CERAWeek by IHS Markit conference this week, fears of too much supply were palpable.

"Everyone is driving break-even prices down," Deborah Byers, head of U.S. oil and gas at consultants Ernst & Young LLP in Houston, said in an interview at the meeting, the largest annual gathering of industry executives in the world. "It isn’t just shale companies; it’s everyone, from deep-water to conventional."

As the conference was ongoing, those fears took physical form as West Texas Intermediate, the U.S. crude benchmark, plunged 9.1 percent this week, closing below the key $50-a-barrel level for the first time this year. It settled at $48.49 on Friday.

The slump came as Scott Sheffield, chairman of Pioneer Natural Resources Co., said prices could fall to $40 if OPEC doesn’t extend its existing agreement to cut production. Shale billionaire Harold Hamm, the CEO of Continental Resources Inc., warned undisciplined growth could "kill" the oil market.

The buzzword was efficiency. In panel discussions and keynote speeches, executive after executive tried to outdo rivals in announcing their low break-even prices. Eldar Saetre, head of the Norwegian oil giant Statoil ASA, told delegates that break even for his company’s next generation of projects had fallen from $70-plus to "well below" $30 a barrel.

David Fuller's view -

Analysis of the international oil market today is simple, albeit very different from what the industry has experienced in earlier decades.  Thanks to technology, oil companies around the world can now produce more crude at $50 a barrel than the global economy can consume.  Furthermore, the average cost of production is still declining and is likely to be considerably lower ten to twenty years from now. 

The world will never run out of oil, even when the global economy is booming with the help of cheaper energy prices.  This is not because the supply of oil in the ground is infinite, which it is not.  Instead, the world is approaching peak oil demand within the next decade, because other forms of energy continue to become more competitive, thanks to technology, and they cause less pollution.

The only way oil prices can move considerably higher than today’s levels for both Brent and WTI crude, is if production is sharply curtailed, for one reason or another.  While theoretically possible, this is unlikely beyond the short term, if at all.  

(See also this week's earlier comments.)



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March 10 2017

Commentary by David Fuller

Winklevoss Twins Lose Bid for Bitcoin Trade Fund

WASHINGTON — The irrepressible Winklevoss twins, known for having sued Mark Zuckerberg over the idea for Facebook, have suffered a setback from federal regulators in their push to expand the use of bitcoin to a wider universe of investors.

The Securities and Exchange Commission rejected Friday a proposed Winklevoss exchange-traded fund that could have opened the digital currency to larger numbers of ordinary investors. The SEC said the proposal from Tyler and Cameron Winklevoss was inconsistent with rules for securities exchanges designed to prevent fraud and manipulation, and to protect investors.

Bitcoin allows people to buy goods and services and exchange money without involving banks, credit card issuers or other third parties. About 8 years old, it has yet to be broadly embraced and has been prone to wild price swings.

David Fuller's view -

I have not been tempted by Bitcoin but like any big mover it charts well.  I assume that we have seen another peak for the potentially lengthy medium-term. 



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March 10 2017

Commentary by David Fuller

The Markets Now

Here is the current brochure.  I am pleased to say that as in January, we will once again be in the excellent Morrison Room, which is spacious and conveniently on the ground floor.

David Fuller's view -

We already have another interesting list of experienced delegates and certainly not just from London. In fact, they are attending from far and wide. 

There are a few seats left, so come along and join us if you can, for another very lively and enjoyable evening, which will now include an introduction from a fourth speaker well known to Iain Little.

Meanwhile, Trump has generated plenty of political and economic controversy.  Among markets, technology has never been more interesting in our lifetime so Charles Elliott’s latest comments will be most welcome. 

Whatever your investments, we will need to keep an eye on these two charts as the year progresses – Dollar Index and US 10-Yr T-Bond Yields.



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March 10 2017

Commentary by Eoin Treacy

March 10 2017

Commentary by Eoin Treacy

New Infrastructure Themes and Top Ideas

Thanks to a subscriber for this report from Deutsche Bank highlighting the growth potential in new technology infrastructure. Here is a section:

A core insight in our theme report is the meaningful shift in spending priorities that our primary research notes at Hyperscale Clouds, Enterprises, and Service Providers. In particular, we highlight +50% Y/Y capex intensity at major Clouds for Terabit Scale Optical Interconnects; required for running Web Scale Applications such as Google Maps, Azure Cloud, AWS, GCP, etc.

A corollary insight is the accelerating IT demand for Software and SaaS based tools for Network and Application Analytics, AI and Machine Learning, and Automation tools – for “structurally lowering” the costs of running complex IT infrastructures at Hyperscale Clouds, Large Enterprises, and Carriers.

A case in point is CSCO “doubling down” on Security, Analytics, AI/ML, and Automation Software capabilities (Meraki, AppDynamics, Jasper, Tetration, etc) to drive incremental Top Line and EPS growth through a “recurring revenue” model – laddering upon CSCO’s +250B networking installed base.

 

Eoin Treacy's view -

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

There is a lot of tech-speak in this report but the three main themes it is promulgating are the growth and increasing sophistication of cloud computing, the growth of fibre optics where Terabit speeds are potentially possible and the rollout of 5G mobile networks. 

Most of what has made headlines in the technology sector over the last decade has been software related. In fact the pinnacle of this reliance on other company’s infrastructure might be Snap’s IPO. The company runs none of its own infrastructure, at least so far, and has instead chosen to outsource everything from managing the backend to client acquisition to third parties like Google and Amazon. However software relies on hardware and infrastructure to grow and if the aspirations of companies that depend on it like Netflix and Facebook are going to be realised then major connectivity investment needs to take place. 

 



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March 10 2017

Commentary by Eoin Treacy

The Pound

Eoin Treacy's view -

The British Pound has been in a reasonably consistent downtrend against the US Dollar since 2014, defined by a staircase sequence of ranges mostly one below another. The present range has unwound the majority of the oversold condition relative to the trend mean and with the impending activation of Article 50, the question of whether the low near $1.20 is going to hold must be to the fore of many traders’ minds. 



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March 10 2017

Commentary by Eoin Treacy

Park's Ouster Raises Prospect of Reset With China, Kim Jong Un

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

The impeachment of Park Geun-hye opens the door for a reset in ties with North Korea and China.

The leading candidates to replace Park, who was ousted as president by South Korea’s constitutional court on Friday, favor a softer touch with North Korean dictator Kim Jong Un. They’re also open to rethinking the deployment of the Thaad missile shield, which has spurred Chinese retaliation against South Korean companies.

“The liberals believe that if you engage with North Korea, then they could get some kind of missile-test moratorium,” said John Delury, an associate professor of Chinese studies at Yonsei University in Seoul. “The Chinese strategy will be to push just hard enough so the South Korean public sees the cost of having Thaad, but not too hard that you unleash outrage.”

The election campaign -- a vote must be held within 60 days -- will spur fresh debate on how to stop Kim from acquiring more powerful nuclear weapons and missiles. Secretary of State Rex Tillerson plans to seek a new approach to dealing with North Korea in a trip to the region next week, though China’s calls for talks have been rebuffed by the U.S., Japan and South Korea.

Earlier this week, the U.S. military unloaded two mobile missile launchers in South Korea to start deployment of Thaad. It came as North Korea launched four ballistic missiles that landed in waters near Japan.    

 

Eoin Treacy's view -

The potential for a reset with North Korea is a double-edged sword. After all this is a regime whose main export has been nuclear technology to any country willing to pay for it, but most particularly those which are at odds with Western interests. In that regard it is reasonable to conclude North Korea’s actions are those of a Chinese puppet state. Too often the liberal attitude to negotiations has been to give the recalcitrant threatening aggressor whatever they want just to make them go away. Unfortunately, that only emboldens them to ask make even more ambitious demands. 



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