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October 25 2016

Commentary by Eoin Treacy

Email of the day on revisions to data

I have noticed some discrepancies between the data you provide for the Bloomberg US Financial Conditions Index and the value as found on the Bloomberg terminal itself. Although the shape of the lines look similar, the values are different. For example in July your data goes up to 0.47, however the Bloomberg data goes marginally above positive. Could you please check and confirm? 

Eoin Treacy's view -

Thank you for highlighting this issue which can only be explained by revisions to the data that readjust the scale of the chart on Bloomberg. This is one of the perils of relying on fundamental economic data. It tends to be revised at least once and possibly more often as more data becomes available. Of course that says nothing about the influence political ambitions have on how data is released.  I have now updated our chart to depict the revisions. 



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October 25 2016

Commentary by Eoin Treacy

'Siri, catch market cheats': Wall Street watchdogs turn to A.I.

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

A.I. may even sniff out new types of chicanery, said Tom Gira, executive vice president for market regulation at the Financial Industry Regulatory Authority (FINRA).

"The biggest concern we have is that there is some manipulative scheme that we are not even aware of," he told Reuters. "It seems like these tools have the potential to give us a better window into the market for those types of scenarios."

FINRA plans to test artificial intelligence software being developed in-house for surveillance next year, while Nasdaq Inc (NDAQ.O) and the London Stock Exchange Group (LSE.L) expect to use it by year-end.

The exchange operators also plan to sell the technology to banks and fund managers, so that they can monitor their traders.

Artificial intelligence is the notion that computers can imitate nuanced human behavior, like understanding language, solving puzzles or even diagnosing diseases. It has been in development since the 1950s and is now used in some mainstream ways, like Siri, an application on Apple Inc's (AAPL.O) iPhone that can engage in conversation and perform tasks. 

 

Eoin Treacy's view -

Artificial Intelligence (AI) is a great example of the exponential growth curve described by Ray Kurzweil. It has been in development since the 1950s but had an inconsequential impact on the wider economy. When the digital economy really took off it provided the feedstock for AI to be truly useful and advances in computing, to make sense of the flood of data, were equally important. 



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October 25 2016

Commentary by Eoin Treacy

Pimco Sees Legs on Brazil's Rally as the Real Hits a 2016 High

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

Pimco’s vote of confidence, albeit with a few cautionary caveats, is helping to reinvigorate investor appetite for a currency that has climbed 28 percent this year. It adds to a string of positive developments in recent weeks that has prompted traders to reassess bets that Brazil’s rally may be over, from President Michel Temer’s success in advancing a spending-cap bill to last week’s rating upgrade for the battered state-run oil giant, Petroleo Brasileiro SA. The central bank signaled Tuesday that it’ll be modest in its quest to lower borrowing costs -- the benchmark rate is 14 percent -- which also supports the real.

“A better-than-expected improvement on the fiscal outlook and the slower-than-expected pace for interest-rate cuts both strengthen Brazilian assets,” said Andres Jaime, a strategist in New York at Barclays Plc. Back in September, “we had a less optimistic outlook.”

In a note on Pimco’s website, emerging market portfolio managers Yacov Arnopolin and Lupin Rahman wrote that Brazil’s high interest rates offer a “decent cushion against potential weakness.” Borrowing dollars to lend in reais has returned 40 percent in a so-called carry trade this year, the most among major currencies.

“The country’s fixed-income assets continue to present compelling opportunities,” they wrote. “With confidence in the government returning, Brazil could be set for a comeback -- one that could restore nominal interest rates to single digits and put credit rating upgrades back on the table.”

 

Eoin Treacy's view -

In a world of close to zero interest rates and where a significant quantity of government debt has negative yields it’s hard to find 14% interest rates in an appreciating currency. Brazil still has a lot of challenges but with commodity prices rebounding and a BIDU new administration, intent of squeezing inflation out of the economy, the outlook for both the currency and asset prices remains positive.  



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October 24 2016

Commentary by David Fuller

Our Roads Could Hold the Secret To Sucking Carbon Out Of Natural Gas

It’s not easy to capture carbon dioxide. I’ve written before about some of the more ambitious efforts currently underway – be it sucking it directly out of the urban air, or transforming it into rock. But now, researchers from Rice University have found another option – asphalt – and they’ve used it to suck carbon dioxide out of natural gas. Now, it’s important to say at this point that this research was funded by an oil and gas exploration company, so there’s a risk of ‘spin’. However, having read the paper(s), it’s clear to me that the technique itself is interesting, and I suspect it’ll find much wider usage. So let’s look into how it works.

When natural gas emerges from the ground, it’s composed of hydrocarbons, and up to 10% carbon dioxide (CO2). Before the gas can be sold to the market, the CO2 plus any other impurities need to be removed, and this cleanup process is expensive. Generally, the ‘raw’ gas is filtered through a series of liquid compounds called amines, which extract only the CO2, while letting the ‘clean’ gas through. Amines have a limited capacity though – they can absorb around a fifth (between 15 – 20%) of their own weight in CO2 – and recycling them for reuse is incredibly energy-intensive. So, lots of research groups have been looking into alternative options that could reduce this cost.

Enter Rice University and their asphalt…though, I prefer to call it bitumen, so no doubt I’ll switch between the two terms. Anyway, asphalt/bitumen is the black, sticky, petroleum-based substance that’s used to build roads. There, it holds together the small bits of rock that are known as aggregate, to form a dense, tough surface for road vehicles to drive on. But if it’s to be used for carbon storage, you need to do a bit of chemistry first.

The team, led by Prof James Tour, started with a naturally-occurring form of bitumen called Gilsonite, which is found in various locations across the US, and used in everything from cement to inks. This, they heated to 400°C to remove the volatile (‘evaporate-able’) components. What’s left is then heated to 900°C in the presence of potassium hydroxide, transforming it into a porous form of asphalt. These tiny holes give the asphalt an ultra-high surface area – so high, in fact, that a single gram of it has a surface area equivalent to that of two ice hockey rinks. And in the same way that a bath sponge can hold a lot of water, this asphalt sponge could be used to store gas… albeit temporarily. This sponge relies on high pressures, already present at gas wells, to hold the carbon dioxide within it pores. Once the pressure drops, the CO2 is released – either to be pumped back into the ground, keeping it out of the atmosphere, or stored for use elsewhere.

The paper, published in Advanced Energy Materials (£), isn’t the first from this team – they’ve been working on carbon sequestration for years. In 2014, they wrote about transforming gaseous carbon dioxide into solid polymers (there’s also a video about that work here) and in 2015, they produced the first version of this porous asphalt. In those initial tests, they showed that their sponge could adsorb (store on its surface) 114% of its weight in carbon dioxide. But in this latest paper, thanks to the increase in surface area (i.e. they made more space in which to store the gas), the asphalt could manage 154% of its weight…. that’s ten times more than the amines currently in use.

There are other benefits too. The raw Gilsonite is readily available, and unlike amines, the final porous sponge can also be reused immediately. “[We’ve shown] we can take the least expensive form of asphalt and make it into this very high surface area material to capture carbon dioxide,” Prof Tour said in the press release. I admit that I’m no great fan of the oil and gas industry, and I hope that we move away from it sooner rather than later. But anything that makes it cleaner and more energy-efficient in the short-term is a positive step, so I’ll be keeping an eye on this area.

David Fuller's view -

I have no idea how close this is to commercial application, and presumably Laurie Winkless of Forbes does either, or it would have been mentioned.  Nevertheless, what impresses me is that we live in an era where the combination of investment capital for privately funded research facilities, or grants for university research, combining highly qualified personnel, plus rapidly developing technologies, are solving problems and producing useful products at a faster rate than ever before.

These are the most important and enduring stories of our era, rather than the current uncertainty caused by low interest rates and slow GDP growth which have temporarily lowered confidence, not least in the developed world.  



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October 24 2016

Commentary by David Fuller

Sweden Holds Out Olive Branch to Brexit Britain

Here is the opening and another brief section of this timely article by Ambrose Evans-Pritchard for The Telegraph:

Sweden has warned that it would be a serious mistake to chastise Britain for voting to leave the EU, appealing instead for an amicable settlement to minimise damage for both sides.

“The softer the Brexit, the better. We’re an open country and we are in favour of free trade, and we want to see a solution that is as beneficial as possible for everybody,” said Magdalena Andersson, the Swedish finance minister.

The olive branch from Stockholm reflects the shared view of the Nordic bloc that there is nothing to be gained from a fractious divorce between Britain and the EU. 

“I think our basic instincts are the same. We’ve heard some voices from the Continent that now is the time to punish the British, whereas our instinct instead is that this is the new situation and we have to make the best of it. We have to see what is good for jobs and growth,” she told the Daily Telegraph on a trip to London.

The EU itself needs to tread with care since there are large eurosceptic movements in Sweden, Denmark, and Finland. A hard-line stance that ignored the concerns of the Scandinavian bloc would risk opening fresh rifts within an already badly-fractured Union.

The comments came as Swedish companies start to feel the chilling effect of the referendum campaign in Britain and the sharp fall in sterling. Data released this week show that Swedish exports to Britain are in free-fall, with a drop of 19pc over the period from January to July compared to the same period a year ago.

And:

 “Sentiments have calmed down a bit during the last few months, but there can be no cherry picking. You can’t just pick the cherries you like,” she said.

The warnings on cherry-picking are part of the joint script agreed by the EU-27 states but it is unclear what this mantra means in practice. Britain has a complex set of diplomatic, defence, and security ties that go far beyond the one-dimensional issue of the single market. It is ultimately implausible to imagine that Britain could be treated like any other ‘third country’ in trade talks, as if it were in Latin America or Africa.

David Fuller's view -

The ‘no cherry picking’ rhetoric is now a familiar EU refrain, but it makes no economic sense, other than to warn the other 27 countries not to follow the UK’s lead. 

It won’t work, at least not if the EU wishes to maintain its significant trade links with the UK, in addition to diplomatic, defence and security ties mentioned by AEP.

For these reasons I maintain that the UK should avoid the farrago of endless negotiations over Brexit.  There is a view that the UK should hang around and see who emerges from next year’s French and German elections.  I disagree because newly elected EU leaders are likely to be even more implacable, not least because they will be negotiating on the basis of what they have to lose.  However, once the UK has left, EU leaders will be negotiating on the basis of what they would like to regain – free trade with the UK, for instance.    

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



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October 24 2016

Commentary by David Fuller

Email of the day

On Germany’s new auto industry push to ban internal combustion engines starting in 2030:

Dear David This article points to a very rapid change in car engines quite soon now. I am sure you will agree with this quote from the article: "...the sooner diesel is stopped from poisoning our lungs with cancer-causing nitrous oxide, the better." And it's not just nitrous oxide. The chart showing the increase in diesel cars to 50% of total cars in Europe over past decades is truly shocking. I believe that was due to EU policy, and their belief in bad 'research' suggesting diesel was less polluting than petrol. Anyone with an ounce of common sense knew that was nonsense. I suspect that EU policy has done more to damage the health of European citizens than any amount of global warming. I wonder if the EU will ever admit its mistake and instigate an investigation into it's enormous blunder. Best wishes

David Fuller's view -

Thanks for your informed comments on EU policy and the appalling levels of diesel pollution.  The nitrous oxide or nitrogen dioxide (N2O) problem has long been a serious concern for many of us.  The cause of this serious health hazard is mainly due to the naïve promotion of diesel, dating back to the mid-1990s, including giving it tax advantages.  Here is one of many articles available on the subject: The rise of diesel in Europe: the impact on health and pollution, from The Guardian.  

I noticed the effects of nitrous oxide in London over a decade ago, before I really knew anything about the problem.  It affected my nose, throat and lungs, problems which were much reduced after a week or more in the countryside.  I am even more concerned about the children and grandchildren, and at least some of us will be spending less time in London, in future, wonderful city though it is.   



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October 24 2016

Commentary by David Fuller

Inflation: Ticking Time Bomb for Next Year

The last time sterling fell off a cliff we were in the midst of global financial crisis from 2007 to 2008. The currency shock sent inflation shooting up to 5.2pc, abruptly squeezing on real living standards.

On that occasion the poor were at least protected. Benefits and in-work tax credits were indexed to inflation. Social cohesion was preserved.

This time the most vulnerable families will take the brunt as the cost of imported food, clothes, and fuel suddenly jump. A parting gift of the last Government was to freeze benefits for 11.5 million households until 2020.

This is a political time bomb that will detonate next year when the inflation ‘pass-through’ from imports bites in earnest. It threatens to poison the already fractious national debate unless steps are taken to mitigate the damage.

The Institute for Fiscal Studies estimates that the freeze was going top cut these benefits by 4pc even before the slide in sterling, but this will now be 6pc based on the deteriorating picture for inflation.

The poorest 8.3 million families will lose an average of £470 a year by 2020, and many will suffer further losses from the effects of universal credit.

“The rise in the minimum wage will help some people but beyond that the only way to compensate those on benefits is to increase those benefits in line with inflation,” said Paul Johnson, the head of the IFS.

Marmite wars have already led to a ghoulish scare over food prices, which may have been the intention of Unilever’s highly-political chief executive Paul Polman. His push for a 10pc rise across the board – regardless of whether items were produced in Britain – smacked of theatre.

In reality the exchange rate adjustment has not even begun. The Office for National Statistics says the jump in headline inflation from 0.6pc to 1pc in September had little to do with the pound. It was a legacy effect from prior causes. The Brexit shock on prices will hit next year.

How much inflation will rise – and how soon – is a hotly-debated topic. The trade-weighted devaluation in 2007-08 was 30pc from peak to trough, an earthquake for a world reserve currency.

The headline impact in that episode was aggravated by a surge in the dollar price of oil over two years following the Great Recession, from $32 to $115 a barrel. This will not be repeated.

Global crude stocks remain near record highs, and the flexibility of US shale drilling has broken the back of the OPEC cartel. The structure of the oil market has changed completely. China’s industrial revolution has in any case come off the boil, and it is China that sets the marginal price of oil in the global economy.

This year’s devaluation has been less extreme (so far) though you would never know it from the cacophany. Sterling has fallen 22pc. The drop is more like 15pc if you shave off the speculative jump last year driven by unwelcome inflows of hot capital.

In strict macroeconomic terms a weaker pound is necessary and unavoidable. The Bank of England describes it as a “shock absorber”, the least painful way to correct a severe economic imbalance. It is a boost to tourism and manufacturing exports.

David Fuller's view -

The headline above is to catch attention.  However, in his concluding words for this column, AEP says: … “a jump in inflation to 2pc or even 3pc is hardly Götterdämmerung”.

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



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October 24 2016

Commentary by David Fuller

Mobius Says India Small Caps May Gain More Amid Modi Plans

Here is the opening of this topical report from Bloomberg:

A three-year rally for Indian small-cap stocks may extend further on growing signs interest rates are headed down in the world’s fastest-growing economy, Mark Mobius said.

India is forecast to grow as much as 7.2 percent this year as Prime Minister Narendra Modi’s plans to boost infrastructure and open up industries such as railways and defense to foreign investment have also bolstered consumer spending. Mobius, the executive chairman of Templeton Emerging Markets Group, said the company has made the South Asian country a top pick in emerging markets and invested as much as $2 billion in its equities.

“India is in a very sweet spot,” Mobius said at a Bloomberg event in Mumbai on Friday. “There is so much variety and so much opportunity, particularly in the small- and medium-cap stocks.”

Mobius, 80, who is closely associated with raising the status of emerging markets as a place for investment, said Modi’s plans to overhaul the country’s economy are one of the most exciting things about India. While the plan to introduce a nationwide sales tax by April 1 may not be fully implemented in 2017, it’s a step in the right direction, Mobius said. Templeton has $600 million of its total Indian investment in small companies, he said in an interview in June.

David Fuller's view -

I agree with all of these points.  Moreover, Narendra Modi is probably the world’s most business-savvy political leader in office today. 

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October 24 2016

Commentary by Eoin Treacy

DDOS Attack Map: What Websites & Areas Are Affected?

This article from Heavy.com dated Friday and written as if in real time may be of interest to subscribers. Here is a section:

A huge DDOS attack has been under way off and on since this morning, sending hundreds of popular websites offline. A third DDOS attack of the day was reported around 4:30 p.m. Eastern. The Distributed Denial of Service wasn’t against specific websites, but against Dyn, Inc., which provides Domain Name Server services. At the time of publication, Dyn was still investigating and mitigating attacks against their infrastructure. A number of outage and attack maps have been shared online, including the one above, which can give you a better idea of just how widespread the problem has been.

As of 4 p.m. Eastern, there were still numerous outages being reported. DownDetector shared a map of outages from Level3 Communications, which offers telecommunications services to business customers, on its website here. the map shows outages all across the United States.

A live outage map for Twitter shows the problems decreasing in the United States, but building in other parts of the world. Netflix, another company reporting problems, is showing similar results.

Eoin Treacy's view -

It took longer than usual to upload the audio on Friday because this denial of service attack was underway and service providers were struggling to combat the attack. You might have had difficulty accessing sites, not least this one, and will understand how aggravating the whole experience is from a customer’s perspective. The effect of course is magnified for companies that rely on the internet to conduct their business and is even more of a nuisance for those attempting to manage servers. 



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October 24 2016

Commentary by Eoin Treacy

Review of Bank relative performance

Eoin Treacy's view -

There has been a great deal of stress in the European banking sector,  the UK is still mired in an increasingly emotional discussion about the fate of London’s financial centre and the introduction of a major change to US money market funds has just occurred. With so much going on I thought it might be instructive to review the relative performance of banking sectors to their respective markets.

Despite the fact banks have become the sector everyone loves to hate, and not without some justification considering the shenanigans that have gone on, it is important to remember that banks are liquidity providers. Considering their influence on the commercial and retail sector, the ability of banks to profit from their activities and their willingness to lend are important factors in sustaining the flow of liquidity that helps to fuel bull markets. There is no denying that over the last decade central banks have taken on many of the responsibilities for liquidity provision that have previously been outsourced to banks. However the financial sector still retains an important position in every economy, so their shares are worth keeping an eye on for signs of underperformance.



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October 24 2016

Commentary by Eoin Treacy

Most Crowded Trade in Bonds Is a Powder Keg Ready to Blow

This article by Brian Chappatta and Anchalee Worrachate for Bloomberg may be of interest to subscribers. Here is a section:

“Rates are rising from a very, very low base, which means there’s lots of downside and very little upside” for bond prices, said Kathleen Gaffney, a Boston-based money manager at Eaton Vance Corp., which oversees $343 billion. She runs this year’s top-performing U.S. aggregate bond fund and has reduced duration and boosted cash. “If you don’t know how to time it, and I certainly don’t, you just want to get out of the way.”

The lengthiest maturities have dominated the decades-long bull market in bonds, precisely because of their higher duration. Investing in 30-year Treasuries since the turn of the century has produced a 7.8 percent annualized return, compared with 4.3 percent for the S&P 500 index. Yet that run has faltered: U.S. long bonds are on pace for their worst month since June 2015, losing 3.2 percent as yields have climbed about 0.2 percentage point.

 

Eoin Treacy's view -

I’ve written quite a bit about the sensitivity of bond prices to interest rates but this is the first article I’ve seen that specifically talks about the duration of the market and how that represents a risk for investors as interest rates begin to rise. What I have not yet seen is a discussion of convexity which is the influence interest rates have on the relationship between price and yield. Nevertheless it is inevitable that this will become a greater consideration as interest rates rise further. 



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October 21 2016

Commentary by David Fuller

The Only Thing on Autopilot at Tesla Is the Hype Machine

Just over a year ago, Tesla sent out a software update to its cars that made its "Autopilot" features available to customers, in what the company called a "public beta test." In the intervening 12 months, several of those customers have died while their Teslas were in autopilot mode. Cars have crashed, regulators have cracked down, and the headlines proclaiming that "Self-Driving Cars Are Here" were replaced with Tesla's assurances that autopilot was nothing but a particularly advanced driver-assist system.

Given all this, one might assume that a chastened Tesla would take things more cautiously with its next iteration of autonomous technology. But in a launch event this week, Tesla introduced its Autopilot 2.0 hardware with the promise that all the cars it builds from now on will have hardware capable of "the highest levels of autonomy."

Tesla's proof that its new hardware is capable of driving in the "complex urban environment" was a brief, edited video of the system navigating the area around its headquarters near Stanford University in California. Though exciting for enthusiasts who can't wait to own a self-driving car, the video is hardly proof that Tesla's system is ready to handle all the complexities that are holding back other companies that have been working on autonomous technology for longer than Tesla. As impressive as Tesla's system is -- and make no mistake, it is deeply impressive -- navigating the Stanford campus is a hurdle that even graduate school projects are able to clear.

Tesla's new sensor suite upgrades what was a single forward-facing camera to eight cameras giving a 360-degree view around the car. It also updates the 12 ultrasonic sensors, while keeping a single forward-facing radar. Yet independent experts and representatives from competitor firms tell me this system is still insufficient for full level 5 autonomy -- the National Highway Traffic Safety Administration's highest rating -- which requires more (and better) radar, multiple cameras with different apertures at each position and 360-degree laser-sensing capabilities.

What Tesla's upgraded hardware does do is vastly improve the company's ability to pull high-quality data from its vehicles already on the road, giving it an unrivaled ability to comply with new regulatory guidelines requiring granular data about autonomous-drive functions in a variety of conditions. Whereas its competitors' autonomous-drive programs harvest data from small test fleets and extrapolate from there, Tesla has made every car it sells into an independent experiment of conditions that can only be found on the open road. All this real-world data gives Tesla a unique opportunity to validate its autopilot technology. If the company had announced Autopilot 2.0 as another step toward an eventual fully autonomous system, this would be an unambiguously good (if not earth-shattering) development.

Unfortunately, that's not what Tesla did. Instead, in Wednesday's launch events, it called its new hardware suite "full self-driving hardware." It said the technology would demonstrate the system's ability to drive cross-country without any human intervention. Tesla even hinted that a feature will allow its cars to be rented out as autonomous taxis when not in use by their owners.

Though Tesla's website noted that many of these features will need validation and regulatory approval, this caveat was lost in the hype. As with Autopilot 1.0, Tesla is again inviting a mismatch between owner/operator expectations and its systems' true capabilities without any apparent recognition that this gap -- not technical failures of the system itself-- is the key point of concern for regulators and critics.

David Fuller's view -

Tesla’s achievements have been amazing, not least for a start-up company in the incredibly competitive automobile industry.  However, that position puts tremendous pressure on Tesla, or indeed any other new and ambitious tech-driven firm trying to not only survive but also establish itself for a profitable long-term future. 

Many companies achieve this in our exciting and increasingly high-tech world.  However, many more fail, as either shooting stars which shine brightly but briefly before falling from sight, as we saw with Nokia.  Others attract interest with a new niche product, and often develop a wide following, but struggle to develop a successful business model as we are seeing with Twitter. 

This item continues in the Subscriber’s Area, where another article on Tesla is also posted.



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October 21 2016

Commentary by David Fuller

EU Is In No State to Snub or Bully Britain

Elements of the EU reportedly do not accept the reality of Brexit – they imagine that a mix of rudeness and indifference can make it go away. They have even threatened to hold negotiations in French. We would urge readers to remain dispassionate: this is the EU leaders’ game plan and, frankly, it betrays how weak their position truly is. Theresa May should respond with resilience – and lay out a confident vision of what Britain is trying to achieve.

The British are used to insults from the EU, so nothing coming out of the European Council meeting in Brussels has been a surprise. The messages have been mixed. European People’s Party leader Manfred Weber said that the UK was attracting anger for its intransigence. And yet Lord Hill, the UK’s former Brussels commissioner, spoke of a “surprisingly widely-held view that Britain might still decide to stay in” – something Donald Tusk, president of the European Council, said that he hoped would happen. Mrs May was given just five minutes to discuss Brexit after dinner on Thursday night.

This behaviour betrays fantasy and arrogance. But also distraction – for the EU leaders have a lot of other, local problems to worry about. Their failure to conclude a free-trade deal with Canada has been symbolic. Getting all 28 European members to agree to a deal was tough enough – but constituencies within constituencies threw up barriers. Belgium as a whole was for it. The Belgian region of Wallonia, on the other hand, was against it, holding up progress for everyone else. Canada’s trade minister concluded that the EU is “incapable” of forging international agreements. The British have known this for years, and it is one of the most compelling reasons why they voted Leave.

Then there are internal economic strains: ongoing crisis in Mediterranean markets, turbulence in Deutsche Bank. The refugee crisis continues to pose challenges for national security and will only be resolved with Britain’s help. Nor would the Europeans want to encourage a rift across the English Channel while squaring off against Russia – and Mrs May rightly called for a united stand among democratic Western nations.

David Fuller's view -

Well said, and you will also see the Mafia kiss in the PDF of this Editorial, posted in the Subscriber’s Area.



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October 21 2016

Commentary by David Fuller

Why Corporate America Debt Is a Major Risk

Here is the opening of this topical article from Bloomberg, and don’t miss their graphs:

Are investors in denial about how dim the outlook is for American businesses?

That’s the question Société Générale’s Andrew Lapthorne, global head of quantitative strategy, posed to his bank’s clients.

“Asset valuations are extreme; returns are poor, the probability of losses is high and the ability to recover any losses quickly is low,” he writes.

In particular, the strategist sounded an alarm over the state of corporate America’s balance sheet. Company spending exceeds cash flow by a near-record amount—a fundamentally unsustainable situation—as net debt continues to increase at a rapid pace.

In many cases, companies have used debt to repurchase their own stock, flattering their bottom-line financial performance. Whilenot all buybacks are financed by debt, Lapthorne did note a correlation between net repurchases and the change in corporate indebtedness.

“U.S. corporate balance sheets are a major risk going forward,” he says. “U.S. corporates are massively overspending.”

To be fair, servicing this debt load isn’t as onerous as it might appear, because of low interest rates. And despite the recent steepening of corporations’ yield curve, companies have continued to extend duration, which offers them more certainty about what their interest payments will be over the long term.

“For corporate credit, there’s very little concern about short-term coverage from the market,” write analysts at Bespoke Investment Group. “We note that maturities continue to creep up slowly; despite higher spread costs, corporates are generally borrowing further out the curve and ‘locking’ low rates.”

But over the long haul, the performance of stock markets will be primarily driven by earnings increases—and the level of corporate indebtedness implies that any latitude to boost earnings per share by shrinking the denominator is limited.

David Fuller's view -

Actually, corporate debt is not a serious concern for me, assuming companies have sensibly used record low debt costs in this era to retire more expensive debt acquired earlier.  Low-cost debt will only be a problem if deflation becomes the long-term norm, which I very much doubt, although it is a widespread extrapolation forecast today. 

Fiscal spending and a gradual normalisation of interest rates should improve GDP growth over the next several years.  Lower energy costs will help consumers and businesses.  Most corporations are already benefiting from efficiency-enhancing technology and low-cost borrowings will help them to expand their businesses as global economy strengthens.      

 



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October 21 2016

Commentary by David Fuller

Scientists Just Showed What It Truly Means When a Huge Antarctic Glacier is Unstable

If there is one story that, more than anything else, makes you wonder if global warming could cause very fast changes and hit planetary tipping points in our lifetimes, it was a moment in 2014.

That was when two separate research papers said there was reason to think a frozen sector of West Antarctica, called the Amundsen Sea region, may have been destabilized. West Antarctica as a whole contains enough ice to raise sea levels more than 3 meters (10 feet), and the Amundsen Sea’s ocean-front glaciers themselves account for about 1.2 meters (4 feet). Two of the largest are Pine Island Glacier, about 25 miles wide at its front that faces the ocean, and capable of someday driving about 1.7 feet of sea level rise, and Thwaites glacier, the true monster, which is 75 miles wide where it hits the ocean. It contains about 2 feet of potential sea level rise but also, it is feared, could destabilize the ice in all of West Antarctica if it goes.

On Thursday, the National Science Foundation and the U.K.’s Natural Environment Research Council made a joint announcement signaling how grave this really is — they will fund a multi-million dollar research initiative to the less-studied Thwaites, in order to determine just how much it is capable of contributing to sea level rise during our lifetimes, and by the end of the century.

[This Antarctic glacier is the biggest threat for rising sea levels. The race is on to understand it]

It will take years of preparation for scientists to even get to the glacier, however. And in the meantime, a new study of Pine Island Glacier, just released in Geophysical Research Lettersreaffirms why this region of Antarctica is so worrisome. The study finds that as the ice melts, the glacier that remains has retreated so far backwards in the face of warm ocean temperatures, exposing so much additional thickness to the ocean in the process, that even a recent bout of cooler water temperatures did little to slow the pace of its ice loss. The work was co-authored by 20 separate scientists based at U.S., British, and Korean institutions, and the first author was Knut Christianson, a glaciologist at the University of Washington in Seattle.

The problem is that in this part of West Antarctica, you have everything you don’t want on a warming planet – a changing ocean up against glaciers that are both very wide and very deep. And scientists now know that warm ocean water is reaching these glaciers at depth, and melting them from below – causing them to shrink, leaving the remaining glacier to retreat backwards and inland. And as they retreat, the seafloor gets deeper the further back they go — what researchers refer to as a “retrograde” configuration. The deeper the water gets, the more ice that can be exposed to the ocean, and the more the glaciers are thereby capable of losing. So there is a fear that there is here something that is called a “marine ice sheet instability” in which, once you start this process, you can’t stop it — and that it has already been started.

David Fuller's view -

I think most of us have sufficient personal experience of global warming over the last few decades to be aware that it cannot be dismissed easily.  It is not all bad news and it is contributing to a greener planet.  Also, common sense and an awareness of global pollution is causing many people to be more responsible.  Technological solutions can reduce if not easily reverse our contribution to global pollution. 

Meanwhile, as a precautionary measure I would avoid investments in fashionable seaside properties.  I would not want to live on or near flood plains.  Anyway, the views and the air are so much better on high ground.   



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October 21 2016

Commentary by Eoin Treacy

October 21 2016

Commentary by Eoin Treacy

MIT EmTech Conference

Eoin Treacy's view -

I spent the last couple of days in Boston at the MIT Technology Review’s EmTech conference and some of my immediate takeaways are:

Artificial Intelligence might be a catchall phrase for machine learning, linguistic programing, advances in one shot learning and automated interpretation of optical data among others but all these strands are experiencing enhanced growth. The field of artificial intelligence has been gestating for decades but the evolution of large data sets gives many of the theoretical applications that have been confined to universities room to grow and reach commercial utility. 

 



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October 21 2016

Commentary by Eoin Treacy

Concentrated Investing

Eoin Treacy's view -

Allen Benello, a long-time subscriber to FullerTreacyMoney, kindly forwarded me a copy his book, Concentrated Investing, written in conjunction with Michael Van Biema and Tobias Carlisle. 

I read it earlier this week and what I found of particular value was the thread of commonality between the strategies deployed by some of the world’s most successful investors. 

Through interviews with highly successful investors like Lou Simpson and Kristian Siem as well as an intimate analysis of the strategies deployed by Charlie Munger and Warren Buffett a number of common attributes appear. 

Concentrating positions in a small number of holdings definitely holds out the potential to enhance returns but also magnifies the risk of loss. 

Therefore having an intimate knowledge of what you are buying, preferably with experience in the sector is vital. Having the patience to wait until the timing is right to capture the value represented by that knowledge is equally important. That speaks to the temperament of successful investors who are willing to act on their opinions despite the fact the majority of other investors will be expressing the opposite view. 

The discussion of the Kelly formula for sizing positions was also of interest. I intend to do some additional analysis of this subject and sense that it will help enhance my personal trading. 

 



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October 21 2016

Commentary by Eoin Treacy

Euro Falls to Lowest Since March as Draghi Eases Nerves on QE

This article by Anchalee Worrachate and Lananh Nguyen for Bloomberg may be of interest to subscribers. Here is a section:

The declines came as speculation faded that central bankers back a sudden end to QE after March, which is the latest date that they’ve committed to for the program. Pacific Investment Management Co. predicts the ECB will actually ease further in December and that it won’t remove stimulus until inflation is “solidly on track” for its goal of close to 2 percent.

“The euro in general has been weakening” on expectations that the ECB will extend stimulus, said Sireen Harajli, a foreign-exchange strategist at Mizuho Bank Ltd. in New York.

“This is all the after-effects of the ECB meeting -- the message has been quite clear by Mr. Draghi that tapering is not on the table.”

The euro dropped 0.6 percent to $1.0864 as of 1:36 p.m. in New York, after touching the lowest since March 10, when the ECB cut its main interest rates to record lows. The shared currency has fallen 1 percent versus the greenback this week, and is down against most of its 16 major peers.

 

Eoin Treacy's view -

The year beginning in December 2016 is going to be a big one for Europe. An Italian referendum potentially followed by an election, as well as scheduled, German, French, Dutch, Czech, Hungarian and Slovenian elections will all conspire to contribute to uncertainty. If these are the known knowns then we must also be prepared for surprises. Against that background it is hard to imagine how the ECB could be in a position to withdraw stimulus, particularly when it is still engaged in a negative interest rate policy. 



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October 20 2016

Commentary by David Fuller

Fed Risks Repeating Lehman Blunder as US Recession Storm Gathers

The risk of a US recession next year is rising fast. The Federal Reserve has no margin for error.

Liquidity is suddenly drying up. Early warning indicators from US 'flow of funds' data point to an incipent squeeze, the long-feared capitulation after five successive quarters of declining corporate profits.

Yet the Fed is methodically draining money through 'reverse repos' regardless. It has set the course for a rise in interest rates in December and seems to be on automatic pilot.

"We are seeing a serious deterioration on a monthly basis," said Michael Howell from CrossBorder Capital, specialists in global liquidity. The signals lead the economic cycle by six to nine months.

"We think the US is heading for recession by the Spring of 2017. It is absolutely bonkers for the Fed to even think about raising rates right now," he said.

The growth rate of nominal GDP - a pure measure of the economy - has been in an unbroken fall since the start of the year, falling from 4.2pc to 2.5pc. It is close to stall speed, flirting with levels that have invariably led to recessions in the post-War era.

"It is a little scary. When nominal GDP slows like that, you can be sure that financial stress will follow. Monetary policy is too tight and the slightest shock will tip the US into recession," said Lars Christensen, from Markets and Money Advisory.

If allowed to happen, it will be a deeply frightening experience, rocking the global system to its foundations. The Bank for International Settlements estimates that 60pc of the world economy is locked into the US currency system, and that debts denominated in dollars outside US jurisdiction have ballooned to $9.8 trillion.

The world has never before been so leveraged to dollar borrowing costs. BIS data show that debt ratios in both rich countries and emerging markets are roughly 35 percentage points of GDP higher than they were at the onset of the Lehman crisis.

This time China cannot come to the rescue. Beijing has already pushed credit beyond safe limits to almost $30 trillion. Fitch Ratings suspects that bad loans in the Chinese banking system are ten times the official claim.

The current arguments over Brexit would seem irrelevant in such circumstances, both because the City would be drawn into the flames and because the eurozone would face its own a shattering ordeal. Even a hint of coming trauma would detonate a crisis in Italy.

To be clear, the eight-year old US cycle has not yet rolled over definitively. The picture remains fluid, hard to read in a world where key signals have been distorted by central bank repression. The third quarter will almost certainly look a little better. 

"We are getting closer and closer to a recession, but we are not quite there yet, looking at our forward-indicators," said Lakshman Achuthan from the Economic Cycle Research Institute in New York.

"I can understand why people are getting worried. We have been seeing a 'growth-rate' cyclical downturn for the last two years. The longer this goes on, the less wiggle room there is," he said.

"We are sure there will be no recession this year or into the first two months of 2017, but beyond that there are worrying signs. The deterioration of our leading labour market index is very clear," he said.

Mr Achuthan thinks it is still possible that US growth will pick up again for another short burst - lifted by a global industrial rebound of sorts - before the storm finally hits.

David Fuller's view -

Well, we have certainly been warned.  AEP even treats us to a sobering quote from Dante Alighieri: “lasciate ogni speranza, voi ch’entrate’” (abandon all hope, you who enter here)

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



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October 20 2016

Commentary by David Fuller

May in Brussels to Tell EU There Is No Turning Back From Brexit

Here is the opening of this topical article from Bloomberg:

Theresa May will tell her fellow European Union leaders that the Brexit vote must be honored and there will be no second referendum as a way to stop the U.K. leaving the bloc. 

Arriving at her first EU summit on Thursday, the prime minister said Britain is on a one-way track out of the EU after some leaders suggested Brexit might not happen.
 
“I’m here with a very clear message, the U.K.’s leaving the EU,” May told reporters in Brussels. “But we will continue to play a full role until we do and will be a strong and dependable partner after we leave.”

May’s comments to her fellow leaders, which she is planning to deliver during a working dinner during the two-day summit, will be her clearest signal yet that she isn’t seeking a close relationship between the U.K. and the EU after Brexit, a British official said. 

While German Chancellor Angela Merkel is among those who have said the bloc must face reality on Brexit, the starkness of May’s message will quash any lingering hopes of a reversal and risks fanning speculation that the government wants a clean break from the single market.

EU President Donald Tusk said last week that Britain could ultimately decide to stay in the EU because the 28-nation bloc wouldn’t offer May any alternative deal to a so-called “hard Brexit,” which would probably mean the loss of tariff-free trading rights.

David Fuller's view -

Theresa May will have to be very candid.  She is sensibly doing this by telling the EU that the Referendum decision was final.  The follow-up should be that the UK will be leaving the EU without delay.  This is crucial because she will be at a disadvantage if trying to negotiate within the farrago of the EU’s delaying tactics, so obviously intended to prevent countries from leaving. 

Conversely, she will have the upper hand in negotiations once the UK is out of the EU.  Everyone knows that the EU will be weaker if it does not have close ties with an independent UK.      



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October 20 2016

Commentary by David Fuller

WikiHillary for President

My thanks to a subscriber for this informative column by Thomas L Friedman for the New York Times.  Here is the opening:

Thank God for WikiLeaks.

I confess, I was starting to wonder about what the real Hillary Clinton — the one you never get to see behind closed doors — really stood for. But now that, thanks to WikiLeaks, I’ve had a chance to peruse her speeches to Goldman Sachs and other banks, I am more convinced than ever she can be the president America needs today.

Seriously, those speeches are great! They show someone with a vision, a pragmatic approach to getting things done and a healthy instinct for balancing the need to strengthen our social safety nets with unleashing America’s business class to create the growth required to sustain social programs.

So thank you, Vladimir Putin, for revealing how Hillary really hopes to govern. I just wish more of that Hillary were campaigning right now and building a mandate for what she really believes.

WikiHillary? I’m with her.

Why? Let’s start with what WikiLeaks says she said at Brazil’s Banco Itaú event in May 2013: “I think we have to have a concerted plan to increase trade ... and we have to resist protectionism, other kinds of barriers to market access and to trade.”

She also said, “My dream is a hemispheric common market, with open trade and open borders, some time in the future with energy that is as green and sustainable as we can get it, powering growth and opportunity for every person in the hemisphere.”

That’s music to my ears. A hemisphere where nations are trading with one another, and where more people can collaborate and interact for work, study, tourism and commerce, is a region that is likely to be growing more prosperous with fewer conflicts, especially if more of that growth is based on clean energy.

Compare our hemisphere, or the European Union, or the Asian trading nations with, say, the Middle East — where the flow of trade, tourism, knowledge and labor among nations has long been restricted — and the case for Hillary’s vision becomes obvious.

The way Bernie Sanders and Donald Trump have made trade and globalization dirty words is ridiculous. Globalization and trade have helped to bring more people out of poverty in the last 50 years than at any other time in history.

David Fuller's view -

Thomas Friedman makes a good point at a time when there appears to be less enthusiasm for either candidate than at any previous US Presidential Election which I can recall, staring with Eisenhower versus Stevenson in 1956.

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October 20 2016

Commentary by David Fuller

Australian Seaweed Found to Eliminate More Than 99% of Cow Burp Methane

Here is the opening of this interesting story from New Atlas:

Australia's CSIRO has identified a strain of seaweed that can reduce bovine methane emissions by more than 99 percent if added to cow feed in small amounts. This could be huge for climate change, but it also has significant benefits for farmers.

I thought this was a cow fart story; it's not. Sadly, according to Australia's CSIRO, the vast majority of bovine methane – some 90 percent of all emissions – comes from burps, not from backdraft.

But whichever end it comes from, methane represents a problem. In climate change terms, methane is a greenhouse gas 28 times more powerful than carbon dioxide. In agricultural terms, when cows burp out methane, as much as 15 percent of the energy in their feedstock is being thrown away instead of converted into meat.

For more than a decade, researchers have been aware that adding seaweed to a cow's diet made a significant reduction to that methane release, leading to cleaner agriculture and better meat production. Early tests found seaweed could cut back methane release by as much as 20 percent.

But recently, Australian scientists have been re-running tests with a variety of different species of seaweed to find out which is the most effective, and now, a very clear winner has emerged.

David Fuller's view -

This has the potential to be a very important discovery.  Clearly the challenge of growing and harvesting many thousands of hectares of a particular type of seaweed known as Asparagopsis taxiformis sounds daunting, controversial and expensive.  Nevertheless, assuming biochemists can identify and recreate the key ingredients for methane reduction, they should be able to reproduce them much more efficiently.      



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October 19 2016

Commentary by David Fuller

Fund Managers Hike Commodity and EM Exposure to Three-Year High but Raise Cash Levels

Investors are no longer underweight commodities for the first time since December 2012, according to the October Fund Manager Survey by Bank of America Merrill Lynch.

The report said the move has been driven by inflation expectations being at a 16-month high and the lack of value seen in developed bond and equity markets. 

Furthermore, there has been a surge in oil prices in recent months with OPEC agreeing to limit supply and Russian president Vladimir Putin supporting the plans. Brent Crude is currently trading at $51.75 a barrel.

However, Adrian Lowcock, investment director of Architas, added "if OPEC fails to deliver on its promises, there is a mild winter or a slowdown in demand then we could see another slump in oil prices".

Oil jumps 6% as OPEC surprises with production cut 

Meanwhile, gold prices continue to rise, up 26% this year, due to political uncertainty in the US and across Europe.

The survey also highlighted a rotation out of healthcare/pharma, REITs and bonds, into banks, insurance, equities, and emerging markets.

Emerging market equities positions rose to their highest overweight in three and a half years, from a 24% allocation last month to 31% in October.

David Fuller's view -

With most investors keeping a close eye on US markets, not least because of their size and influence, and with additional interest in next month’s Presidential Election and especially the Fed’s probable rate hike in December, we can expect some volatility.  

We also know that a number of central bankers and also international economists are calling for more fiscal spending to spur GDP growth.  There are also calls for corporations to invest in the development of their business, rather than just parking capital in financial assets or using it for share buybacks.

Against this background we should not assume that inflation will remain dormant.  In fact, the cost of living has increased for most households.  They are experiencing rising property prices in many countries, higher rents, increased school fees and insurance costs, to mention just a few contributors to the inflation which is seldom mentioned in financial reports.    

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October 19 2016

Commentary by David Fuller

Why It Is Time for a New Campaign for Brexit

There is no such thing as permanent victory in politics. History never ends: triumphs are fleeting; majorities can turn into minorities; and orthodoxies are inevitably built on foundations of sand. Communism was supposed to be discredited forever after the collapse of the Berlin Wall; yet many young people in Britain and America now call themselves socialists.

Progress is never guaranteed in politics: there are just ups and downs and swings of the pendulum.

This applies to Brexit too, of course: those who thought that Leave’s victory on June 23 somehow settled the question were deluded. The good news is that it remains likely that we will leave the EU in 2019.

Theresa May is fully committed and will be canny and steely in her negotiations. But the Remainers are staging a fight-back which is beginning to inflict serious damage on the Brexiteer cause.

Every piece of bad news is blamed on Brexit; an endless supply of reports, economic “forecasts” and articles explain how leaving the EU is self-evidently bound to hurt us, slash our GDP, make us the world’s laughing stock and wreck our prosperity. Even Ed Miliband and Peter Mandelson are back.

Remarkably, given that the insurgents were meant to have seized power, the propaganda wars have been one-sided: the Government isn’t really taking part, and the other Brexiteers have vacated the battlefield.

Unless Mrs May decides to change tack, and becomes much more aggressive in defence of the policy that will come to define her, the Brexiteers will have only one option left: reconstitute a version of Vote Leave and relaunch a full-throttled, independent campaign.

One thing is clear: concern is mounting in Eurosceptic circles.

It’s not just the specifics of how we leave the EU that are still up for grabs. Some Remainians still hope that withdrawal can be delayed long enough for it never to happen; others are discussing whether Article 50 could be reversed once it’s invoked.

David Fuller's view -

I sympathise with these comments and the sentiments of many friends and colleagues who voted for Brexit.  Wouldn’t it be wonderful to fast forward and be entirely outside of the EU, a sovereign state once again, trading with the global economy and not just the failing EU.   

To happen anytime soon, this requires a declaration of Article 50 in early January, followed by a list of UK terms for trading with EU partners in our mutual interests, which does not impinge on UK sovereignty.  This is not a blink moment for the UK.  It is a final offer, which we should assume will probably not be accepted by Merkel and Hollande, in which case we respectfully withdraw.  I believe this is what Patrick Minford and Roger Bootle advise, and they would be very useful contacts for the Prime Minister. 

EU threats of fines, ongoing commitments and binding agreements extending well into the decade, which have been bandied about, are little more than attempted bullying tactics to prevent any country, heaven forefend, from leaving the dysfunctional EU.  There are no Brexit terms; the UK is creating them as it leaves. 

Would hard Brexit result in turmoil?  Almost certainly for a brief period.  Thereafter, I think the majority of UK citizens and residents from other countries contributing to the UK economy would welcome the new challenge and get on with it in our mutual interests.  The UK government should now be forming its plan of action and recovery, in this event.

The Prime Minister may think a more cautious, exploratory approach could be more effective, not least as dissatisfaction and turmoil within the EU is not only increasing, but could easily lead to the electoral fall of Holland and perhaps also Merkel in 2017.  Perhaps, but that would not necessarily favour the UK.  Moreover, a long drawn-out negotiating process would likely be far worse for the UK - in terms of national morale, unity and capital - than a swift, hard Brexit.  



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October 19 2016

Commentary by David Fuller

Want to Know Why Central Bankers Can Not Solve World Problems? Read a Book

Ever since the writer Thomas Carlyle coined his rude epithet about economics, the world of letters and the “dismal science” have circled each other warily. But in his new book about the history of the Nobel Prize, Avner Offer, a professor of economic history at Oxford University, says economics actually has more in common with literature than, say, physics. 

It isn’t an obvious pairing. Literature’s understanding of economics is, at best, patchy and simplistic. Polonius’s advice in Hamlet to “neither a borrower nor a lender be” is well-meaning. But, taken too literally, it would undermine the entire global financial system.

Yet the literary canon, in all its vastness, does occasionally, almost accidentally, brush up against economics.

The monetary principle known as Gresham’s law, which states that “bad money drives out good”, is said to have been prefigured by Aristophanes in The Frogs. King Lear, who thought that “distribution should undo excess/and each man have enough”, was clearly a bit of an old Marxist. And when Levin isn’t mowing in the fields or moping after Kitty in Anna Karenina he’s voicing Leo Tolstoy’s slightly warped views on agricultural reform. 

But those novels that really try to grapple with economic issues – like George Orwell’s The Road To Wigan Pier, which discusses why many of those that might best benefit from socialism are most implacably opposed to it – either date quickly or – like Ayn Rand’s paean to capitalism Atlas Shrugged – are borderline unreadable. 

There are rare exceptions. The second part of Johann Wolfgang von Goethe’s Faust is essentially an extended treatise on fiat money (currencies that are deemed legal tender by governments) and the perils of expansionary monetary policies. 

Mephistopheles (the devil), disguised as a court jester, advises an indebted emperor to issue promissory notes against his country’s yet-to-be-discovered gold, saying: “Such paper’s convenient, for rather than a lot / Of gold and silver, you know what you’ve got. / You’ve no need of bartering and exchanging, / Just drown your needs in wine and love-making.”

David Fuller's view -

Alternatively, enjoy the Royal Opera’s production of Gounod’s Faust – one of Bryn Terfel’s best roles. 

A PDF of Ben Wright’s column is posted in the Subscriber’s Area.



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October 18 2016

Commentary by David Fuller

Central Banks Have Lost the Plot, QE is Sending the World Over a Cliff

In 2008 the central banks reacted to a massive crisis they had completely failed to foresee by cutting rates to record lows and embarking on “quantitative easing” – pumping trillions of dollars into their economies by buying up the assets of commercial banks. The trouble is that eight years later they are, to varying degrees, still doing it. Like doctors keeping their patients on a drip many years after an operation, they are losing credibility and producing very dangerous side effects.  

There are at least 10 serious drawbacks to this – all of which can be accepted for a short period but become either politically explosive or economically unwise if continued indefinitely. 

  1. Savers find it impossible to earn a worthwhile return, which drives them into riskier assets thus causing the price of houses and shares to be inflated ever higher. 
  2. Higher asset prices make people who own them much richer, while leaving out many others, seriously exacerbating social and political divides and fuelling the anger behind “populist” campaigns. 
  3. Pension funds have poor returns and therefore suffer huge deficits, causing businesses to have to put more money into them rather than use it for expansion. 
  4. Banks find it harder to run a viable business, contributing to the banking crisis now visibly widespread in Italy and Germany in particular. 
  5. Those people who are able to save more do so, because they need a bigger pot of savings to get an equivalent return, so low interest rates cause those people to spend less, not more. 
  6. Companies have an incentive to use borrowed money to buy back shares – which they are doing on a big scale – rather than spend the money on new and productive investments. 
  7. Central banks are starting to buy up corporate bonds, not just government bonds, to keep the system inflated – so they are acquiring risky assets themselves and giving preference to some companies over others. 
  8. “Zombie companies”, which can only stay in business because they can borrow so cheaply, are kept going even though they would not normally be successful – dragging down long-term productivity. 
  9. Pumping up the prices of stock markets and houses without an underlying improvement in economic performance becomes ever more difficult to unwind and ultimately threatens an almighty crash whenever it does come to an end – wiping out business and home buyers who got used to ultra-low rates for too long. 
  10. People are not stupid; when they see emergency measures going on for nearly a decade it undermines their confidence in authorities, who they think have lost the plot. 

I am not an economist but I have come to the conclusion that central banks collectively have now indeed lost the plot. The whole point of their independence was that they could be brave enough to make people confront reality. Yet in reality they are blowing up a bubble of make-believe money to avoid immediate pain, except for penalising the poor and the prudent. 

Earlier this year I put this view to the top staff at the central bank of a major Far East economy, thinking they might set my mind at rest and explain why everything made sense. But, far more alarmingly, they said they agreed with me: their problem was that no single authority can opt out of these policies because they might cause a recession for their own country unless there was a global, co-ordinated move gently to raise interest rates. 

David Fuller's view -

I think most economically savvy people would now concur with William Hague’s article.  I also think a coordinated global response led by the USA and other developed economies would be the least disruptive.  The problem is that the US economy, while somewhat firmer than others due mainly to its technology lead, significant energy production and healthier banking sector, is clearly leading the economic recovery cycle among major nations.

Consequently, a unilateral rate hike, even if only 25-basis points, could push the US Dollar Index up out of its current trading range.  If so, this would be a headwind for not only the US economy, in proportion to additional USD strength, but also for emerging markets which borrowed in the highly liquid currency at lower levels.  In other words, a too strong Dollar could further delay the next global economic recovery which is sorely needed.

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October 18 2016

Commentary by David Fuller

Investor Cash Levels Jump Toward Levels Not Seen Since 9/11

Here is the opening of this interesting article from Bloomberg:

Fears of a bond-market crash, a breakdown in globalization, a new crisis in the euro area?

There were a bevy of reasons for fund managers to push their cash balances to 5.8 percent of their portfolios in October, up from 5.5 percent last month, matching levels not seen since the aftermath of the Brexit vote. The share of cash hasn't been higher than that since November 2001, shortly after the terrorist attacks in the U.S.

The amount of dry powder in portfolios is above that seen during both Europe's sovereign-debt crisis and the U.S. debt-ceiling debacle, according to Bank of America Merrill Lynch's monthly survey of money managers. 

“This month’s cash levels indicate that investors are bearish, with fears of an EU breakup, a bond crash and Republicans winning the White House jangling nerves,” said Michael Hartnett, the bank's chief investment strategist.

There are no shortage of risks on the investor horizon, according to market participants surveyed, with 18 percent fearful of a disorderly adjustment in the bond market.

The monthly survey solicits the views of investors with more than half a trillion dollars in cumulative assets under management.

Over the past year and a half, Hartnett has advised investors to hold more cash in their portfolios or be outright long paper money on multiple occasions.

In mid-September, a Goldman Sachs Group Inc. team led by Managing Director Christian Mueller-Glissman downgraded bonds on a three-month basis while also retaining an overweight position on cash.

David Fuller's view -

These cash reserves are higher than many of us expected and this news may have contributed to today’s firm performance by stock markets.

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October 18 2016

Commentary by David Fuller

The Weekly View: We Favor Stocks and Corporate Bonds

My thanks to Rod Smyth for this astute letter published by RiverFront Investment Group.  Here is a brief sample from the opening:

 3rd Quarter Review: This week, we will publish our October Chart Pack, which looks back at the markets in the 3rd quarter and discusses our outlook and current positioning.  Stocks bottomed shortly after the Brexit vote and rebounded nicely during the 3rd quarter.  Non-US stocks improved, led by emerging markets, and high yield bonds added another strong quarter.  In the case of both emerging markets and high yield bonds, we believe 2016’s strong returns should be viewed in the context of the tough year they both experience in 2015.  While high yield has more than recovered its 2015 losses, emerging markets are still below January 2015 levels.  Both have been influenced by the commodity cycle and have been helped by the recovery in commodity prices this year.   

David Fuller's view -

Historically, commodities have generally been cyclical outperformers in the latter stages of stock market cycles.  Brazil demonstrates this very clearly over the last two cycles, with this year’s strong rebound and also by advancing strongly in 2Q 2008, after the DJIA and other broadly diversified US indices peaked in 3Q 2007.   

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



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October 17 2016

Commentary by David Fuller

Euro House of Cards to Collapse, Warns ECB Prophet

Here is the opening and also a latter section of this article by Ambrose Evans-Pritchard for The Telegraph:

The European Central Bank is becoming dangerously over-extended and the whole euro project is unworkable in its current form, the founding architect of the monetary union has warned.

"One day, the house of cards will collapse,” said Professor Otmar Issing, the ECB's first chief economist and a towering figure in the construction of the single currency.

Prof Issing said the euro has been betrayed by politics, lamenting that the experiment went wrong from the beginning and has since degenerated into a fiscal free-for-all that once again masks the festering pathologies.

“Realistically, it will be a case of muddling through, struggling from one crisis to the next. It is difficult to forecast how long this will continue for, but it cannot go on endlessly," he told the journal Central Banking in a remarkable deconstruction of the project.

And:

Many would say the crisis mushroomed precisely because the ECB was unable to act as a lender-of-last resort. Prof Issing and others from the Bundesbank were chiefly responsible for this design flaw.

Jacques Delors, the euro's "political" founding father, issued his own candid post-mortem last month on the failings of EMU but disagrees starkly with Prof Issing about the nature of the problem.

His foundation calls for a supranational economic government with debt pooling and an EU treasury, as well as expansionary policies to break out of the "vicious circle" and prevent a second Lost Decade.

"It is essential and urgent: at some point in the future, Europe will be hit by a new economic crisis. We do not know whether this will be in six weeks, six months or six years. But in its current set-up the euro is unlikely to survive that coming crisis," said the Delors report.

Prof Issing is not a German nationalist. He is open to the idea of a genuine United States of Europe built on proper foundations, but has warned repeatedly against trying to force the pace of integration, or to achieve federalism "by the back door".

He decries the latest EU plan for a "fiscal entity" in the Five Presidents' Report, fearing that such move would lead to a rogue plenipotentiary with unbridled powers over sensitive issues of national life, beyond democratic accountability.

Such a system would erode the budgetary sovereignty of the member states and violate the principle of no taxation without representation, forgetting the lessons of the English Civil War and the American Revolution.

Prof Issing said the venture began to go off the rails immediately, though the structural damage was disguised by the financial boom. "There was no speed-up of convergence after 1999 – rather, the opposite. From day one, quite a number of countries started working in the wrong direction."

David Fuller's view -

It sounds to me as if architects of the ‘United States of Europe’ concept, from Germany and France’s old guard, are exonerating themselves from blame for the EU’s failure.  I would not be surprised to hear more of this. 

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



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October 17 2016

Commentary by David Fuller

Where to Invest $10,000 Right Now

Here is the introduction to this interesting article from Bloomberg, featuring five experts: Barry Ritholtz, Sarah Ketterer, Mark Mobius, Rob Arnott, and Francis Kinniry: 

Successful investors take risks. The trick is to take smart ones, in a diversified portfolio.

Here’s how.

First, make sure you’re covered on the financial basics. Then start scouting out powerful places to invest any excess cash that's making you next to nothing in a savings account. With the holidays and perhaps a raise or bonus on the horizon, it’s a good time to make that money work for you and your retirement.

To help, we asked five leading investors to share their best ideas on where to invest $10,000 right now. (It makes sense for smaller sums, too.) We first quizzed them back in June, when we also asked exchange-traded-fund analyst Eric Balchunas of Bloomberg Intelligence to choose ETFs that came closest to the strategies and themes they highlighted. Some of the experts also run mutual funds that employ their strategies.

Among their summer favorites were out-of-favor emerging markets, and many ETFs tracking those markets have seen double-digit gains. How did our panel of experts do last quarter, exactly? Very well, thank you. Check out the results that follow each new entry below. For comparison, the Standard & Poor’s 500-stock index was up 3.3 percent from June 30 to Sept. 30.

So is it too late to get into emerging markets now? Is China still promising or just too messy? We’ll let the panel answer, and share its new ideas, ranging from opportunities in floating-rate bank loans to consumer-related stocks in China.

You can toggle between last quarter’s and this quarter’s advice with a quick click, or just check out the panel’s advice for the here and now. Either way, as we emphasized in June’s “Where to Invest $10,000 Right Now” and above, take a look at these financial musts first.

Then see if you can profit from our experts’ latest ideas.

David Fuller's view -

There is plenty of interest in emerging markets among the five distinguished names mentioned by Bloomberg above.  Only one favoured Europe, as I recall, and not that enthusiastically.  No one recommended US stocks.  No one mentioned commodities, including precious metals.

What should we make of this?

This item continues in the Subscriber’s Area.



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October 17 2016

Commentary by David Fuller

Federal Reserve Vice Chairman Stanley Fischer Says Fiscal Policy Could Help Fight Low Growth

Here is the opening of this topical article from Bloomberg:

Federal Reserve Vice Chairman Stanley Fischer said government policies could partly counteract the impact of lower productivity and an aging population that are holding back the U.S. economy and weighing on interest rates.

“Some combination of more encouragement for private investment, improved public infrastructure, better education, and more effective regulation is likely to promote faster growth of productivity and living standards,” Fischer said in the text of a speech Monday to the Economic Club of New York. Such policies could also “reduce the probability that the economy and, particularly, the central bank will in the future have to contend with the effective lower bound” for interest rates.

Fischer said an increase in government spending by 1 percent of gross domestic product would lead to a rise in the equilibrium level of interest rates -- the rate that neither stimulates nor holds back the economy -- by 0.5 percentage point, according to Fed research. An equivalent tax cut would lift the equilibrium rate by 0.4 percentage point.

David Fuller's view -

This is an obvious point and there was a paucity of back slapping among the old boys at the Economic Club of New York for this meeting.  No wonder as Stanley Fischer cited slower domestic growth, an aging population, lower investment and slower foreign growth as reasons for the current problem. 

This item continues in the Subscriber’s Area.



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October 17 2016

Commentary by David Fuller

What OPEC Oil U-Turn Missed: Peak Demand Keeps Getting Closer

Here is the opening of this interesting article from Bloomberg:

OPEC’s decision last month to reverse its policy of unfettered production and cut oil output to boost prices may be at odds with the industry’s most important long-term trend: demand for what they produce could start falling within 15 years.

If rapid improvements continue in renewable energy, electric vehicles and other disruptive technologies, petroleum consumption will peak in 2030 and decline thereafter, according to a Report from the World Energy Council. As the globe’s largest producers gather in London this week for the Oil and Money conference, they might want to check their assumption that the market will grow for decades to come.

The plunging cost of renewable energy -- with solar-module costs falling 50 percent since 2009 -- is already upending the business model of utilities. Disruption could spread to the oil industry as electric vehicles become more economic than gasoline or diesel cars, potentially displacing millions of barrels of daily fuel use by the late 2020s. Projections for decades of demand growth that underpin investments in oil projects could be misplaced.

“The longer-term outlook, beyond 10 years, is certainly less rosy,” said Alex Blein, London-based energy-portfolio manager at Amundi, which holds more than $1 trillion of assets. “Given the advances in battery technology, by 2030 carbon-powered vehicles will be the exception rather than the norm. This will inevitably impact on oil demand.”

David Fuller's view -

Whether OPEC actually reduces production, other than by accident, war or strikes, remains to be seen.  However, OPEC is guaranteed to face more competition from countries which follow the USA lead by developing their fracking potential.  Additionally, renewable technologies are likely to develop even more rapidly than forecast.  Energy independence will be the ambition of every successful nation, and many will achieve it within the next fifteen to twenty years.    



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October 14 2016

Commentary by Eoin Treacy

October 14 2016

Commentary by Eoin Treacy

Is the Deepwater Dead?

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

Marky Mark-ing to market cost and efficiency gains: More competitive than you think
Contrary to popular belief, the US onshore isn’t the only sector seeing meaningful cost deflation and/or efficiency gains. While the ~60% reduction in DW rig rates has grabbed headlines, broad improvements, including drill-days (-30%-40%), steel costs (-30%), and various SURF/topsides costs (-10%-30%) have reduced total project costs by 30%-40%, in our view. And given the lag in response time, excess capacity and a moderate pick-up in activity, we expect cost and efficiency gains to be more durable than in the US onshore.

But not all barrels are created equal. Only high quality resource can compete While all deepwater tends to get lumped together, the range of economics across projects is diverse (sub $30/bbl-$80+/bbl breakevens), with only high quality resource set to compete. We examine various drivers of project economics, many poorly understood, including fiscal terms, resource size, resource density, and proximity to infrastructure, and potential impact. We see high quality, pre-FID deepwater projects breaking even at roughly $40-$50/bbl.

Meaningful challenges remain
Though more competitive than the market believes, meaningful challenges will continue to drive an increasing share of discretionary capital to US shale, including: geologic risk, project execution risk, geopolitical risk, and capital inflexibility. Adjustments to development strategies and scope can mitigate some risk, and large, diverse IOC budgets will invest across the spectrum, but failure to revolve would demand a higher rate of return, with an increase to 15% required IRR (vs. 10%) increasing average breakevens by $7.5/bbl.

Eoin Treacy's view -

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

Drilling for oil offshore is quite a bit more expensive and carries with more risk that drilling onshore. Nevertheless, before the evolution of unconventional onshore oil and gas wells in the USA, oil companies had little choice but to explore the world’s oceans. The question is not whether the oil is in place offshore but rather what is the cost of extraction and transportation to shore?



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October 14 2016

Commentary by Eoin Treacy

Your money market fund has changed

This article by Darla Mercado for CNBC may be of interest to subscribers. Here is a section:

All of that changed in September 2008, when Lehman Brothers filed for bankruptcy. The Reserve Primary Fund, a large money market fund, held Lehman bonds.

In turn, institutional investors pulled billions of dollars from the fund, knocking its share price from the supposedly steady $1 to 97 cents on Sept. 16, 2008. It had "broken the buck."

That crisis spurred new rules from the SEC, aimed at protecting smaller investors from large redemptions.

Two key reforms came about: One would require so-called prime institutional money market funds (generally used by large investors) to have a floating net asset value rather than a fixed $1 share price.

The other creates liquidity fees and "redemption gates," which are temporary halts on withdrawals to certain money market funds.

Eoin Treacy's view -

Highlighting the clear difference in risk between government and corporate commercial paper is at the root of these changes to the structure of money market funds. That is likely to be a net positive overall but it represents a change to the status quo and therefore an uncertainty.  



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October 14 2016

Commentary by Eoin Treacy

Email of the day on South Africa

The South African courts are for the most part independent, competent and play a key role in holding the worst excesses of Zuma and his cronies in check - and hopefully ultimately ensuring they go to jail. The National Prosecuting Authority and the Hawks (part of the police) are 'captured' by Zuma and merely do his bidding - mostly to keep him out of jail (there are 786 charges of fraud, corruption and racketeering against him) and to torment people like Gordhan who seek to limit the thieving and waste. SA does not really have single party rule either - the moderate opposition DA now runs Johannesburg, Pretoria, Cape Town (and the Western Cape provincial government) and Port Elizabeth. The ANC secured only 53.9% of the overall vote in the recent municipal elections, much of that from the rural areas.

Eoin Treacy's view -

Thank you for sharing your on-the-ground perspective of political and regulatory developments in South Africa. An independent judiciary is a very important component in assessing the standards of governance and the potential for them to improve for any country. Zuma’s interference in the judiciary, not least prosecuting his rival, Gordhan, is a negative development.

 



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October 14 2016

Commentary by Eoin Treacy

Google and 3D Printing Buildings

This article by Katie Armstrong from 3D Printing Industry dated May 3rd may be of interest to subscribers. Here it is in full:

3D printed buildings are the way of the future! At least that’s what Eric Schmidt, executive chairman of Google’s parent company, Alphabet, says.

Imagine you could walk onto an empty block of land one day, and have a house built on it a few days later. Sounds like science fiction, doesn’t it? What if I told you it was already happening?
A recent conference in Los Angeles saw Schmidt predict the technologies that would be game changers. The Milken Institute’s Global Conference, which brings together leaders from diverse sectors and industries around the world, explores solutions to today’s most pressing challenges in financial markets, industry sectors, health, government and education. Schmidt talked about synthetic meat made from plants, VR, self-driving cars, and 3D printing for buildings.

Schmidt points out that constructing buildings, both residential and commercial, is time consuming, energy intensive, and costly. He said that construction represented 5% of the economy, but that homes and buildings built in an industrial environment could be cheaper, more efficient and built on 100% recyclable material.

This isn’t the first time Schmidt has sung the praises of 3D printing technology and its potential applications. Back in 2013 he predicted the rise in the use of 3D printing, and he wasn’t wrong.
The implications of 3D printed houses and infrastructure are incredible. Instead of a home taking months to build, it could take just days. A company in China claimed to have built 10 houses in under 24 hours in 2014, with all their materials coming from recycled waste materials.

With the UN estimating that three billion people will need housing by 2030, large scale 3D printers are being suggested as a solution to this. They could be the solution to cheap, reliable housing which would replace slums in developing countries.

 

Eoin Treacy's view -

It occurs to me that homebuilding is a sector ripe for disruption. It is totally reliant on individuals who specialise in one set of skills. Carpenters, roofers, block layers, masons, plumbers, and electricians are all needed on a building site and because of designated duties one cannot start until the other has finished. In addition each of these trades tends to have a negotiated pay rate which is rather generous and has no bearing on what work is being done. 



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October 13 2016

Commentary by David Fuller

Hydrogen Heating a Step Closer as Government Adviser Backs UK Trials

Radical plans to use hydrogen to heat UK homes and businesses have moved a step closer after the Government’s official climate advisers said the plan was “technically feasible” and called for major trials to be undertaken.

In a report, the Committee on Climate Change identified using hydrogen in place of natural gas in the UK’s existing gas grid as one of the two “main options” for greening Britain’s heating supplies.

It said the second was the use of heat pumps, which use a reverse refrigeration process to draw heat from the air, ground or a water source.

The Government must decide by 2025 what role hydrogen will play in order to implement its chosen plan in time to hit its 2050 climate targets, Matthew Bell, the CCC chief executive, said.

About 80pc of UK homes are currently heated using natural gas from the grid, which produces carbon dioxide when burnt.

The CCC estimates that if the UK is to comply with the Climate Change Act, which requires greenhouse gas emissions to be slashed to 20pc of their 1990 levels by 2050, the majority of homes and almost all businesses will need to cease burning natural gas.

However, the CCC said the UK’s attempts at green heating so far had “been unsuccessful” and called for the Government to devise “a proper strategy”.

This including doubling the rate of installation of heat pumps this parliament in homes that are not on the gas grid, many of which use heating oil, as well as conducting the “sizeable trials of hydrogen for heating”.

“The main options for the decarbonisation of buildings on the gas grid in the 2030s and 2040s are heat pumps and low-carbon hydrogen,” the CCC said in a report.

In addition, the UK could also use some district heating networks in urban areas, taking heat from a central source through insulated pipes to homes and businesses.

David Fuller's view -

This is clearly a project for the future and unlikely to be of any near-term benefit.  Nevertheless, it provides further evidence of energy creativity in this fascinating era of accelerating technological innovation. 

At the beginning of this century alarmists were worried about running out of energy, against a background of every higher prices for crude oil.  The exact opposite is happening as a result of human ingenuity.  In the next decade and well beyond, we will be awash with increasingly cheap energy from a variety of different sources.  That will be good news for consumers and GDP growth in developed economies, but don’t tell anybody – they won’t believe you. 

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



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October 13 2016

Commentary by David Fuller

October 13 2016

Commentary by David Fuller

On Target: the Private Newsletter on Global Strategy from Martin Spring

My thanks to the author for his ever-interesting report – here is the opening:

Low-Risk Plan: ‘Shot Through the Heart’

Those of you who have been following my opinions for a while know how much I favour a Browne Plan for those who don’t have the experience, skill or time to manage family wealth actively.

Invented by the American strategist Harry Browne, such a plan promises steady long-term capital growth with minimal downside risk, requires no management beyond a simple annual portfolio view, and frees you from having to make any decisions about what’s happening in the markets. The concept is simple – ignoring fixed assets such as your home, you allocate a fixed proportion of your capital to each of several very different asset classes, but rebalancing periodically, moving capital from those that have gained in value into those that have fallen. You sell some expensive assets to buy more of those that have become cheaper.

Browne recommended investing 25 per cent of your portfolio in each of just four assets -- shares, bonds, gold and cash.

Anyone who followed such a plan in the US since 1970 would have achieved an average return of 8.35 per cent a year. In only five of those 45 years did the portfolio lose money, and always bouncing back strongly in the following year.

The logic behind such a plan is…

David Fuller's view -

Harry Browne’s investment plan has appealed to an increasing number of professional investors in recent decades, whether they admit it or not.  There is a buy-low-sell-high logic behind Browne’s investment plan, although ‘the devil is often in the detail with any investment strategy. 

Martin Spring is a big fan, as you can read in this issue.  Tim Price who is quoted in the opening headline, is no longer a fan, having scrapped two of the four investment strategies.  You can see his latest assessment of Browne’s investment plan in detail, as his presentation from The Markets Now on Monday was posted in Comment of the Day yesterday.   

Martin Spring’s On Target is posted in the Subscriber’s Area.



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October 13 2016

Commentary by David Fuller

Brad Katsuyama Q&A: I Do Not Think We Would Have Survived If It Was Just Hype

Stock exchanges are part of the plumbing of Wall Street, and the details of how they’re run have never exactly captured the public imagination. That changed with Brad Katsuyama, 38, the co-founder and chief executive officer of IEX, who brought equity market structure to the mainstream as the hero of Michael Lewis’s book Flash Boys. Katsuyama was working as a trader at the Royal Bank of Canada, helping big investors buy stock, when he noticed it was getting increasingly difficult to do so without moving the price. As he investigated, he came to the conclusion that stock exchanges weren’t always looking out for investors’ interests and the market favored high-frequency traders at the expense of long-term investors. (In Lewis’s words, the market was “rigged.”) This led Katsuyama to start IEX, an exchange with a “speed bump” designed to slow down high-frequency traders on behalf of longer-term investors. After a grueling application process full of fierce resistance, IEX’s Investors Exchange gained approval from the U.S. Securities and Exchange Commission in June. “We just wanted a chance to compete,” says Katsuyama, who spoke with Matt Levine of Bloomberg View about the nuances of market structure shortly after the exchange went live in September.

David Fuller's view -

This service has posted plenty of copy on predatory high-frequency trading (HFT) over the years and Brad Katsuyama was one of the few people who actually did something about it. 

Speed bumps have slowed HFT down in some markets but it is still a problem which will not go away.  Most of the momentum moves in markets are driven mainly by HFT systems, according to insiders.

We can live with that and even benefit from it on occasion, by following three common sense guidelines: buy-low, sell-high and use leverage conservatively.    



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October 13 2016

Commentary by Eoin Treacy

I have seen the future and his name is Kevin

Thanks to a subscriber for this note by Albert Edwards at SocGen which may be of interest to subscribers. Here is a section:

Summers’ relaxed view on the debt build-up, particularly visible in the corporate sector, is in sharp contrast with our own view that this looks set to wreck the US economy. Summers was particularly dismissive of comparing debt to income as the former is a stock and the latter a flow concept. He thought it entirely appropriate in a world of lower interest rates that debt had reached record levels relative to income? belying, for example, the concerns expressed by the IMF this week. Should we worry about the chart below or not?

The charts above and below have just been updated by my colleague Andrew Lapthorne (and using the S&P 1500 ex financials universe). Summers? point was we shouldn’t be too stressed about rising debt as 1) QE is driving up asset prices and higher debt does not look excessive relative to assets, and 2) rock-bottom interest rates mean the debt is easily serviceable. Now on the first point, Andrew shows that quoted company corporate debt has rocketed relative to assets to now exceed the madness last seen at the height of the 2000 TMT bubble. Indeed the problem with Summers? analysis in my view is that it is the higher debt that is being used to push up asset values (via share buybacks), just as it did during the housing bubble in 2005-7. And by pushing asset values well beyond fundamentals you build debt structures on false asset values, which only become apparent when the asset bubble bursts. And am I in any way reassured that the Fed sees no bubbles? No, I am not. These dudes will never identify an asset bubble? at least before the event!

Andrew notes that the way corporate bond pricing models work (e.g. Moody’s KMV and Merton’s “distance to default” models) it is not just a company’s ability to pay its coupon that affects its valuation. Investors are in effect always asking, can this company repay its principal TODAY, even though the repayment is not actually due for 30 years. If asset values collapse in the event of a recession, corporate bond spreads will explode irrespective of the fact that they can easily pay the interest. But hang on a second, let’s just look at interest cover for the quoted sector, for Andrew finds that despite record low interest rates, cover has declined to levels last seen in the depths of the last recession (see chart below)! In the next recession a sharp decline in both profits and the equity market will reveal this Vortex of Debility. US corporate spreads will then explode as the economy is overwhelmed by corporate defaults and bankruptcies. And with the Fed having been the midwife of yet another financial crisis, what price do you give me for it to lose its independence?

 

Eoin Treacy's view -

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

A point I’ve made on a number of occasions is that the corporate finance courses taken by MBA students dictate that corporations attempt to access the cheapest cost of funding in order to reduce the weighted average cost of capital. It is advantageous, from a balance sheet perspective, to load up on debt when interest rates are low and to extend the maturity out as far as is practicable, then to use the proceeds to buy back shares, regardless of price, because that reduces funding costs overall. 



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October 13 2016

Commentary by Eoin Treacy

Email of the day on medical innovation

Here's an intriguing finding - silkworms  can produce silk with graphene embedded, which gives material with electrical conductivity! With further development, materials with these properties moves us closer to the day when we may be wearing 'ordinary' clothing which gathers and transmits information in real time about our health. So all of us can then have a longitudinal personal health record assessed constantly by AI systems which feedback instantly any concerns being noted. No need to visit a doctor for diagnosis, AI will be much faster and much more accurate. Comparison of our personal health longitudinal record with the collected human database will give much more accurate diagnosis and prediction than is possible today. 

This vision is one of the reasons I noted in an email a few days ago that healthcare will generate the biggest of big data, and why we need blockchain technology to secure it. 

 

Eoin Treacy's view -

Thank you for this interesting article highlighting the success of a Chinese team in improving the conductivity of silk. Wearable technology is advancing in leaps and bounds so within the decade it is entirely possible that we have 24/7 monitoring of our vital signs available from a host of different products.

In addition the number of metrics examined will also increase as our collective understanding of body chemistry and interactions improves. In fact as the quantity of data and the number of metrics that need to be assessed, both in isolation and in unison, increases it will be impossible for any human to keep track of it all, so artificial intelligence will be a necessity rather than a luxury.

 



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October 13 2016

Commentary by Eoin Treacy

Email of the day on the influence of mega-caps on the performance of the S&P 500:

Given that (apparently) the FANGS account for about 50% of the total gains in the S&P500 over the last 2 years, it would be interesting to see what a chart of the S&P500 minus the FANGS would look like. Does such a chart exist?

My gut feel is that the chart would look more like the Dow Jones Industrial Index

 

Eoin Treacy's view -

Thank you for raising this important question. I don’t have a chart that removes Apple, Alphabet, Microsoft, Amazon and Facebook from the performance of the overall index but I did create this spreadsheet ranking the constituents of the Index by market cap. 



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October 12 2016

Commentary by David Fuller

If Europe Insists On a Hard Brexit, So Be It.

Personally, I have been in favour of a "soft Brexit" that preserves unfettered access to the single market and passporting rights for the City, but not at any political cost - and certainly not if it means submitting to the European Court, which so cynically struck down our treaty opt-out on the Charter in a grab for sweeping jurisdiction.

But what has caused me to harden my view - somewhat - is the open intimidation by a number of EU political leaders. "There must be a threat," said French president Francois Hollande. "There must be a price... otherwise other countries or other parties will want to leave the European Union."

These are remarkable comments in all kinds of ways, not least in that the leader of a democratic state is threatening a neighbouring democracy and military ally. What he is also admitting - à son insu - is that the union is held together only by fear. He might as well write its epitaph.

Mr Hollande and German Chancellor Angela Merkel invariably fall back on the four freedoms -movement, goods, services, and capital  -enshrined in EU treaty law, as if they were sacrosanct.

These freedoms are nothing but pious shibboleths. They often do not exist, and where they do exist they are routinely honoured in the breach. Services make up 70pc of the EU economy yet account for just 22pc of internal EU trade. All attempts to open services up to cross-border commerce have been defeated, to the detriment of Britain.

The sorry saga of the Services Directive in 2006 tells all you need to know about how the EU works. "The French and Germans gutted it," said Professor Alan Riley from the Institute for Statecraft.

The 'country of origin rule' that would have allowed firms to operate anywhere in the EU under their own domestic law was dropped, casualty of the "Polish plumber" scare. The directive did not cover health care, transport, legal services, professions, tax experts, and the like. Germany protected its guilds.

Online and digital trade across borders remains minimal, riddled with barriers. Britain's All-Party Parliamentary Group for European Reform concluded that "there is no single market in services in any meaningful sense."

As Brussels correspondent I covered the parallel fiasco of the takeover directive. This too was sabotaged by France and Germany,  after fourteen wasted years. They reinstated poison pills and a host of tricks in an explicit attempt to stop 'Anglo-Saxon predators' taking over their companies, even as their own companies were free to stalk British prey.

"It was disgusting," one Commission official told me at the time. Frits Bolkestein, the quixotic single market chief, was despondent.  "It is tragic to see how Europe's broader interests can be frustrated by certain narrow interests," he said.

So much for the freedoms of capital and services. Nor has the free movement of people been strictly upheld. France and Germany - unlike Britain - blocked access to their labour markets and welfare systems for East Europeans for seven years after they joined the EU in 2004. It was political decision.

The four freedoms are really just aspirational guidelines, enforced when expedient, neglected at other times. The rigid exhortations from Paris, Berlin, and Brussels that there can be no free trade with Britain unless there is unrestricted migration - even after leaving the EU - is politics masquerading as principle. If they want to find a compromise solution, they can do so easily.

It is an odd spectacle. On the one hand the EU is so insecure that it talks of punishing Britain to deter other escapees; on the other it exhibits an imperial reflex, demanding submission entirely on its own terms, seemingly unable to accept or even to imagine a reciprocal trading relationship based on sovereign equality.

Mr Hollande wishes to bring about the hardest possible Brexit. If this proves to be the EU position - and it may not be, since it is lunacy and he for one will soon be irrelevant - it does at least clarify the issue.

A hard Brexit was never my preference. While the economic benefits of the EU customs union are greatly overstated, it would be no small matter to unwind the nexus of cross-border supply chains that has evolved over decades.

But if that is the only choice, so be it.

David Fuller's view -

I will repeat the two most telling paragraphs in this excellent column:

But what has caused me to harden my view - somewhat - is the open intimidation by a number of EU political leaders. "There must be a threat," said French president Francois Hollande. "There must be a price... otherwise other countries or other parties will want to leave the European Union."

These are remarkable comments in all kinds of ways, not least in that the leader of a democratic state is threatening a neighbouring democracy and military ally. What he is also admitting - à son insu - is that the union is held together only by fear. He might as well write its epitaph.

Shortly after the Brexit vote on June 23rd, Jean-Claude Junker and other EU bureaucrats took a very hard line on the British result.  At first this seemed like adolescent bullying and wounded pride on realising that the UK did not wish to remain in their club.  However, as the attempts at intimidation continued it became obvious that this was not just aimed at the UK – far from it.  These apparatchik-style threats are mainly aimed at other EU countries which may be tempted to follow the UK’s lead.    

Noting French president Francois Hollande’s comments on Brexit, reminds me of the French Foreign Legion, only with double standards.

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



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October 12 2016

Commentary by David Fuller

Soaring Gilt Yields are a Bigger Problem than the Pound Slide

Forget about sterling; the real action is in the bond market, which has suddenly caught fire.

Yields on 10-year gilts have almost doubled to 1pc; they were just 0.52pc on 12 August.

Investors are reeling, and for good reason.

So what is happening?

For years now, gilt yields have been going down, and further down, in common with fixed income markets in all developed countries.

The cost of long-term borrowing has fallen to ridiculously low levels; in many cases, people have been paying in real terms for the privilege of lending to the Government.

There are cons as well as pros to this.

We’ve seen the emergence of a giant bonds bubble, a false market in gilts fuelled by quantitative easing and the belief that central banks are now the gilt buyer of first resort; asset prices have surged, bolstered by lower discount rates; pension funds have become almost unviable; and an excessively bearish view of long-term economic growth has taken hold, with forecasters confusing artificially low bond yields with the market’s assessment of long-term GDP growth.

The main advantage of cheap money is that it has slashed the cost of government as well as private sector borrowing.

Fixed rate mortgages have tumbled, and companies have been able to borrow more cheaply, which means that the hurdle rate for capital projects has fallen, boosting corporate investment.

Yet the trend in the UK has suddenly turned, for now at least. In the last week alone, yields have jumped from 0.73pc last Monday to 1pc today, going hand in hand with sterling’s drop from $1.30 to $1.24.

Some institutional investors are licking their wounds: since 12 August, the 10 year gilt price is down 3.7pc, the 20 year gilt by 6.6pc and the thirty year gilt by 9pc, according to Hargreaves Lansdown.

So much for a supposedly safe, non-volatile asset. On top of all of this, the gap - or spread - between gilt yields and the yields on German government has increased, rising to almost a whole percentage point. Philip Hammond’s borrowing will be more expensive and his deficit greater; by contrast, pension fund deficits have fallen sharply in recent days.

David Fuller's view -

These are important points and they have wider implications.  A 35-year secular trend of falling yields in government bonds, arguably the biggest bull market in history, will not end quietly. 

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



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October 12 2016

Commentary by David Fuller

Four Ways the UK Can Take Advantage of a Weaker Pound

First, let’s focus on core export industries where price makes a difference

We sell a lot of pharmaceuticals, but they are not price sensitive. Ten per cent here or there does not make a lot of difference to which medicine you prescribe.

But our largest single export by value is now cars – we sell $46bn (£37bn) of those abroad every year.

With a cheaper pound, the likes of Jaguar and Land Rover should make real progress against BMW and Lexus – indeed, the German manufacturers must be feeling a little queasy at the thought of tariffs in retaliation for our audacity in leaving the EU on top of the currency movement.

Likewise, our biggest net export by value is Scotch whisky. That is now going to be a lot cheaper against brandy or bourbon or any other high-end spirit. We should help distillers to expand and conquer new markets. If people get a taste for British cars and drinks again, that will last a long time.

Next, let’s encourage a fresh wave of inward investment

It looks like we are going to lose the advantages of being in the single market, which was a powerful incentive for global companies to base themselves here.

But, heck, we just became far, far cheaper, and, to make it even better, we have the lowest corporation tax of any major economy as well.

If overseas companies want to set up in this country, or buy our companies, then great. The more the better. In the last decade foreign investors have rebuilt half of London – let’s get them to rebuild Manchester and Leeds as well. And if at least three FTSE companies haven’t been sold in the next year, we should count that as a failure.

David Fuller's view -

These are obviously sensible recommendations from Matthew Lynn and I would be astonished if Mrs May’s Government did not have similar views.

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



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October 12 2016

Commentary by David Fuller

Email of the day

On dealing with EU countries once out of the EU:

Dear David, In commenting on Roger Bootle's article yesterday, you wrote "Once out of the EU, the UK can propose sensible trade terms with individual European nations..." As I understand it, once the UK leaves the EU it will only be able to negotiate trade agreements with the EU Commission and not with individual EU countries. Under EU treaties, it is the Commission that has exclusive authority to negotiate trade deal on behalf of its members as a whole. Were you referring to all the other European countries in your comments?

David Fuller's view -

Thanks for this email and you are correct in terms of the rules for EU treaties.  However, we also know that the bigger EU countries, notably Germany and France, often set their own conditions on various issues, regardless of the EU’ rules which are treated as no more than flexible guidelines. 

The EU, I suggest, is in crisis mode.  Old rules are being ignored and new guidelines are adopted by different countries on a frequent basis.  The political situation in many countries is currently less stable or predictable than at any time in the EU’s history. 

Against this background and in the event of a “hard Brexit” by the UK, which I favour, does anyone think that Germany’s automobile manufacturers will be approaching and then waiting on the EU Commission to negotiate their future trade terms with the UK?  I think not, and I also suspect that all EU countries will be similarly negotiating trade terms in their best interests, with or without the EU Commission.   



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October 12 2016

Commentary by David Fuller

The Markets Now

Held last Monday evening at London’s Caledonian Club.

David Fuller's view -

We had a very enjoyable and stimulating gathering at London’s excellent Caledonian Club on Monday, with two rooms at our disposal, better projection equipment and four speakers. I shortened my presentation a tad, allowing more time for excellent talks by Tim Price, Iain Little and Bruce Albrecht.  It was nice to meet and talk to the sons of two delegates, and I hope other subscribers will also bring their children who are interested in the markets, including daughters, to future Markets Now.  

Tim Price’s profound and witty presentation is posted in the Subscriber’s Area.



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October 12 2016

Commentary by Eoin Treacy

Dollar Advances for a Third Day Versus Euro Before Fed Minutes

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

The dollar climbed for a third day versus the euro before the release of minutes of the Federal Reserve’s latest policy meeting that may provide clues on the path of U.S. interest rates.

The greenback reached its strongest level since July versus Europe’s shared currency as traders awaited the record of the Federal Open Market Committee’s September meeting for signs that Chair Janet Yellen will raise borrowing costs soon. The odds of a rate increase by year-end have climbed to 68 percent, from 60 percent a month ago, amid speculation a recent surge in oil prices will fuel inflation. A gauge of the dollar held near a two-and-a-half month high.

“The dollar has already received support over the recent days on comments” from Fed officials, and “the market now wants to look if the minutes are in the same direction,” said Georgette Boele, a currency and commodity strategist at ABN Amro Bank NV in Amsterdam. “If the minutes confirm it, the dollar could get a bit more support.”

The dollar appreciated 0.3 percent to $1.1025 per euro as of 7:22 a.m. New York time, having touched $1.1010, the strongest since July 27. Bloomberg’s Dollar Spot Index, which tracks the currency against 10 major peers, was little changed, after rising Tuesday to the highest level since July.

Eoin Treacy's view -

The Fed is flirting with raising interest rates again, having already done so once. While absolute levels are still very low that represents a sharp distinction from just about all other major central banks that are still in easing mode. 

The experiment with negative interest rates in the EU and Japan has helped support their respective currencies. However there is increasing acceptance that it is counterproductive to the aim of the achieving inflation and also represents an existential threat to their respective banking sectors. 



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October 12 2016

Commentary by Eoin Treacy

Baidu is bringing AI chatbots to healthcare

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

The Chinese search engine launched "Melody" on Tuesday, a chatbot that uses artificial intelligence to help doctors care for patients over text.

Baidu (BIDU, Tech30) aims to make medical consults more accessible and help patients determine whether or not they should see a doctor in person.

For instance, if you tell Melody your child is sick, it might ask whether she has a fever or is jaundiced and follow up with additional questions.

Melody integrates with the Baidu Doctor app, which already lets patients ask doctors questions, make appointments and search for health information. Melody asks the patient preliminary questions and pulls data from digitized textbooks, research papers, online forums and other healthcare sources.

The app produces a hypothesis regarding treatment options that a human doctor edits and sends to the patient. The self-learning bot will continue to sponge up information and improve conversation as time goes on.

 

Eoin Treacy's view -

Ray Kurzweil made clear in his talk at the ExMed conference earlier this week that “life begins at a billion impressions” when it comes to artificial intelligence (AI). In other words if you want to teach a computer how to recognise an image you need to feed it a billion examples before it can make the leap to recognition. 



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October 12 2016

Commentary by Eoin Treacy

Email of the day on Brexit and Fanuc

A couple of things I have come across this morning which I think are very interesting:

1/ the article below about the parliament being consulted re the Brexit. As I have already expressed in other emails, governance is the most pressing issue now for the UK; a debate and a vote in the parliament should soothe the impression that many have that the most basic rules of parliamentary democracies have been averted (hence GBP moving up), and that an unelected bureaucracy (this unequivocally is unelected)  has taken control of the country, its citizens life and assets. Good governance and common sense would require a qualified majority to be obtained to move things further, but it is too late for this now and I maintain that the UK will be labelled as a country with unpredictable and subpar governance for a very long time (S&P put it down very elegantly when it downgraded the country credit rating following the referendum saying that it "lead to a less predictable, stable, and effective policy framework in the UK. We have reassessed our view of the UK’s institutional assessment and now no longer consider it a strength in our assessment of the rating.")

2/Fanuc has finally broken back above the 200-day MA, and rallied. Any international investor - not to mention any UK investor - would already be in profit given the strong performance of the JPY, even if entering the position on the break below the MA. I think it's quite powerful signal, and one worth flagging up.

 

Eoin Treacy's view -

Thank you for sharing your perspective as someone intimately affected by the decision to leave the EU and the potential loss of passporting rights for UK domiciled funds. 



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October 12 2016

Commentary by Eoin Treacy

Thailand King Critical, What happens if he dies?

This article from the South China Morning Post may be of interest to subscribers. Here is a section:

Thai monarchy observers said the choice of words stood out from previous official updates on the ailing king’s health. The widely venerated monarch enthroned since 1946 has been out of the public eye in recent years due to a range of health issues including renal failure. The palace has released more frequent updates of his health this year.

Ailing Thai king's health 'not stable' after haemodialysis treatment, palace says
Commentary from within Thailand about the king’s health and succession plans is scarce because of the country’s tough royal defamation laws, which has seen increased usage under the current military government.

“This is an extraordinary statement from the Royal Household Bureau. Usually they try to say something positive, not this time,” said Kevin Hewison, a veteran Thai politics expert who is emeritus professor of Asian Studies at the University of North Carolina at Chapel Hill.

 

Eoin Treacy's view -

The Thai king has been a unifying force in a country where political uncertainty has long been a destabilising issue. Proposed elections and a return to civil rule might be delayed should the king die even if the crown prince is expected to take over. 



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October 11 2016

Commentary by David Fuller

UK Economic Interests Are Not the Same as Those of Self-interested Business Leaders

It is striking how the use of certain terms distorts underlying concepts and impairs understanding. The current debate is characterised by a supposedly sharp divide between “soft Brexit” and “hard Brexit”. The defining difference is whether the UK remains part of the single market.

Whenever it is suggested that we might go for so-called “hard Brexit” it is widely assumed that our economic future will be worse. The underlying idea seems to be that the single market is economically good. Accordingly, if the UK rejects membership of it, this must be because, either we are mad, or we value certain non-economic – and political – objectives more highly than economic prosperity. Prime among these are the control of immigration and the restoration of sovereignty, including escape from the clutches of the European Court of Justice. Accordingly, much of big business, and especially the City, favours “soft Brexit”, implicitly putting prosperity before politics.

But is it clear that membership of the single market is such a good thing? Most of the world – including the US, China, Canada and Singapore - does not belong to “the” single market nor, come to that, to any other single market. Yet they seem to be rubbing along all right.  Meanwhile, the members of the single market are not doing so well.

Most of those economists who supported Brexit and wanted to leave the single market – including yours truly – did not make this choice because they believed that certain political gains outweighed economic losses. They believed that in the long run, if not also immediately, leaving the single market would deliver the best economic result.

This should not be surprising. Along with single market membership comes three significant negatives. Prime among them is the need to submit to all EU rules and regulations. Britain’s leading business organisations have been berating us for years about how cumbersome and costly these are. Why have they now apparently forgotten this?

Second, if we belong to the single market we are unable to manage our own trade relations with countries outside the Union. We have to impose the EU’s common external tariff and are forbidden from forging trade deals with them.

Third, we have to pay a membership fee, amounting to about 0.5pc of GDP per annum.

Those business people and institutions who are confident that belonging to the single market is such a good thing are, on the whole, the same as those who were confident that a vote to leave the EU would bring immediate economic pain. When will they learn that the single market is not all that it is cracked up to be? The UK’s economic interests are not the same as those of established businesses as perceived by their short-termist and self-interested leaders – and loudly proclaimed by their myopic and blinkered lobby groups.

David Fuller's view -

This is a brilliant and also droll column by Roger Bootle.  I commend the entire article to you, and feel free to pass it along to nervous ‘Remainers’.   

“Hard Brexit” may feel like a leap in the dark but it is probably far more sensible than a long, protracted and expensive negotiation with a dysfunctional EU of 27 nations, which have no experience of a departure from the Union, and which some may choose to take personally.  Once out of the EU, the UK can propose sensible trade terms with individual European nations and common sense would be more likely to prevail.  Meanwhile, the UK will be simultaneously pressing ahead with trade agreements elsewhere around the globe.  

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



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October 11 2016

Commentary by David Fuller

Email of the day 1

On sterling’s current slide:

This article makes a lot of sense.

Though my holiday in Greece next year may cost more, that's a small price to pay for a rebalanced economy that will eventually benefit a broader swathe of the UK population.
We just need to figure how to handle that border in Ireland!

Best wishes to you both and thanks for your great service.

David Fuller's view -

Thanks for your email and kind words.

Here is the opening of the article by Ambrose Evans-Pritchard, and a section of the conclusion, as not all Subscribers will be able to access the link above.  I will also have a PDF of the article in the Subscriber’s Area:

The slump in sterling is a blessing in disguise after years of overvaluation and helps to break the corrosive stranglehold of the financial elites over the British economy, according to a former bail-out chief for the International Monetary Fund.

“It is desirable from every point of view. The idea that Britain is in crisis or is on its knees before the exchange rate vigilantes is ludicrous,” said Ashoka Mody, the IMF’s former deputy-director for Europe and now at Princeton University.

“The UK economy is rebalancing amazingly well. It is a stunning achievement that a once-in-fifty-year event should have gone to smoothly,” he told the Telegraph.

Professor Mody, who led the EU-IMF Troika rescue for Ireland, said the pound had been driven up to nose-bleed levels from 2011 to 2015 by global property speculators and the banking elites acting in destructive synergy, causing serious damage to Britain’s manufacturing base and long-term competitiveness.

The role of the City as the unrivalled financial centre of Europe made it a magnet for speculative property flows from Russia, China, the Mid-East, and the wider world, a bubble that was further leveraged by cheap dollar credit though global banks operating in London.

“It was essentially a bank-property nexus, and the rest of the economy was left to suffer. It is stunning that just 1.4pc of all loans were going to the manufacturing sector,” he said.

And:

A weaker currency has lost its ability to frighten in a deflationary world where most of the major advanced states or economic blocs are trying to drive down their exchange rates to break out of the liquidity trap. Britain has inadvertently stolen a march in an undeclared global currency war.

For the fragile eurozone economy, the opposite dynamic is playing out. The pound is one of the largest components of the euro’s trade-weighted index, and the 20pc fall since late last year has the side-effect of further tightening the deflationary noose.

The exchange rate has now fallen so far that most eurozone exporters selling into Britain can no longer absorb the currency effect by shaving their profit margins. They increasingly face the risk of declining sales and market share.  

Prof Mody said eurozone leaders may be on thinner ice than they care to admit. “They are in a debt-deflation cycle, and it is self-reinforcing,” he said.

French president Francois Hollande has now openly stated that his desired policy is to “threaten” Britain and make the country “pay a price”. The more he succeeds, the more painful the blowback into France.

I maintain that weaker sterling and successful fracking in the UK represent the long missing economic stimulants which can turn the central and northern regions of the UK back into a manufacturing powerhouse over the next decade.  



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October 11 2016

Commentary by David Fuller

The Markets Now

Held Monday evening at London's Caledonian Club.

David Fuller's view -

We had a very enjoyable and stimulating gathering at London’s excellent Caledonian Club last night, with two rooms at our disposal, better projection equipment and four speakers. I shortened my presentation a tad, allowing more time for excellent talks by Tim Price, Iain Little and Bruce Albrecht.  It was nice to meet and talk to the sons of two delegates, and I hope other subscribers will also bring their children who are interested in the markets, including daughters, to future Markets Now.   

Presentations are being posted in the Subscriber's Area this week.



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October 11 2016

Commentary by David Fuller

Email of the day 2

On a “hard Brexit”:

I agree that the intransigent and punishing approach emerging from the EU is actually a blessing for the UK. A rapid 'hard Brexit', in much less than 2 years, may actually be the BEST scenario for our country. Yes there will be losers, and they will kick and scream, but there will be winners too (who will be quieter). In the mid-term I think it likely the winners from Brexit will out-number the losers and we will have a better society too.

David Fuller's view -

Thanks and well said.  I could not agree more.



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October 11 2016

Commentary by David Fuller

Email of the day 3

On UK fracking:

I fully agree with your comment David. This decision on fracking, if extended across the midlands and north, could do more to bring about the 'Northern Powerhouse' than all the politician's hot air and boondoggles. Those regions could once more become powerhouses of the global economy, especially if EU countries stay with their current policies on fracking. Energy costs in Europe will continue to do enormous damage to competitiveness. The UK can break free.

David Fuller's view -

Thank you – powerfully said and I certainly agree.



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October 11 2016

Commentary by Eoin Treacy

A $7 Trillion Moment of Truth in Markets is Just Three Days Away

This article by Tracy Alloway may be of interest to subscribers. Here is a section: 

Not since the financial crisis of 2008 has Libor, to which almost $7 trillion of debt including mortgages, student loans and corporate borrowings, is pegged — experienced such a surge. The three-month U.S. dollar Libor rate has jumped from 0.61 percent at the start of the year to 0.87 percent currently — a 42 percent rise — ahead of money market reform that's due to come into effect on Oct. 14.

The new rules require prime money market funds — an important source of short-term funding for banks and companies — to build up liquidity buffers, install redemption gates, and use 'floating' net asset values instead of a fixed $1-per-share price. While the changes are aimed at reinforcing a $2.7 trillion industry that exacerbated the financial crisis, they are also causing turmoil in money markets as big banks adjust to the new reality of a shrinking pool of available funding.

Some $1 trillion worth of assets have shifted from prime money market funds into government money market funds that invest in safer assets such as short-term U.S. debt, according to Bloomberg estimates. The exodus has driven up Libor rates as banks and other corporate entities compete to replace the lost funding.

Now, analysts are debating whether the looming Oct. 14 deadline will mark a turning point for the interbank borrowing rate, as money markets acclimatize to a new reality.

 

Eoin Treacy's view -

A great deal of capital is parked in money market funds overnight because they are considered relatively secure because the NAV is steady. The transition to two types of money market fund; one investing only in government securities with a static NAV and others in commercial paper with a highly variable NAV, represents a major change and will need time for bedding in so the potential for volatility is non-trivial.



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October 11 2016

Commentary by Eoin Treacy

S. Africa's Gordhan to Be Charged; Rand Plunges Most Since June

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

South African Finance Minister Pravin Gordhan was summonsed to appear in court on fraud charges next month, the latest twist in a struggle with President Jacob Zuma that could cause South Africa’s credit rating to be downgraded to junk. The rand weakened against the dollar by the most in more than three months.

Gordhan Tuesday called the summons politically motivated and said “there is no case,” adding that South Africans need to ask why the prosecutors took the decision to charge him over approving a retirement package, two weeks before the delivery of the mid-term budget. He’s due to appear in court on Nov. 2. Shaun Abrahams, the head of the National Prosecuting Authority, said there had been no political interference.

“Gordhan has done an outstanding job and enjoys an extremely high degree of confidence,” said Anthony Sedgwick, co-founder of Abax Investments (Pty) Ltd. “Obviously, there is extremely deep suspicion as to what the motive behind the move is.”

 

Eoin Treacy's view -

An independent judiciary is one of the most important positive factors that we can use to determine whether standards of governance can be sustained not to mind improve. The fact South Africa’s courts now appear to be subject to political agendas is a serious retrogression and further highlights the increasingly dire consequences of single party rule without a commitment to improving governance. 



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October 11 2016

Commentary by Eoin Treacy

Email of the day on South Korea

I would like to draw your attention to the 20 year Korean Kospi chart... An explosion waiting to happen ???

Eoin Treacy's view -

Thank you for this question and I displayed a number of long-term charts in the big picture long-term audio / video on Friday. A number of Asian markets are in very long-term ranges and some are testing their long-term highs so I agree it is a good time to ask a question whether they represent explosions waiting to happen now or perhaps later?



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October 11 2016

Commentary by Eoin Treacy

Illumina Dives as Quarterly Revenue Falls Short of Forecast

This article by Doni Bloomfield Bloomberg may be of interest to subscribers. Here is a section:

llumina Inc. plunged as much as 28 percent, the most in five years, after saying third-quarter sales were lower than it previously anticipated because of declining demand for its high-speed genetic sequencers.

Sales were about $607 million last quarter, the company said Monday in a statement after the markets closed. That’s below Illumina’s July forecast of $625 million to $630 million, and the $628 million average of analysts’ estimates compiled by Bloomberg.

“We are clearly disappointed by the preliminary revenue result,” Chief Executive Officer Francis DeSouza said Monday in a short call with investors. Revenue from sequencing instruments declined 26 percent year-over-year, a bigger drop than anticipated at the start of the quarter, he said.

 

Eoin Treacy's view -

From what I learned by talking to people at the ExMed conference over the last four days has been that there is enormous disruption emerging in the sequencing of DNA. The method used over the last 50 years is being superseded by new technology and that represents a challenge for Illumina because it is the leader in providing the machines used today to sequence DNA. 



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October 10 2016

Commentary by Eoin Treacy

Exmed Conference 2016

Eoin Treacy's view -

It was a pleasure to spend the weekend and much of today at the ExMed conference in Coronado San Diego not least because there are so many people in attendance both as speakers and attendees who are at the forefront of their respective sectors.

It’s been something of a data overload so it will take some time to process the information and I will need to do some background research to check out the credibility of some of the claims made and what the possible investment implications are.

Here are some of the themes that are evolving:



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October 10 2016

Commentary by Eoin Treacy

Email of the day on blockchain and healthcare

Thanks for sharing this article and I look forward to reading your comments after attending the healthcare-focused conference in San Diego. 

Regarding blockchain, I was surprised by this statement in the article quoted:
...' an elegant but costly technology in search of real world relevance beyond the initial application of digital cash exchange.'

I am deeply involved in the hi-tech healthcare sector in the UK. Blockchain is beginning to impact the sector. By chance, the CEO of a startup in Cambridge UK sent this information to me today:
"At ***** we are developing a platform for storing and sharing genomic data based on Blockchain technology. Our platform exploits the power of a distributed ledger enabling the secure storing of genomic data and also, thanks to a series of smart contracts, enables sharing of specific parts of a genome with doctors, family members and researchers around the world without compromising the entire genomic information and therefore respecting the privacy of the owner."

I gave a presentation last October at a Big Data in Healthcare conference in Luxembourg at which I made the case that the scale of data requirements in healthcare will exceed all other sectors. Security of that data will be essential and I believe blockchain may be an essential piece of the puzzle.

And

I posted a comment under your article about blockchain. In it I mentioned a presentation I gave in October 2015 at a conference on Big Data in Healthcare. It was about the best conference I ever attended. I have attached the slides I presented. If you want to share these with subscribers please feel free to do so. They make the case for the scale of healthcare data on-line being absolutely massive.  With the inevitable security implications, blockchain may become very important in the healthcare sector and startups here in the UK are beginning to focus on the opportunity as I mentioned in my comment.

Eoin Treacy's view -

Thank you for the  comment added to the article I posted on Friday as well as the above email and PowerPoint presentation you attached to the above email.

In order for blockchain to represent the kind of financial innovation required to truly represent a transformative effect on the financial sector I believe its link to bitcoin has to be completely unwound. 



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October 07 2016

Commentary by David Fuller

A Wave of Tech Consolidation Will Drive the Next Leg of the Bull Market

Even if you can’t quite squeeze the prospectus into a 140 characters, it is now clear that Twitter is up for sale, with Disney and Google touted as possible buyers. There are rumours swirling of a possible take-over of Netflix. A mega-deal between Amazon and e-Bay has been reported as under discussion, and at least one of the fast-growing music streaming services, led by Spotify, could well be the next company on the block.

The booming tech sector is gearing up for a wave of consolidation, as some companies discover they don’t really have a business model, others find that they don’t have the cash to compete in a ferociously competitive market, and some of the emerging Chinese giants wade into the market.

That matters – and not just because it will consolidate the hold of the big companies that already dominate the internet. It will drive the next stage of what it already turning into an epic bull market. Indeed, if frenzy of M&A deals breaks out, it could easily mark its top.

The screaming hoards of Corbynistas, Cyber-Nats, and swivel-eyed Ukippers that make up daily life on that relaxed and tolerant forum for genteel discussion known as Twitter may soon find they are hammering out messages for a different corporate overlord. After a terrible year on the stock-market, and with is founder Jack Dorsey seemingly unable to turn it around, it is now up for sale.

Alphabet, the new name for Google, is said to have turned it down but may yet change its mind. Disney, slightly implausibly, is said to be in the running, even if Walt will be turning in his grave at some of the language used on the site. Salesforce.com is said to be interested as well, along with Microsoft. We will probably find out who the buyer is in the next month.

But that is far from the only mega-deal on the rumour mill. On Wall Street, shares in Netflix have been rising on talk that the company might be a target, with Apple touted as a suitor, as well as, again, Disney (although someone will have to delicately explain to Walt’s ghost what ‘Netflix’n’Chill’ actually means).

If it not looking at Netflix for a way to spend some of its massive $230 billion cashpile, Apple is also said to be eyeing up the music streaming service Tidal, although more realistically it might prefer to buy the far more successful Deezer or best of all Spotify. Given that Amazon never likes to be left out of anything, it has been lined up as a potential buyer of e-Bay, even if any deal might run into monopoly issues given that both dominate online marketplaces.

In truth, that is just a taster of the likely wave of bids and deals up ahead. The booming tech industry is seeing a spate of takeovers – and will power the next leg of what is turning into a major bull market. Why? There are three reasons.

David Fuller's view -

The Fuller Treacy Money site has long maintained that tech and bio tech are the sectors most likely to lead the USA and other tech-savvy stock markets higher over the longer term.  Moreover, 2016 is not replaying the late-1990s devastating tech bubble.  Back then, the better tech companies could envisage their long-term potential, but they knew far less about how to monetise those opportunities in terms of corporate profits.  A massive shakeout and lengthy convalescence followed.

Matthew Lynn’s article above is excellent and I commend it to you.  However, my question is: where are we in the tech cycle today?

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



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October 07 2016

Commentary by David Fuller

Emails of the day 1 & 2

More on Merkel Brexit Warning:

It is likely the EU "hard talk" versus UK "hard Brexit" gamesmanship will hurt the EU more than the UK or at least be neutral. First, EU exporters outnumber UK exporters and will lose out if the UK retaliates via tariffs (German car exporters must already be angry about the competitive devaluation of the GBP, a gift to Philip Hammond and the UK). Second, it makes the UK's negotiating position much easier. When you have little to lose, tougher counterparty positions having been taken, you can focus on areas where you are strong or your adversary weak and be more aggressive in your demands for areas you are likely to lose, knowing they will be watered down or dismissed. Third, a PR disaster, other counties with EU reservations or facing referendums -Holland, Hungary, E Europeans etc- will see the ganging up on the UK as a potential thorn in their own side when they are looking for reassurance from the EU, fortifying the centrifugal political forces already operating in the EU. Fourth, it will accelerate the post Article 50 end game, since the UK may react to EU intransigence by curtailing or terminating negotiations if it knows that the EU is not going to give way (the EU has now declared its hand; this is seldom a good idea in negotiations). The default position is WTO tariffs for the UK anyway. If your adversary does not care about losses when you engage him, he is a much more dangerous adversary; this is the position that the EU is creating for itself with reference to the UK.

And:

It will be very interesting to see how international non-EU businesses that have invested in the UK as the best country to manufacture inside the EU will now react to Brexit. I think it will be a long and slow process because they have fixed investments that cannot be shifted easily or quickly.

Unfortunately, politics has dominated over economics and finance in the building of the EU and I fear that this will continue to be the case.

That is why I think that the EU will continue to stagnate.

David Fuller's view -

Regarding the first email above, very well said.  I agree and appreciate this informed contribution.

 

Regarding the second email, it will indeed be interesting to see how overseas companies operating in the UK for the purposes of exporting to the EU respond to a hard Brexit, if that is the only sensible option for the UK.  Manufacturers will be reluctant to move because the UK is a favoured location for a number of reasons, including language, labour relations and plant infrastructure to which these companies have already made significant contributions.  Non UK financial firms may be more tempted to move, although this may not be necessary as most banks and insurance companies already have representative offices in some EU countries.  Meanwhile, the UK’s devaluation, tax structure, regulatory terms and international professionalism will be increased by hard Brexit.  Lastly, overseas corporations and governments with UK divisions will not thank the EU for adding to their costs, if it makes the political decision to block single market access for UK-based firms.    

Game, set and match? 



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October 07 2016

Commentary by David Fuller

Free to Frack, Now We Are Cooking With Gas

Here is the opening of Juliet Samuel’s article on this important development for the UK, published by The Telegraph:

Free to frack at last. The Government has cleared the logjam stopping the development of Britain’s first shale gas reserves and Cuadrilla Resources, the company at the centre of it all, can finally rev up the drills.

The intervention of Sajid Javid, Secretary of State for Communities and Local Government, opens the door to an industry that will generate jobs, cheaper household bills, energy security and lower carbon emissions. It has taken far too long to get to this point, but now that we have, there must be no more delays. 

 It has been a staggering six years since Cuadrilla first began work on the Lancashire site it wants to drill. In that time, shale gas extraction has gone from being a marginal industry to the United States’ biggest source of energy, making the country self-sufficient for the first time in decades. While this mini-industrial revolution was taking place across the pond, Britain was obsessing over planning documents, legal appeals and face-painted, drumming protesters in kilts.

The birth of a shale gas industry could be a huge bonus for Britain at a time of rising economic uncertainty. Investors are watching nervously to assess the effects of Brexit and Theresa May has lurched leftwards to deploy a stream of anti-business rhetoric. So it matters more than ever that the Government means it when it claims Britain is open for business. This first permission granted to Cuadrilla is a decent start.

The direct economic benefits of fracking are obvious. Cuadrilla’s work alone could create several thousand jobs, many of them in the North, and it has several rivals trying to develop their own sites in the region. The development of the US’s gas industry also led to a rapid revival of the country’s declining manufacturing industry. Companies that had for years been shifting their operations to Mexico and Asia started setting up factories in the Gulf to take advantage of bargain energy prices.

Full-scale production in Britain is still some years away, but when it comes on-stream, the whole country will benefit. We are heavily reliant on gas for heat and power. Household electricity bills have risen 14pc since Cuadrilla started work in Lancashire, even as prices have plunged abroad. MPs harangue energy companies constantly about why Britain pays such high bills. If they were serious about cutting costs, they would look to their own obstructive policies.

Of course, we do not know quite how much gas can be recovered from the rocks under Lancashire, because Cuadrilla has not been allowed to find out. But the estimates so far suggest it is an enormous amount and easily enough to provide a massive boost for Britain’s energy security without the eye-watering costs of a project like Hinkley Point C.

David Fuller's view -

This is a sensible decision, long overdue.  Europe has the highest energy costs of any major region of the globe.  It is yet another reason for the EU’s economic underperformance. 

Fracking will be of enormous benefit to the UK economy, creating the potential for significantly lower energy costs in the next decade and beyond, while providing many new jobs.  Lower energy costs will help all sectors of the economy and make independent Britain the most cost-competitive country in developed Europe.  From the USA to Japan this will attract more manufacturing companies to Britain for export to the European region.  This will be transformative for the Midlands and also northern regions of the UK. 

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



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October 07 2016

Commentary by David Fuller

The Markets Now

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

David Fuller's view -

Stop Press – I am delighted to say that popular speaker and Middle Eastern expert Bruce Albrecht will also speak at next Monday’s Markets Now.   

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

You can still join Markets Now for Monday 10th October by contacting Sarah Barnes - [email protected]



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October 07 2016

Commentary by Eoin Treacy

October 07 2016

Commentary by Eoin Treacy

Remarks at the 40th Annual Central Banking Seminar

This transcript of a speech by Ray Dalio of Bridgewater Capital to the New York Fed may be of interest to subscribers. Here is a section:

As a result of this confluence of conditions, we are now seeing most central bankers pushing interest rates down to make them extremely unattractive for savers and we are seeing them monetizing debt and buying riskier assets to make debt and other liabilities less burdensome and to stimulate their economies. Rarely do we investors get a market that we know is over-valued and that approaches such clearly defined limits as the bond market now. That is because there is a limit as to how negative bond yields can go. Their expected returns relative to their risks are especially bad. If interest rates rise just a little bit more than is discounted in the curve it will have a big negative effect on bonds and all asset prices, as they are all very sensitive to the discount rate used to calculate the present value of their future cash flows. That is because with interest rates having declined, the effective durations of all assets have lengthened, so they are more price-sensitive. For example, it would only take a 100 basis point rise in Treasury bond yields to trigger the worst price decline in bonds since the 1981 bond market crash. And since those interest rates are embedded in the pricing of all investment assets, that would send them all much lower.

At the same time, as bonds become a very bad deal and central banks try to push more money into the market and yields go even lower and price risks increase further, savers might decide to go elsewhere. At existing rates of central bank buying—which I believe will be required for the foreseeable future—central banks are going to start to hit the limits of their existing constraints. Those limits were put into place because they originally thought that they were prudent but they are going to have to go buy other things. Right now, a number of the riskier assets look attractive in relationship to bonds and cash, but not cheap in relationship to their risks. If this continues, holding non-financial storeholds of wealth like gold could become more attractive than holding long duration fiat currency flows with negative yields (which is what bonds are), especially if currency volatility picks up.

Concerning what policies will likely be required of central bankers given the reduced effectiveness of interest rate cuts and quantitative easing, and assuming that political limitations on fiscal policies and structural reforms remain stringent, it appears to me that there will have to be greater purchases of riskier assets and more direct placements of purchasing power in the hands of spenders, especially as the previously described squeeze intensifies.

 

Eoin Treacy's view -

The number of large bond investors calling for direct provision of liquidity to consumers is growing steadily as serious doubts about the sustainability of negative yields continue to be voiced. In central bank parlance that equates to helicopter money.



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October 07 2016

Commentary by Eoin Treacy

Email of the day 'plucky' trades

I admire your plucky gold and silver long trades opened just below the downtrend line from the 2011 high and your recently increasing those positions as the knife dropped....with the higher than 2011 "Spec" interest screaming alarm signals to stale PM Bulls! Do you have a "stop" in mind when you open your trades? This from Sharps Pixley website today 

Eoin Treacy's view -

Thank you for your email and the attached article. Plucky is one description but at today’s price I think masochistic is another apt term. Yes I have a stop in mind and that has not yet been reached. I’m reluctant to talk about specific levels for obvious reasons but I do not have a limit order in the market. 



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October 07 2016

Commentary by Eoin Treacy

Follow Your Nose

Thanks to a subscriber for this interesting report from Deutsche Bank. Here is a section:

Key Themes to Drive Industry Shift
Minimally Invasive Treatment is Large and Underpenetrated: Balloon sinus dilation (BSD) is a minimally invasive alternative to functional endoscopic sinus surgery (FESS). The procedure was introduced in 2005, but remains underpenetrated (we estimate 20% today). We view penetration increasing to 26% in 2021 lead primarily by continued economic and clinical data.

From the Operating Room to the Physician’s Office: We believe an increasing number of chronic sinusitis procedures will shift from the operating room to the physician’s office setting moving forward. This shift provides benefits to all: patients, physicians, and payors.

DB Survey Supports View of Market Growth and Penetration
We conducted a survey of 30 US based, board certified otolaryngologists. We asked our survey respondents to comment on volume expectations, procedure settings, and market share trends. Our results indicate increased volume across procedure types, a move toward office based procedures, and further penetration of minimally invasive treatment options.

Opportunities for Technologies that Lower Costs and Improve Outcomes
New technologies that further enable minimally invasive procedures and the shift to physician’s office based care are also garnering more attention. Medical supplies and devices companies have taken note with recent launches of more compact navigation systems, steroid eluting stents, and more compact surgical tools and technologies.

 

Eoin Treacy's view -

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

Technology is evolving at a pace that is difficult for many people to keep up. That is the challenge of living in a time where exponential growth in understanding innovation, technology and science are competing and complimenting one another. I’m heading to San Diego this afternoon for Singularity University’s ExMed conference where the primary topic of conversation will be what the future holds for the healthcare sector. I look forward to sharing any insights I gain with you when I get back. 



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October 07 2016

Commentary by Eoin Treacy

Wal-Mart's next move against Amazon: More warehouses, faster shipping

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

The world's largest retailer is now on track to double the number of giant warehouses dedicated to online sales to 10 by the end of 2016, according to Justen Traweek, vice-president of e-commerce supply chain and fulfillment.

That pace is faster than the 8 large warehouses that industry consultants expected Wal-Mart to build by the end of 2017.

At the same time, Wal-Mart in the last year has installed new technology such as automated product sorting and improved item tracking that for the first time puts them on par with Amazon's robot-staffed facilities, according to supply-chain consultants.

"We have doubled our capacity in the last twelve months and that allows us to ship to a majority of the U.S. population in one day," Traweek said.

Wal-Mart is holding its annual investor day on Thursday when, among other topics, it is expected to update on the progress it has made in its e-commerce business.

Wal-Mart, which has about 4,600 stores in the United States and over 6,000 worldwide, has been investing in e-commerce for 15 years, but it still lags far behind Amazon.

"These additions definitely give Wal-Mart the opportunity to compete better than other companies going head-to-head with Amazon," said Steve Osburn, director of supply chain with consultancy Kurt Salmon, referring to the likes of Target (TGT.N) and others. "Having said that, choosing to race with Amazon is different than catching up with them."

 

Eoin Treacy's view -

As the number 1 online venue for shoppers Amazon is the obvious target for aspirational brick and mortar retailers who wish to leverage their own customer bases. Amazon is no longer concentrating on being the cheapest venue, having succeeded in developing a large loyal following of consumers by offering outstanding   quibble free customer service. Wal-Mart on the other hand will have to deal with its caché of appealing to the lower income consumer if it wants to compete with Amazon Prime.



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October 07 2016

Commentary by Eoin Treacy

Blockchain: In Search of a business Case

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

A number of financial institutions and private investors have devoted significant time and financial resources to looking at ways to monetize the blockchain technology, but to date only the bitcoin payments system has achieved even modest adoption.

While a number of financial institutions believe that blockchain will evolve into a more efficient medium for transferring value or ownership of assets, in fact the elegance and simplicity of blockchain as illustrated by bitcoin may also be the most daunting obstacle to broader adoption.

Despite an enormous amount of hype and investment going back nearly a decade, blockchain remains an elegant but costly technology in search of real world relevance beyond the initial application of digital cash exchange.

 

Eoin Treacy's view -

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

Anyone with even a modicum of libertarian spirit will appreciate blockchain for dispensing with third parties by allowing peer to peer transactions on a global basis that occur outside the ability of governments to tax, or banks to charge commissions on. However the challenge faced by the technology is in delivering scale and utility to the wider financial system. It is looking increasingly likely that the original blockchain decentralised architecture may be swept away in favour of a system created exclusively to cater the needs of the global financial system. 



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October 06 2016

Commentary by David Fuller

On Merkel Brexit Warning

My thanks to a subscriber for this short item by Alex Barker of the FT, dated October 6th 2016:

There was a meeting last week that should make Brexiters sit up and take note. Captains of European business – the European Roundtable of Industrialists - held their annual evening pow-wow with Angela Merkel, Francois Hollande and Jean-Claude Juncker. This year the venue was the chancellery in Berlin. After enjoying white wine on the balcony and a Berlin sunset, the assorted executives (all male) moved to the dining room and a discussion of Europe’s economic future.

Digital issues were the main topic. But of course Brexit could not be avoided. One executive cheekily explained that he had been lobbied by Britain to stress the importance of preserving good economic ties, to make clear that while Britain was leaving the EU, the benefits of the single market should not be totally sacrificed. Leaving aside the “I was lobbied” disclosure, this is the kind of intervention Brexiters had long envisaged would be decisive. German industry would weigh in and Chancellor Merkel would tell the EU to cut a favourable Brexit deal.

The first reply came from the French president and it amounted to a traditional defence of core single market principles. Then the chancellor spoke. Ms Merkel explained that she had at first wavered over this issue. But she was now convinced there was no alternative. She agreed with Mr Hollande. Any special deal would be dangerous. Giving up the union’s principles would threaten the existence of the EU itself. According to one guest at the table, Mr Juncker then intervened in slightly theatrical fashion: “all of you here should listen very carefully to what the president of the French Republic and German Chancellor just said.”  

As we reported last month, the mood on Brexit is definitely hardening in Berlin (and as today's FT interview with Germany's defence minister shows, the annoyance is not just over the divorce). This could all be bravado as the EU-27 prepare for a tough negotiation. But Ms Merkel’s tough private views are emerging in public too. Yesterday at a public meeting of business leaders she said deviating from the four freedoms of the internal market would pose a “systemic challenge for the entire EU”.  If countries are permitted to demand special rights on areas like free movement, the result “is an extremely difficult situation”, she continued. The business audience gave her hearty applause. Brexiters be warned.

David Fuller's view -

Evening pow-wows to discuss contentious issues can produce plenty of bluster when tongues are lubricated by drink.  We have heard similar reports following EU gatherings since the UK had the audacity to democratically vote to leave the European project following our Referendum on June 23rd

It is partly a lobbying tactic, and other EU countries, in addition to businesses are watching closely.  EU politicians and bureaucrats were shocked that the UK voted to leave.  They then hoped for a Soft Brexit, in which the UK would mainly remain while paying EU fees and accepting their terms on most issues. 

However, the UK voted to leave the EU, thus choosing to regain its national sovereignty in every respect, not least to make its own laws, control its immigration policy, while also having the freedom to negotiate trade deals with the much larger portion of the global economy which is outside the EU. 

Theresa May’s Conservative government understands this and has no intention of compromising any aspect of British sovereignty following the Referendum. 

This item continues in the Subscriber’s Area.



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October 06 2016

Commentary by David Fuller

The Markets Now

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

David Fuller's view -

Stop Press – I am delighted to say that popular speaker and Middle Eastern expert Bruce Albrecht will also speak at next Monday’s Markets Now.   

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



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October 06 2016

Commentary by David Fuller

The Real Identities of so called Tyler Durden and Zero Hedge Have Been Revealed

Here is the opening of this article from Business Insider may interest some of you: 

The men behind the legendary finance blog Zero Hedge have been unmasked after one former blogger with the site revealed the identity of his employers.

Speaking with Bloomberg reporters Tracy Alloway and Luke Kawa, Colin Lokey — described as a "political science graduate with an MBA and a Southern twang" — said he was part of a three-man team running Zero Hedge, the blog best known for its sensationalist headlines and bearish outlook on the world.

Lokey, 32, says the other men behind the site are 37-year-old Daniel Ivandjiiski, a Bulgarian former hedge fund analyst, and Tim Backshall, a 45-year-old credit derivatives strategist. Lokey claims to have worked for Zero Hedge for more than a year.

The identity of the bloggers running Zero Hedge has long been the subject of speculation in the financial community, with Ivandjiiski often cited as the likely source of much of the site's content. As early as 2009, speculation that Ivandjiiski could be behind the blog appeared in US media, with a New York Post article titled "BLOGGER MAY HAVE A PAST" speculating that he was in fact behind Zero Hedge.

Ivandjiiski worked in a hedge fund before being kicked out of the securities industry during the height of the financial crisis in 2008 for insider trading, the report says.

Backshall frequently tweets under the handle @credittrader and has made appearances on CNBC. In 2012, for example, Backshall appeared on CNBC by phone to discuss the credit default swap market. The screenshot below is taken from that appearance. Backshall declined to comment to Bloomberg on the matter, while Ivandjiiski confirmed that the three men were the only ones on Zero Hedge's payroll in the past year. 

Secrecy at Zero Hedge is helped by the fact that all reports on the site are filed under the byline Tyler Durden, taken from one of the protagonists of the cult movie "Fight Club."

David Fuller's view -

Subscribers occasionally send me articles from Zero Hedge, in fact, I received two more this week.  They are invariably topical, colourfully written and sometimes informative.  I have published a few of them in past years although I am unlikely to do so again, now that I know more about the site. 

I have nothing against Zero Hedge and their articles are intelligently written, albeit sensationalist.  However, I have always been wary of financial articles written either anonymously or under pen names.  In ‘Tyler Durden’s’ case, I regard them as clever financial entertainment.    



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October 06 2016

Commentary by David Fuller

Saudi Arabian Engine of Future Growth Is Running Out of Gas

Here is the opening of this informative article from Bloomberg:

The first year of Saudi Arabia’s drive to reduce its oil dependence may end with the opposite result.

A flurry of cost-cutting measures will likely push the non-oil economy into recession, analysts say. That means that any overall growth in 2016 will be largely due to record crude output.

Efforts to manage the fallout from cheap oil gathered steam over the past two weeks. Policy makers have suspended bonuses and trimmed allowances for government employees. Ministers’ salaries were cut by 20 percent. The central bank also said it’s injecting about 20 billion riyals ($5.3 billion) into the banking system to ease a cash crunch.

Austerity will help Saudis reduce a budget deficit that reached 16 percent of gross domestic product last year. But it will also likely exacerbate the economic slowdown as consumption falls. A Bloomberg survey shows overall growth at 1.1 percent this year, with Capital Economics and BNP Paribas both predicting the first contraction since 2009.

“The hits to households are getting bigger and bigger,” said Jason Tuvey, Middle East economist at Capital Economics in London.

David Fuller's view -

The severely troubled Middle East could only benefit if its major economies could manage to diversify sufficiently to gainfully employ their mainly subsidised populations.  They are the most numerous and likely losers following peak oil.  There are plenty of educated and privileged Saudi’s who could help in this endeavour but little modern tradition for significantly entrepreneurial efforts. 

This item continues in the Subscriber’s Area. 



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October 06 2016

Commentary by Eoin Treacy

Investors Covet Gold Miners Once More in Search for Yield

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

The spread between the estimated dividend yield of companies on the S&P 500 Index and the BI Global Senior Gold Valuation Peers narrowed to 1.1 percent, from 1.61 percent in February, according to data compiled by Bloomberg. Meanwhile, both Goldman and Credit Suisse over the past two weeks have flagged prospects for higher dividends among gold-mining companies.

“Investors are hungry for yield,” and an increase in dividends may provide the catalyst for shares to move higher, Goldman analysts said in a Sept. 21 report.

And

Still, even with the cost cuts, miners’ prospects depend heavily on the outlook for gold prices, and a continued decline would hurt the companies’ balance sheets and drag valuations lower, said Dan Denbow, a portfolio manager at the $782 million USAA Precious Metals & Minerals Fund in San Antonio.

“If gold goes down, you’re going to lose more than just the dividend,” Denbow said in a phone interview. “When they’re buying gold miners, they’re thinking it’s going to go higher. That could be the only bet.”

 

Eoin Treacy's view -

Precious metals extended their decline today into an even more oversold condition but against the background of a Dollar which has been quite firm of late. Market participants are now probably waiting for a bullish catalyst in the form of a weaker Dollar or clear uptick in investment demand/safe haven buying to check the slide and pressure shorts not least as prices are still trading in the region of the trend mean. 



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October 06 2016

Commentary by Eoin Treacy

The Overlords of Finance

Thanks to a subscriber for this article by Danielle DiMartino Booth which may be of interest. Here is a section:

Well ain’t that a thing! Now we know why the dialogue shifted just after former chair Ben Bernanke made his way out the door in January 2014. The exit from unconventional monetary policy, you may recall, was originally set to begin with the tapering of purchases, being followed by allowing the balance sheet to run off and then prompt the first rise in interest rates – in that order.

A funny thing happened on the way to the exit, though. Bill Dudley is not only the president of the Federal Reserve Bank of New York but also the vice chairman of the Federal Open Market Committee and coveted holder of a permanent vote. Back on May 14, 2014, in a question and answer session with reporters following a speech, he literally stood the preexisting exit principles on their head.

“Delaying the end of reinvestment puts the emphasis where it needs to be — getting off the zero lower bound for interest rates,” explained New York Fed president Bill Dudley. “In my opinion, this is far more important than the consequences of the balance sheet being a little larger for a little longer.” Luckily for investors in any and every risky asset, his opinion holds a lot of sway. Dudley’s central banking peers in developed countries have followed his lead and peace on earth has held ever since.

As for those pesky financial stability concerns, we’ve been instructed to look the other way. Some have even gone so far as to suggest that the time has come to devise a new term to replace ‘bubble.’ No doubt, it’s an unseemly word given the nasty images it conjures. But what if the word ‘bubble’ is not substantial enough to capture what’s been created before our very eyes, across the full spectrum of asset classes?

 

Eoin Treacy's view -

This article offers an erudite exposition of the problems residing in the fixed income markets and the extent to which leverage now plays a role in just about all asset classes. The simultaneous asset price inflation of the stock, bond and property markets, particularly since 2011, is a testament to the fact that a potential problem is brewing.  

The Velocity of Money is on a steady downward trajectory, and in fact has been declining since 1997. That goes a long way towards explaining why monetary policy has been so easy and why central banks are reluctant to withdraw the additional liquidity from the market. The only reason a problem might arise is if the status quo changes. 

 



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October 06 2016

Commentary by Eoin Treacy

BHP Billiton: Oil a benefit not a drag

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

The world isn’t ending after all
BHP’s share price has risen 28% so far in 2016, versus a broader market that has largely stalled (ASX 200 up 3%). Although sizeable gains have already been posted, we expect we are still in the early stages of a significant upgrade cycle for the resource sector. For the majority of the year we have been at the top of consensus on BHP, on the belief that expectations had become unrealistically pessimistic on commodities/miners. This thematic of an impending ‘relief rally’ across commodities continues to play out, with oil and bulk resources (coal and iron ore) the key gainers.

Oil adds x-factor to cash flow upside
While we have already seen a significant recovery in oil prices so far in 2016, we expect there is still further upside potential. OPEC’s decision to announce an output cut of 750kbopd is important fundamentally for oil given it indicates that OPEC’s strategy to defend market share by squashing oil prices has essentially been accomplished and the cartel is returning to its traditional role of supporting oil prices as a swing producer. We expect the downturn has caused permanent damage to US shale’s ultimate potential. 

Petroleum investor briefing
BHP’s petroleum team is conducting an investor briefing in London on 5 October and Sydney on 10 October. The briefing will provide significant detail on BHP’s petroleum strategy (both conventional and onshore), which has been in a state of transition from gas to liquids. In particular, we expect a lot of focus to remain on BHP’s US onshore assets, where its cash flow performance has been pressured by depressed oil and gas prices.

Good mix of exposures to ongoing recovery
Our preference for BHP amongst our large-cap Australian resources coverage is driven primarily by the cash flow upside potential it holds from recovering volumes and commodity prices in FY17. We see the big miner as being ideally positioned to pursue growth at the low point in the cycle while supported by a strong balance sheet and the potential for additional upside in near-term cash flow. We maintain our Add recommendation with an unchanged A$25.30 price target. The key risk to our call is commodity price risk.

Eoin Treacy's view -

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

The performance of the FTSE-350 Mining Index and the S&P/ASX 300 Resources Index has been broadly similar highlighting the broad based appeal of the mining sector this year. It is also notable that the performance of the industrial metals has been considerably less volatile of late than the precious metals, which highlights the quiet different internal dynamics of the respective markets. 

 

 

 



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October 05 2016

Commentary by David Fuller

The IMF Must Stop Playing Political Games and Get Back to its Roots

The International Monetary Fund this week kicked off its annual meeting in Washington on the typically downbeat note we have come to expect from these events. The global economy is weak and fragile, it warns in its latest World Economic Outlook, prompting a destructive backwards slide into protectionism, economic malpractice and reduced openness.

This sub-par growth, moreover, “risks perpetuating itself” because of “the negative economic and political forces it is unleashing”. Brexit is cited as a prime example of this potential plunge into the abyss.

Maurice Obstfeld, the IMF’s chief economic counsellor, goes further. Brexit, he says, is part of a political backlash “that blames globalization for all woes and seeks somehow to wall off the economy from global trends rather than engage cooperatively with foreign nations”.

I was a remainer, but I can’t accept this interpretation of Britain’s vote to leave. Mr Obstfeld doesn’t overtly lump Brexit in with Trumpism, but he might as well have done. His meaning is clear, and as seems ever more frequently to be the case with the IMF, he could not have been more wrong about it.

Nobody yet knows how Brexit will pan out. Lots of things could go wrong, not least a defensive and vengeful reaction from the the European Union that attempts to lock Britain out of the single market. But on present evidence, Brexit is a very long way from the sort of protectionist, inward looking, reactionary force Mr Obstfeld imagines.

To the contrary, as articulated by the new Government, Brexit is about embracing the many positives of globalisation and standing up for free trade, not turning the nation’s back on them. Economically, Brexit will undoubtedly be difficult and troublesome, but it is most unlikely to be disastrous.

Not for the first time, the IMF has become captive to “group think” and powerful establishment forces. Over the last ten years, the fund has been pretty much wrong about everything of substance. It failed to see the financial crisis coming, and it failed to anticipate the eurozone debt crisis, having essentially become a cheerleader for integrationist ambitions of monetary union.

It then proceeded to become part of one of the biggest economic policy blunders of the modern age, over-riding its own rules and conventions to save the euro and bailout the bankers. It has also been consistently wrong about the UK. Some serious soul searching is in order. The very purpose of this institutional corner stone of the post-war, Bretton Woods economic settlement is being called into question as rarely before.

Time and again, the IMF has been found guilty of faulty forecasting, analysis and policy, undermining its authority and impugning its reputation as a non partisan organisation that can be trusted with the economic world order. Too often it becomes captive to powerful political interest in its membership, as occurred in Britain’s referendum campaign when it was used as a key part of George Osborne’s “Project Fear”. In one scenario examined by the IMF, the possibility of a relatively mild reaction to Brexit was at least entertained. But these nuances got lost in the overall message: that the consequences of a vote to leave would be “bad to very, very bad”. So far they have not been.

Yet the big failure was over the euro, the subject of a lacerating report by the IMF’s Independent Evaluation Office (IEO) a few months back. First the IMF ignored the design flaws at the heart of European monetary union, and therefore completely failed to see its propensity to crisis.

Then, as the debt meltdown began, it remained upbeat about the health of the European banking system, taking at face value the self interested reassurances of national and euro area regulators.

And finally it squandered the fund’s resources on an unprecedented scale supporting the continuation of a currency which for some of its members had become an economic doomsday machine. Ensuring the single currency’s survival was routinely prioritised over the individual nation’s best interests.

David Fuller's view -

This needs to be said, not least as the IMF probably gets more publicity for its views than any other organisation.  One cannot stop the IMF from forecasting, nor would that be desirable.  However, the IMF should do some soul searching; show a little humility; consider its views in the context of opinions by independent and experienced commenters with sound analytical records, and above all, resist the temptation to issue politically biased forecasts. 

Unfortunately, that is a big ask.

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



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October 05 2016

Commentary by David Fuller

Alaska Oil Reserves May Have Grown 80% on Giant Discovery

Alaska’s oil reserves may have just gotten 80 percent bigger after Dallas-based Caelus Energy LLC announced the discovery of 6 billion barrels under Arctic waters.

The light-oil reserves were found in the company’s Smith Bay leases between Prudhoe Bay and Barrow along the Arctic shore, according to a statement from Caelus on Tuesday. As much as 40 percent of the find, or 2.4 billion barrels, is estimated as recoverable, the company said. That compares with the state’s proved reserves of 2.86 billion barrels in 2014, almost 8 percent of the U.S. total, Energy Department data show. 

“It’s a really exciting discovery for us, and we think it’s really exciting for the state of Alaska,” Caelus Chief Executive Officer Jim Musselman said in a phone interview. “They need a shot in the arm now.”

Alaska’s oil output has been gradually declining, to 483,000 barrels a day last year from a peak of more than 2 million barrels a day in 1988, Energy Department data show. The last major field brought online was Alpine in 2000, which averaged 62,000 barrels a day in September, Alaska Department of Revenue data show.

Musselman, the man who engineered the $3.2 billion sale of Triton Energy Ltd. to Hess Corp. in 2001, founded Caelus in 2011 to explore and develop petroleum resources on the North Slope. In 2014, the company formed a partnership with affiliates of Apollo Global Management LLC to invest in oil and gas properties in Alaska.

The development will cost between $8 billion and $10 billion over the life of the project, which could be brought into operation by the fall of 2022, Musselman said. Located about 125 miles from any other facilities, the company will need to build pipelines and roads. An oil price of about $65 a barrel and greater certainty on state tax policy and incentives is needed to develop the field, he said.

“A lot of the investment decision is going to revolve around what happens within the state from a regulatory standpoint,” he said.

Caelus said its newly discovered field could produce as much as 200,000 barrels a day.

David Fuller's view -

Light crude oil is highly desirable, being more valuable than the many heavy crudes available because it produces more gasoline and diesel when refined.  Assuming further drilling confirms the size of this discovery, it is an important development for the economies of both Alaska and the USA generally, although Caelus’ oil cannot be developed quickly.  Nevertheless, it also has two important messages for the global crude oil market. 

This item continues in the Subscriber’s Area and contains a further article.



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October 05 2016

Commentary by David Fuller

Hurricane Matthew Is a $15 Billion Threat Headed to Florida

Here is the opening of this worrying report from Bloomberg:

Hurricane Matthew has thousands fleeing the U.S. Southeast where it’s expected to batter the coastline and threaten electricity supplies to more than 1 million people. Potential losses are seen as high as $15 billion.

Matthew will bring 120-mile (193-kilometer) winds to the Bahamas starting Wednesday, along with flooding rains and storm surges that could push the ocean 15 feet (4.6 meters) above high-tide levels, the U.S. National Hurricane Center said in a 4 p.m. New York time advisory. The Category 3 storm closed the Buckeye oil terminal in Freeport, Bahamas, and could disrupt oil shipments along the U.S. East Coast.

The National Weather Servicewarned that winds, heavy rain and storm surge could kill, wash out roads, cut communication links and cause outages lasting weeks. Evacuations could push storm damage to $10 billion to $15 billion mainly in losses related to economic disruption, said Chuck Watson, a disaster modeler with Enki Research in Savannah, Georgia. Jonathan Adams and Jeffrey Flynn, analysts at Bloomberg Intelligence, projected losses to be closer to $5 billion, with Florida bearing the brunt. 

“The big thing is that the Northeast gets spared, which is good and bad because they actually needed the rain, and the Outer Banks too,” said Evan Duffey, a meteorologist at AccuWeather Inc. in State College, Pennsylvania. “Regardless, the Bahamas and Florida are going to see a deteriorating situation throughout the day. Landfall is still possible in Florida.”

David Fuller's view -

Hopefully, the worst forecasts will not be realised.  However, significant damage in Florida and neighbouring states would very likely lower the USA’s 4Q GDP prospects.  That could also create another hurdle for a generously priced US stock market.  Rebuilding efforts should provide a stimulus for 1Q 2017.  



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October 05 2016

Commentary by David Fuller

The Markets Now

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

David Fuller's view -

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



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October 05 2016

Commentary by Eoin Treacy

Musings from the Oil Patch October 4th 2016

Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report for PPHB which may be of interest. Here is a section

What we found surprising in the EIA’s forecast was the lack of penetration by EVs into the vehicle fleet. Based on the bars shown in Exhibit 8 (prior page) for plug-in and all-electric vehicles, the EIA’s sales total is less than one million units in 2040. To be honest, we find that acceptance rate to be extremely low given what the automobile industry is planning, at least based on their rhetoric. As a result, we are not sure what to make of the EIA’s outlook for gasoline consumption, which is shown in Exhibit 9. 

We will be working in the future to improve our forecasting model, but the conclusion we derive from our work is that the growth of the EV segment of the vehicle fleet will have an impact on gasoline consumption. The question is how much that impact will be. By 2025, according to our forecast, the impact may be anywhere from 500,000 barrels a day (b/d) to 1.0 million barrels a day (mmb/d) of reduced gasoline consumption. That is the equivalent of one to two huge refineries in this country. Moreover, the destruction of gasoline demand in later years becomes even more meaningful – nearly 2.5 mmb/d to 4.6 mmb/d - a huge impact on the refining industry let alone overall oil consumption in America. If we extrapolate the U.S. experience to the rest of the world, there will be a noticeable impact in transportation fuel markets. Regardless of whether our forecasts are right or not, the issue of EVs, and the associated issue of self-driving cars, will have an impact on oil demand, forcing the oil producing and refining sectors to have to re-examine their long-term strategies. 

Eoin Treacy's view -

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

I’ve been thinking recently about the manner in which people buy their cars and how this could influence their decisions on whether to buy electric vehicles. This article from Bloomberg carries some important statistics on leases. Here is a section: 

Leases accounted for 28 percent of new-car sales in September, up from 20 percent in 2012, according to car-sales tracker Edmunds.com. GM, Ford and Fiat all have reported strong sales in the latest quarter. As the chart above shows, they and Toyota have all ramped up their leasing in recent years.



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October 05 2016

Commentary by Eoin Treacy

Email of the day on the differences between moving average calculations

Reading your last comments on precious metals, I noticed that you are using 200-day exponential moving average. And I thought that the talk was always about simple MA, I even remember David stressing using it and not EMA a number of years ago. I looked through the charts mentioned recently; both by you and David, and they all have EMA. Can you please comment on this and explain your choice, because two measures can be quite different. For example, simple MA on the silver chart is at $17, while EMA, is at $18 where the price currently is. 

Eoin Treacy's view -

Thank you for this email which may be of interest to other subscribers. I have always favoured the exponential moving average because I believe that giving more recent data some additional weighting in the calculation is the most appropriate policy. However as you highlight there is some debate, which is unlikely to ever be resolved, between what are the best moving average calculations to use. 



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October 05 2016

Commentary by Eoin Treacy

All eyes on the spending cap

Thanks to a subscriber for this note from Deutsche Bank focusing on the Brazilian market. Here is a section:

Speaking at the Senate Economic Committee on Tuesday, BCB President Ilan Goldfajn. Goldfajn repeated several statements that had already been published in the central bank’s Inflation Report last week, reaffirming the intention of making inflation converge to the 4.5% target in 2017. Goldfajn also repeated the remarks published in the Inflation Report about the three conditions for the authorities to initiate an easing cycle (namely limited persistence of food price shock, disinflation of IPCA components, and lower uncertainty about the fiscal adjustment implementation). The Goldfajn, however, added that the BCB “does not have a pre-established timetable for monetary easing,” as the COPOM decision will depend on several factors, including inflation expectations and forecasts. This comment suggests that the BCB has not yet made a final decision to cut rates, perhaps because market inflation expectations for 2017 have not converged to the 4.1% target yet. Despite Goldfajn’s cautious remarks, we still expect the COPOM to cut the SELIC rate by 25bps at the next meeting later this month.

Eoin Treacy's view -

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

Brazil has a number of challenges facing the economy not least corruption and the low standards of governance in its state institutions which have contributed to low approval ratings for the government regardless of who is in power. Controlling inflation will be one of the key tests from an international perspective because of the impact that would have on the currency. 



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October 05 2016

Commentary by Eoin Treacy

October 04 2016

Commentary by Eoin Treacy

U.K. Stock Gauges Hit Simultaneous Highs 1st Time Since '99

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

“It’s not just the FTSE 100 -- this is a buy U.K. phenomenon,” said Alan Higgins, chief investment officer at Coutts & Co. in London. His firm oversees 14.6 billion pounds ($19 billion). “We have a really nice combination of sterling weakness, reasonably robust economy and generally not a bad environment for risk assets.”

The FTSE 100 and the FTSE 250 climbed 1.8 percent at 3:06 p.m. in London, while the FTSE Small Cap excluding investment trusts index advanced 1.7 percent.

The falling pound is helping the three gauges because their members get a big chunk of their revenues from overseas -- almost three-quarters for FTSE 100 companies, and about half for those on the FTSE 250, according to JPMorgan Chase & Co. and UBS Group AG. JPMorgan Asset Management has estimated the measure of smaller shares also gets about half of its sales from abroad.

The pound fell to its lowest level since 1985 on Tuesday, surpassing the bottom reached following the June 23 vote, after three senior figures in Prime Minister Theresa May’s administration said financial-services companies will get no special favors in secession talks. That increased concern that the nation is heading for an exit that would restrict access to the EU’s single market. May said on Sunday she will trigger the process of leaving the bloc by the end of March, which will mark the formal start of a two-year negotiation process.

Recent data have reinforced optimism that the domestic economy is weathering the aftermath of the vote. The construction industry unexpectedly grew in September, while a manufacturing gauge jumped to its highest level in more than two years. A Citigroup Inc. index tracking economic surprises in Britain is near a three-year high, and the International Monetary Fund upgraded its outlook for the nation, predicting growth of 1.8 percent this year from the 1.7 percent projected in July.

 

Eoin Treacy's view -

With the weekend announcement that the UK government is planning to begin negotiating to leave the EU in Q1 2017, and to a large extent signalling it is willing to risk the passporting rights of the City’s financial services companies, a high stakes period of brinksmanship is unfolding. That is putting pressure on the Pound and it extended its downtrend today by breaking to a new low. While a short-term oversold condition is evident a clear upward dynamic would be required to check the slide and signal of low of near-term significance.



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October 04 2016

Commentary by Eoin Treacy

Australia Stands Pat on Rates as Commodity Rebound Gathers Pace

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

Lowe’s key challenge -- like many of his developed world counterparts -- is generating inflation; part of that involves trying to tame a currency that’s up more than 10 percent in around nine months. The Aussie’s revival, even if partly justified by a jump in iron ore and coal prices and a better outlook for key trading partner China, puts pressure on services industries that are key growth drivers for the post-mining boom economy.

The new governor offered insights to his strategy in the RBA’s renewed agreement with the government, stressing financial stability concerns as part of monetary policy. The risk of further stoking Sydney’s housing boom should discourage him from further cuts, especially as the economy grew an annual 3.3 percent last quarter and unemployment has fallen to 5.6 percent amid rising terms of trade, or export prices compared to import prices.

Coking coal prices have surged more than 150 percent this year as output from China, the world’s biggest miner, tumbles under government pressure to cut overcapacity. Iron ore, Australia’s biggest export, has rebounded 30 percent, though analysts are skeptical about the rally’s durability. Still, the jump in prices for Australia’s biggest exports is a boon for the economy and a government struggling to rein in its budget deficit.

 

Eoin Treacy's view -

The recovery in commodity prices from depressed levels at the end of last year has been a benefit to just about all commodity exporters. Australia’s dependence of some of the major resources China’s economy requires not least  iron-ore, coal and natural gas means that the rebound in all three has been a major influence on the advance in the stock market this year. 



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October 04 2016

Commentary by Eoin Treacy

October 04 2016

Commentary by Eoin Treacy

Emails of the day on the audio and video format for last week's big picture long-term audio:

The accompanying charts with too days "Friday big picture presentation" works very well for me.   I hope we will see more of this new format in the future.  If it costs a bit more I am happy to support the adoption of this new format.  

And

I love the video format much easier to follow, fantastic I suggest you putting a password though I think anyone could view it I'm not sure but screencasts didn't ask me a password see you soon in London 

And 

I really like your new audio/visual format

And

Enjoyed the new Friday audio/video format very much. Ten out of ten. I have been following the service since the 70’s; this is yet another good advance.

And

Loved the latest Long Term Outlook video format, really brought your commentary to life. I can’t wait for the next one!! Thank you

And

I really liked your Video supporting your long-term audio - please continue with this format. The charts do indeed highlight your "spoken" words I am looking forward to meeting you at the seminar in November in London. Best regards

And

I found your new format, Sept. 30th ‘16 of the composite audio/chart presentation to be very worthwhile. More absorbing and easier to follow. I hope other subscribers did find it the same, so you will continue with that format, in future, many thanks, 

 

Eoin Treacy's view -

Thank you all for this generous and valuable feedback. I too believe that the video accompaniment is a useful additional aspect to the commentary and I’m looking into how to set up to a more secure way of making future recordings available to subscribers. I’m also looking forward to meeting a number of you at next month’s London venue for The Chart Seminar. 



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October 04 2016

Commentary by Eoin Treacy

Email of the day on the possible nationalisation of Deutsche Bank

Hello I have a question, I think they will nationalize Deutsche Bank but doesn't that mean that the stock is suspended and the equity holders get wiped out? That would create a panic on the market anyway wouldn't it?

Eoin Treacy's view -

Thank you for this question which may be of interest to other subscribers. Yes, if Deutsche Bank is nationalised the equity shareholders would be wiped out and since this would not be the first Eurozone bank to have the same fate we cannot rule out the possibility. 



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October 04 2016

Commentary by Eoin Treacy

October 03 2016

Commentary by Eoin Treacy

Nearly 80% of data in Chinese clinical trials have been fabricated

Thanks to a subscriber for this article from biospectrumasia.com which may be of interest. Here is a section:

A recent investigation led by the Chinese State Food and Drug Administration (SFDA) revealed that nearly 80 percent of the data used in clinical trials of new pharmaceutical drugs have been "fabricated." The investigation looked at data from 1,622 clinical trials for new pharmaceutical drugs currently awaiting approval. 

With these fraudulent activities coming to light nearly 80 percent of current drug applications, which were awaiting approval for mass production, have now been cancelled. The SFDA found that the more than 80 percent of the data failed to meet analysis requirements, were incomplete, or totally non-existent.

 

Eoin Treacy's view -

The lack of governance and perhaps more important integrity in the Chinese corporate sector is truly worrying from the perspective of consumers and particularly medical care customers. However as the above article goes on to highlight very few people are overly surprised at these findings since general expectations for supply chain and research integrity are so low. 



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October 03 2016

Commentary by Eoin Treacy

Adobe Expertly Balances Growth and Profitability

This article from MorningStar following Adobe’s results on September 20th may be of interest to subscribers. Here is a section:

Third-quarter revenue rose 26% year over year to $1.46 billion, driven by 51% growth in the firm’s subscription revenue base. Creative Cloud continues to serve as the company’s key revenue driver, as both greenfield customers and cloud migrators are providing a consistent lift in the annual recurring revenue base. We believe ample growth opportunities remain across both Creative Cloud and Digital Marketing, particularly as consumer users migrate and enterprise customers consolidate digital content creation and marketing spend around suites of applications versus point solutions.

The company is beginning to show the two main benefits of renewal billings in its subscriber base, which are higher prices and substantially lower customer acquisition costs. As a result, GAAP operating margin exceeded our forecast by more than 300 basis points at 25%, the firm’s best quarterly mark since the fourth quarter of fiscal 2012. While we suspect the firm will need to maintain aggressive investment in sales and marketing, particularly as competition for digital marketing wins remains intense, we think the increasing renewal mix of Creative Cloud billings will smooth this effect, yielding mid-30s operating margins in the long run.

 

Eoin Treacy's view -

I’m reminded of an old adage that “you can sheer a sheep every year, but only send him for slaughter once” when looking at the success of Adobe’s subscription pricing model. A significant number of companies are now adopting the same policy, opting for the relative security of payments over the long-term versus relying on “lumpy” sales of new software. 
 

 



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October 03 2016

Commentary by Eoin Treacy

Donald Trump Is Handing a Windfall to Mexican Immigrant Families

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

Data shows Mexicans are sending more dollars back home than they have in years, a surge explained in part by the rush to take advantage of the attractive exchange rate. What’s more, some experts even believe that more Mexicans could eventually be tempted to cross into the U.S. in search of work if the peso remains at these levels for months to come.

“If you’re saving to buy a house or have a big expense coming up,” said Carlos Vargas-Silva, an economist with Oxford University’s Migration Observatory, “this is the moment” to ship back the money.

Lozano understands that part, of course. Like most Mexicans here, he follows the peso’s fluctuations closely and has been scrambling of late to repatriate every dollar he can. Some weeks, he sends as much as $200, double what he used to. That’s part of the reason his wife has had so much extra spending money. He just hadn’t realized that it was Trump that was triggering those swings in the peso.

It plunged to a record low of 19.93 per dollar early last week before recovering some of its losses as Trump’s campaign showed signs of faltering weeks before the November vote. Investors worry that if elected, Trump would try to seize migrant remittances; or force American manufacturers to close plants in Mexico and re-open them at home (he’s called out Ford Motor Co. and Carrier Corp. on this point); or wind up accidentally weakening the U.S. economy, the buyer of four-fifths of all Mexican exports.

 

Eoin Treacy's view -

MXN 20 represents a psychological resistance level for the Dollar and some consolidation of its impressive rally is now underway. Nevertheless, a sustained move below the trend mean would be required to question the medium-term uptrend. The fact that the Dollar has been trending higher against the Peso since 2014 highlights the fact that while Donald Trump’s antagonistic rhetoric may have been a factor in the currency’s recent strength it is far from the only challenge facing the economy. 



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October 03 2016

Commentary by Eoin Treacy

Shale Oil Firms Hedge 2017 Prices in 'Droves' After OPEC

This article by Alex Longley and Javier Blas for Bloomberg may be of interest to subscribers. Here is a section:

Harry Tchilinguirian, head of commodity research at BNP Paribas SA in London, said on Friday that OPEC had thrown a “lifeline” to U.S. shale firms, prompting them to hedge “in droves.” The bank has “seen many queries coming through” from producers, he said.

The West Texas Intermediate 2017 calendar strip -- an average of future prices next year that’s often used as a reference for hedging activity -- rose above $50 a barrel to its highest since August on Monday. “When calendar 2017 pricing rises into the low-to-mid $50s, as it is doing now, producer hedging rises materially,” Longson said.

U.S. shale producers used a similar rally to hedge their prices in May, when the WTI 2017 calendar strip also rose above $50 a barrel. The current activity comes after industry executives told investors in July and August they planned to use any window of higher prices to lock-in cash flows for next year.

"We would like to be a little bit further hedged than we are today," Pioneer Natural Resources Co. Chief Executive Officer Tim Dove said back in July, noting his company has locked in prices for up to 55 percent of its 2017 exposure. “I’d like to see us get that number up as we go towards at the end of this year.”

 

Eoin Treacy's view -

US unconventional onshore supply represents an important marginal producer that functions independently of the OPEC/Russia cartel. The level at which US producers are willing to hedge supply into next year tells us more about at what level they deem to be economic for their operations than probably any other factor. It is now possible to hedge December 2017 supply at over $53 so we can reasonably conclude that level represents where the incentive to drill and produce even more really becomes inviting. 



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