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March 09 2017

Commentary by David Fuller

US Shale Surge Overwhelms Oil Market as OPEC Splits Deepen

Oil prices have plunged to the lowest level this year as US shale producers boost output at an astonishing pace and crude inventories keep rising, triggering a wave of selling by hedge funds with record speculative positions.

The US surge threatens to neutralise cuts agreed by the OPEC cartel and a Russia-led group of producers last November, potentially delaying a full recovery of the market until 2018 or even later. 

Texas light crude fell $48.90 a barrel on Thursday after yet another surprise jump in US stocks. Prices have slid 8pc in three days and have broken through key levels of technical support, dousing enthusiasm for commodities across the board. 

America's shale frackers have slashed cost so far that they can now produce large volumes at a break-even price of $35 or lower in the prolific Permian Basin, the twelve-layered 'crown jewel' of West Texas, where land auctions have reached $60,000 an acre in core zones.

Continental's legendary wild-catter Harold Hamm said drilling is coming back so fast, and on such a large scale, that it threatens to overwhelm the global industry. "We are on something of an equal basis today with OPEC. We need to be careful not to overproduce. It has to be done in a measured way or else we’ll kill the market," he said at the CERAWeek energy forum of IHS Markit in Houston.

The US rig count has almost doubled to 756 since touching bottom last May. The productivity per rig has soared as longer lateral drills, "geological steering", and precision "clustering" triple extraction rates in some sweet spots.  The decline rate of the wells has dropped from 65pc to 35pc a year since 2013.

“The consequence has now become alarmingly visible. US crude oil production is growing. And it is growing strongly," said Bjarne Schieldrop from SEB.

Raghdaa Hasan from Statoil said US producers have restored almost all the losses of the slump in just four months, lifting production by over 500,000 b/d. "US shale has proved itself really resilient. They are able to pour significant output into the global system," she said at CERAWeek.

And:

The shale rebound has combined with events in the Middle East to seriously rattle the day-to-day oil markets. The Iraq's oil minister, Jabbar Ali Al-Luiebi, stunned traders with predictions at CERAWeek that his country would lift output by almost a million barrels a day (b/d) to 5m in the second half of this year. 

Such an expansion would further flood the global market before it has come close to rebalancing. It is matched by similar rhetoric from Libya, which has already doubled output to 700,000 over recent months and is ultimately eyeing 2.2m b/d.

And:

It had been assumed that the Saudis would do whatever it takes to push oil back up to a band of $60 to $70 in order to smooth the way for a $100bn part-privatisation of the state oil giant Aramco next year, the biggest public offering ever. This is no longer so certain.

Patrick Pouyanné, chairman of the French group Total, said OPEC is going to have to bite the bullet and accept much longer cuts. "The fact is, we still have build-ups in U.S. inventories. If OPEC wants to rebalance the market, then they'll have to extend the agreement. It will take a year to 18 months to really have an impact on inventories," he said in Houston.

David Fuller's view -

OPEC’s fragile agreement to cut supplies has fallen apart well before its official review date in June.  Short covering and some speculative buying pushed the price of Crude Oil (weekly & daily) temporarily into a range either side of $55 for three months. 

However, Russia never delivered its agreed supply cuts.  Now everyone in OPEC will increase supplies while prices remain above $40.  US shale producers in the Permian Basin, which have never been part of OPEC, are in the strongest position.  They can ramp up production very quickly when prices are firm, as we have seen in recent months.  Even more importantly, they can reduce output very quickly, when prices are less attractive, while preparing additional wells for the next price rise.

Most oil producers were overly dependent on $100 plus prices which we may never see again.  Those with large populations face a rough time, burning through reserves and facing huge declines in their standard of living.   

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



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March 09 2017

Commentary by David Fuller

Green van Beurden of Shell Warns On Looming Peak Oil Demand

Shell's chief executive Ben van Beurden has warned global energy leaders to brace for the shock of falling oil use as soon as the 2020s, warning that those who trivialise the threat of climate change will exhaust public tolerance for fossil fuel companies if they are not careful.

"We have to acknowledge that oil demand will peak, and it could already be in the next decade. It could happen. There are people who believe it will grow forever but I don't subscribe to that," he told the CERAWeek energy forum of IHS Markit.

Mr van Beurden said the industry is skating on thin political ice - notwithstanding the election of Donald Trump in the US - and needs to shore up its flank. "Social acceptance is just disappearing. I do think trust has been eroded to the point that it is becoming a serious issue for our long term future," he said.

"This is the biggest challenge of my career. We're under a lot scrutiny and pressure. It is not a rational discussion any more, it's emotional," he said. Regulators across the world are starting to demand that fossil fuel companies account for 'stranded assets' and financial risks from climate change, leading in turn to a shareholder pressure on the boards.

Claims of peak demand are anathema in the US oil capital of Houston. "Wishful thinking," said Chevron's chief John Watson. Saudi Arabia's energy minister Khalid al-Falih said talk of peak demand is ridiculous and ultimately dangerous, discouraging vitally-needed investment before alternatives are on offer. "They are compromising the world's energy security," he said.

Mr van Beurden advised the oil and gas industry to take an activist approach to show that it takes the threat of global warming seriously. Shell is already the biggest provider of renewable energy in the US through its wind farms. It is planning to invest $1bn a year in green technologies, and carbon capture and storage.

"You can be too early on this, as we discovered to our detriment. You have to get the timing right," he said. This time the stars are finally coming into alignment as renewable costs fall to parity with fossils.

Shell can afford the luxury of this 'moral' position because it has already made the switch to natural gas, the lone fossil fuel winner of the Paris Agreement on climate change. Gas emits roughly half the C02 of coal in power generation. It is also the perfect back-up for intermittent solar and wind.

“The largest contribution Shell can make to reducing emissions globally in the near term is to continue to grow the role of natural gas,” he said. The company has finished integrating BG following the $52bn takeover in 2016, creating a gas giant and $4bn of synergies this year. "We have taken a tremendous amount of cost out," he said.

The BG merger is one prong of the strategy. The recent sale of $8.5bn of oil sands acreage in Canada is another. Shell is today far less exposed to the political risk of climate change.

The group has not abandoned oil, although it has pulled out of Alaska where it wasted $9bn on a "dry well". Mr van Beurden said the regulatory overkill in Arctic waters, married with high costs, made it pointless to continue.

David Fuller's view -

Ben van Beurden is a brave man, having entered the wounded lions’ den at the CERAWeek energy forum of HIS Markit in Houston, and delivered this message.  I trust he came away unscratched.

I think he is right.  In fact, I said so, more or less, in Monday’s Comment of the day.  I won’t repeat all those points but you can either scroll back to Monday, or use these two links to access Email of the day 2 on crude oil, and also AE-P’s earlier article: Permain Shale Boom in Texas Is Devastating for OPEC.

Oil is obviously an immensely important commodity.  However, its days as a fuel are now in decline, for all the reasons mentioned above.  That will not change.  However, oil is a very useful chemical, both today and in the foreseeable future.  That will be no consolation for oil producers because both the demand for oil and its price will be much lower a decade from now.

These changes are entirely due to our era of accelerating technological innovation.  To appreciate the significance of this, just consider the example of oil over the last decade.  In fact, only a few years ago experienced commentators were still telling us that the world was rapidly running out of crude oil.  Today, I suggest there is far more oil available than the world will ever require.

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



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March 09 2017

Commentary by David Fuller

The Markets Now

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

March 09 2017

Commentary by Eoin Treacy

March 09 2017

Commentary by Eoin Treacy

A Father of Fracking Seeks to Emulate U.S. Shale Boom in Alaska

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

A pioneer of the U.S. shale revolution wants to take fracking to America’s final frontier. Success could help revive Alaska’s flagging oil fortunes.

Paul Basinski, the geologist who helped discover the Eagle Ford basin in Texas, is part of a fledgling effort on Alaska’s North Slope to emulate the shale boom that reinvigorated production in the rest of the U.S. His venture, Project Icewine, has gained rights to 700,000 acres inside the Arctic Circle and says they could hold 3.6 billion barrels of oil, rivaling the legendary Eagle Ford.

While the potential is huge, the difficulty of shipping millions of gallons of water, sand and chemicals -- the ingredients used in fracking -- to one of the most remote areas on earth is nothing short of monumental. At stake is an Alaskan industry that’s seen output tumble from 2.1 million barrels a day in 1988 to 520,000 in 2016 as reserves dwindled and explorers sought cheaper supplies in shale fields to the south.

“The oil is there,” said Basinski, founder and chief executive officer at Houston-based Burgundy Xploration LLC, in an interview. “Now it’s a question of how quickly we can get it to flow and whether we can get the economics to work." One exploratory well has been drilled, he said, and a second is planned by mid year.

 

Eoin Treacy's view -

OPEC is riddled with problems. The first is that members with large populations like Saudi Arabia might have control over some of the world’s cheapest to exploit reserves but they have allowed domestic financial commitments to essentially turn them into high cost producers. They no longer have the flexibility to curtail supply like they did in the 1970s. 

The second is that they have a lot more competition. OPEC was founded in 1960 by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. Today it has 13 members and all are competing for market share. That is quite apart from the fact that Russia needs exports to fund its domestic economy and adventurism, the USA is now exporting after a 40-year hiatus and Canada is actively exploring export options. 

 



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March 09 2017

Commentary by Eoin Treacy

China Inflation Heads Off in Two Directions

This article from the Wall Street Journal may be of interest to subscribers. Here is a section: 

China's consumer-price index in February was up just 0.8% from a year earlier, Beijing reported Thursday, slowing from January's 2.5% pace, while the producer-price index--which measures production costs at the factory gate--was up 7.8%, its biggest jump since September 2008.

It is the CPI, which eased largely due to food prices, that most economists see as more indicative. The sharp rise in input costs for manufacturers reflects how low commodity prices were a year ago, and should moderate as that factor fades. Both consumer and producer prices will soften if the overnight plunge in global oil prices proves to be the beginning of a longer slide. Oil's biggest one-day drop in more than a year followed news of record U.S. stockpiles, though prices recovered a touch during Asian trading hours Thursday.

Still, going even further down the rabbit hole, it seems unlikely that China's surprisingly weak inflation reading will lead the central bank to relax. CPI inflation may be far short of the government's 3% target, but the People's Bank of China has a more urgent task than goosing prices: preventing financial risk, from ballooning debt to asset bubbles, from wrecking the economy.

"Despite lower-than-expected inflation, the PBOC will continue to raise money-market interest rates because the overarching theme for China this year is deleveraging," said Liu Dongliang, senior economist at China Merchants Bank.

 

Eoin Treacy's view -

China’s producer prices have been rising because of the weakness of the yuan, higher energy prices and the trend of higher wages without commensurate improvements in productivity. 

It’s looking increasingly likely that oil has rolled over so that will remove some pressure from both the CPI and PPI figures over the coming months in both absolute and year over year comparisons. However the renminbi is still trending lower and wages are still rising. Against that background the central bank’s attempts to control the shadow banking system while also encouraging the domestic economy highlights just how fine a line it is treading in terms of monetary and fiscal policy. 

 



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March 09 2017

Commentary by Eoin Treacy

Bitcoin May Go Boom: A Guide to This Week's Big SEC Decision

This article by Jeff John Roberts for Forbes may be of interest to subscribers. Here is a section:

The agency must decide if the BATS stock exchange can change its rules to offer a bitcoin ETF (exchange traded fund), which would let people buy bitcoin like a common stock. The ETF—called the Winklevoss Bitcoin Trust ETF—is the creation of the Winklevoss brothers, who once fought Mark Zuckerberg for control of Facebook, and now own a large stock of bitcoins.

WHY IS THIS ETF SUCH A BIG DEAL?
It's all about liquidity. While there are plenty of places to buy bitcoin, many investment funds can only hold assets that meet certain regulatory standards—such as approval from the SEC. If the agency approves the ETF application, money managers who want to include bitcoin in their portfolio are likely to jump in. Meanwhile, millions of ordinary people will have an easy new way to buy the digital currency. I can't really phrase it any better than this quote from BitMex, a bitcoin analysis site:

If the SEC approves the Bats rule change, all manner of American muppet retail investors can yolo into Bitcoin via a regulated ETF. The pool of eligible money that can easily obtain exposure to Bitcoin will dramatically rise. There are various predictions about the amount of money that could flow into Bitcoin. In short, it will be Yuge.

 

Eoin Treacy's view -

Bitcoin is a speculative vehicle with unique characteristics that make it especially attractive for people looking to skirt capital controls and other forms of official surveillance. To date Chinese traders have dominated volume but if the SEC allows ETFs to track the price then it will potentially open up additional sources of demand from investors seeking an alternative asset class. 



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March 09 2017

Commentary by Eoin Treacy

Ivory Coast Cocoa Farmers See Rainfall Boosting Mid-Crop Harvest

This article by Baudelaire Mieu and Olivier Monnier for Bloomberg may be of interest to subscribers. Here is a section:

Good rainfall in Ivory Coast’s cocoa-growing areas has farmers upbeat on prospects for the season’s smaller crop that starts in April.

Soil is moist in producing regions including the fertile southwest, and the development of flowers that turn into pods is getting a boost from the wet weather, growers said this week.
Farmers in Ivory Coast, the world’s top cocoa producer, harvest a main crop from October to March and a smaller one, called the mid-crop, from April to September.

Recent rain “gives hope for the mid-crop,” Jacques Oulaye, a cocoa farmer based in Gbapleu, in the country’s western mountain region, said by phone March 6. “Young flowers in the trees have begun to blossom, meaning the new pods will go out soon.”

A large mid-crop would compound a surplus of cocoa piling up in Ivory Coast, after the main crop was bigger than expected and some local companies defaulted on contracts to export cocoa.

The International Cocoa Organization last week forecast the West African country’s harvest will increase 20 percent in the current season, contributing to a global surplus that’s projected to be the biggest in six years.

 

Eoin Treacy's view -

The Ebola epidemic which ravaged West Africa between 2014 and 2016 represented a bullish outcome for cocoa prices since it had a negative impact on yields. However with the easing of the outbreak, farmers returned to their holding and supply increased not least because of the outpouring of sympathy for the region from the international community and the assistance farmers have received from major consumers keen to ensure they have secure supplies. 



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March 08 2017

Commentary by David Fuller

How the Euro Could Break Up or Be Saved

Here is the opening of this topical article from Bloomberg:

Talk about the breakup of the euro is fashionable again. With populists such as Marine Le Pen trying to storm the establishment and the popularity of the single currency in decline, executives and investors, including JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon, say nothing can be ruled out. At the same time, the euro has already survived a number of scares since its inception in 1999, with the political and economic elites proving willing to do whatever it takes to support the currency.

We took a look at three scenarios that could lead to the euro splintering—and three that could see the currency coming through the populist wave in even stronger shape. And we poll expert opinion on the chances they could happen.

David Fuller's view -

Natural scientists are now talking about the real possibility of cloning a woolly mammoth and possibly various varieties of dinosaurs, so it is not beyond the bounds of imagination to assume that the euro could be kept alive for a few more years before it becomes extinct.

The problem, however, is that Europeans would much rather have the woolly mammoth than the euro.  Not everyone agrees, of course.  John Major, Tony Blair and Barrack Obama still think the euro is a wonderful idea, presumably because they have never had to live with it as their own currency.

This item continues in the Subscriber’s Area.



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March 08 2017

Commentary by David Fuller

With Little Room to Manoeuvre, Philip Hammond Delivers a Steady-as-She-Goes Budget

Having declared the Spring Budget redundant it would have defied logic, not to mention his own temperament, for Philip Hammond to use the last one to launch a display of fiscal pyrotechnics. True to form and extensive pre-event leaks, the Chancellor of the Exchequer did little more than wave a couple of rather lacklustre sparklers.

The Budget document was only 68 pages long - roughly half the length of last year’s. Were the (admittedly rather good) jokes a sign that the Chancellor was at ease with himself, or an attempt to pad out his material? 

That said, the choice to do nothing - or, at least, very little - can itself be a decisive act. Most companies will be glad of it. Some politicians and commentators would like to use the UK’s departure from the European Union, the barely mentioned elephant in the Commons chamber today, as an excuse to be radical, to deregulate the economy and fully embrace free trade. All this can come later.

As the man with his hand on the tiller as the UK begins to navigate Brexit, Hammond appears to be developing into an Oakeshottian Chancellor, adhering to the 20th century philosopher’s observation that all political activity can be likened to sailing on “a boundless and bottomless sea”.

“The enterprise,” as Michael Oakeshott wrote, “is to keep afloat on an even keel.” 

As a former transport secretary, Hammond is probably minded to invest in the nation’s infrastructure, like roads, railway lines, airports and superfast broadband. But the stubborn budget deficit of around £60bn a year and debt of £1.7 trillion keeps a lid on the largesse.

Opening the fiscal floodgates, as Donald Trump has promised to do in the US, could well lead to an increase in inflation. Over there, this would be mitigated by the strong dollar; over here it would be exacerbated by the weak pound. As it is, the Office for Budgetary Responsibility today predicted that inflation will hit 2.4pc this year. 

David Fuller's view -

I watched Philip Hammond deliver his budget this morning.  It was predictably conservative, and Theresa May’s inclusions on education were sensible.  The Government is going to be fiscally prudent ahead of the Brexit negotiations for the obvious reason that it cannot know for certain how the EU will respond at this stage. 

Interestingly, it was a very polished and upbeat presentation by Hammond.  His jokes, at the expense of Labour, were surprisingly funny and had Jeremy Corbyn in a high state of dudgeon.  The Prime Minister and Chancellor of the Exchequer need to maintain their current levels of confidence throughout Brexit negotiations with the EU.   

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



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March 08 2017

Commentary by David Fuller

Saudis Lose Patience on OPEC Cheating, Lash Out at Irresponsible Anti-Fossil Campaign

Saudi Oil Minister Khalid al-Falih has lashed at Western leaders for promoting the 'myth' of peak oil demand and scare-mongering over vast stranded resources in the fossil fuel industry, accusing of them committing a grave disservice to mankind.

The defiant minister said the campaign of attacks on the high-carbon sector will deter trillions of dollars of vitally-needed investment, leading to a disastrous energy crunch once the current glut is cleared.

"They are doing nothing less than compromising the world's energy security. It will lead to damaging oil price spikes, and more acute poverty for developing countries," he said, speaking at the IHS CERAWeek summit in Houston.

Mr al-Falih said Saudi Arabia welcomes wind, solar, and other renewables but warned that they cannot quench Asia's "insatiable demand" for more oil or meet supply as global energy demand doubles by 2050.

For now the problem is the opposite one. The oil market is over-supplied and inventories remain near record levels, despite an accord last November by OPEC and a Russia-led group of states to cut output by 1.2m barrels a day (b/d).

Mr al-Falih admitted that the global crude market has not yet tightened enough and complained that some countries are cheating on cuts. "It has been slower quite frankly than I had thought in the first two months of this year," he said.  

"Saudi Arabia will not allow itself to be used by others. The agreement is for the benefit of all, and needs to be addressed by all. We cannot accept free riders," he said.

The minister said his country would back cuts only for "a restricted period of time" and warned speculators with big long positions on crude oil derivatives that they should not expect the Kingdom to back-up their bets by choking supply.

"I would caution not to tempt investors into irrational exuberance, or into wishful thinking that OPEC or the Kingdom will underwrite the investments of others at our expense and long-term interests."

It is a strong hint that the Saudis may not agree to extend the deal when it expires in June. OPEC officials have been meeting oil traders at the CERAWeek forum to probe what is happening in the parallel futures market. They have been told that the funds may close their positions en masse and trigger a fresh price crash if OPEC returns to pumping at will.

Traders say Russia has cut barely half the 300,000 b/d pledged, similar to the late 1990s when Moscow never followed through on promises. The country's oil minister Alexander Novak told the forum that Russia would deliver by end of April, but also said dismissively that there are "more important issues to talk about" than the OPEC deal. He digressed instead into the issue of currency wars.  

David Fuller's view -

So the Russians have only honoured half of their agreed oil production cut – what a surprise.

Meanwhile, OPEC producers may quietly increase their production following today’s downward dynamic Brent Crude (weekly & daily).  It also helps to have the Permian Basin, easily one of the world’s largest deposits of shale oil, in Texas.   

Saudis remain in a state of shock, due to the USA-led accelerated rate of technological innovation which has made US shale so competitive.  I think their forecasts for “damaging oil price spikes” are wishful thinking.  The Saudi riyal remains pegged to the US$ but for how long?  The risk of a massive devaluation before the end of this decade is increasing. 

(See also: Email of the day 2 “On crude oil” posted on Monday, 6th March, and also AE-P’s excellent article: Permain Shale Boom in Texas Is Devastating for OPEC)  

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



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March 08 2017

Commentary by David Fuller

Women Go On Strike in US to Show Their Economic Clout

Here is the opening and a latter section of this informative report from Associated Press:

PHILADELPHIA (AP) -- Many American women stayed home from work, joined rallies or wore red Wednesday to demonstrate how vital they are to the U.S. economy, as International Women's Day was observed with a multitude of events around the world.

The Day Without a Woman protest in the U.S. was put together by organizers of the vast women's marches that drew more than 1 million Americans the day after President Donald Trump's inauguration.

The turnout on the streets this time was much smaller in many places, with crowds often numbering in the hundreds. There were no immediate estimates of how many women heeded the call to skip work.

"Trump is terrifying. His entire administration, they have no respect for women or our rights," said 49-year-old Adina Ferber, who took a vacation day from her job at an art gallery to attend a demonstration in New York City. "They need to deal with us as an economic force."

The U.S. event - inspired in part by the Day Without an Immigrant protest held last month - was part of the U.N.-designated International Women's Day.

In Warsaw, thousands of women showed Poland's conservative government red cards and made noise with kitchenware to demand full birth control rights, respect and higher pay.

In Rome, hundreds of women marched from the Colosseum to demand equal rights. Thousands marched in Istanbul, despite restrictions on demonstrations imposed since last year's failed coup. Turkish police did not interfere.

And:

Trump took to Twitter to salute "the critical role of women" in the U.S. and around the world. He tweeted that he has "tremendous respect for women and the many roles they serve that are vital to the fabric of our society and our economy."

First lady Melania Trump marked the day by hosting a luncheon at the White House for about 50 women.

The White House said none of its female staff members skipped work in support of International Women's Day.

Lovely Monkey Tattoo, a female-owned tattoo parlor in Whitmore Lake, Michigan, offered tattoos with messages like "Nevertheless, She Persisted" - a reference to the recent silencing of Sen. Elizabeth Warren on the Senate floor - with proceeds going to Planned Parenthood.

Women make up more than 47 percent of the U.S. workforce and are dominant among registered nurses, dental assistants, cashiers, accountants and pharmacists, according to the census.

They make up at least a third of physicians and surgeons, and the same with lawyers and judges. Women also account for 55 percent of all college students.

At the same time, American women earn 80 cents for every dollar a man makes. The median income for women was $40,742 in 2015, compared with $51,212 for men, according to census data.

David Fuller's view -

In what should be an obvious point which I have made for decades, is that countries are the most successful where women have the highest degree of equality.  By equality, I mean free from legal, political, or social restrictions, and with equal rights and opportunities protected by law. 

My own conclusion, based on observation when I travelled extensively around the world for several decades, continuing into the early 2000s, was that Singapore topped the list.  I doubt that has changed. 



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March 08 2017

Commentary by David Fuller

The Markets Now

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

March 08 2017

Commentary by Eoin Treacy

March 08 2017

Commentary by Eoin Treacy

Oil Falls to Two-Month Low as Traders Focus on Record Supplies

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

Oil has fluctuated above $50 a barrel since the Organization of Petroleum Exporting Countries and other nations started trimming supply on Jan. 1 to reduce a glut. Saudi Arabia and Russia, the architects of the deal, presented a united front on complying with the cuts at the CERAWeek conference Tuesday in Houston. Alongside officials from Iraq and Mexico, they insisted the curbs are working. Managed money boosted wagers that U.S. oil futures would rise to a record last month.

"There’s a huge amount of speculative length in the market and they’re starting to bail," Bob Yawger, director of the futures division at Mizuho Securities USA Inc. in New York, said by telephone. "OPEC didn’t do a good job at CERA convincing the market that it would roll over the cuts into the second half of the year."

 

Eoin Treacy's view -

Any arbitrage in the futures curve has been squeezed out by hedging activity over the last couple of months as unconventional producers locked in what are economic prices for their activities. That has effectively kept a lid on prices despite OPEC’s quite disciplined cut to supply. The fact the USA is now both a major new source of supply and exporting is a challenge for the cartel. 



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March 08 2017

Commentary by Eoin Treacy

Musings from the Oil Patch March 7th 2017

Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report for PPHB. Here is a section on solar cells

A more recent analysis by the Lawrence Berkeley National Laboratory covering 1998 to 2015 shows a different measure of PV cost. (See Exhibit 15 on next page.) The pattern of that decline is interesting. It took 11 years for the price per watt to drop from $12 to $8. Notice how the cost per watt dropped between 1998 and 2000, but then remained flat until 2002, after which it declined for the next three years. Starting in 2005, the cost slowly increased for two years before beginning a slow decline that lasted for two years. In 2009, the pace of decline accelerated until it reached about $4 per watt, or half the 2009 value. The recent decline coincides with China’s entrance into the solar panel manufacturing business and its prompt dumping of surplus output into the U.S. market, driving down panel prices and driving U.S. manufacturers out of business.

It is difficult to separate how much of the historical price decline came from technological improvements versus that from a misguided investment strategy by China. More importantly, will these price reduction trends continue as in the past and how dependent on technological breakthroughs in material science are lower prices in the future?

 

Eoin Treacy's view -

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

The cost of producing solar cells collapsed as China introduced economics of scale to the market. That has been perhaps the greatest influence on the price of cells and has contributed to the collapse of the investable sector because so many companies are now running at a loss. There have already been a significant number of bankruptcies and remaining companies are still in a highly competitive environment. 



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March 08 2017

Commentary by Eoin Treacy

New Research Could Turn Water Into the Fuel of Tomorrow

This article from Futurism.com caught my attention and I thought it may be of interest to subscribers. Here is a section:

“What is particularly significant about this study, which combines experiment and theory, is that in addition to identifying several new compounds for solar fuel applications, we were also able to learn something new about the underlying electronic structure of the materials themselves,” Neaton said in a Caltech press release.

To discover these new photoanodes, the team combined computational and experimental approaches. A Materials Project database was mined for potentially useful compounds. Hundreds of theoretical calculations were performed using computational resources at the National Energy Research Scientific Computing Center (NERSC), together with software and expertise from the Molecular Foundry. Once the best candidates for photoanode activity were identified, it was time to test those materials in the laboratory.

The materials were simultaneously tested for anode activity under different conditions using high-throughput experimentation. This was the first time these kinds of experiments had been run this way, according to Gregoire.

“The key advance made by the team was to combine the best capabilities enabled by theory and supercomputers with novel high throughput experiments to generate scientific knowledge at an unprecedented rate,” Gregoire said in the press release.

 

Eoin Treacy's view -

There has been great deal of commentary in the media about the advances in artificial intelligence and how it is represents a threat to employment across a number of fields. A broader perspective to the easy application of massive computing power is the scale that can be brought to experiments through computer simulation and data analysis. Artificial intelligence represents a major facilitator for technological innovation. Coupled with rapid prototyping and CRISPR the potential for unprecedented change in a range of sectors, stretching from materials to healthcare, is looking increasingly like the base case.  



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March 08 2017

Commentary by Eoin Treacy

Treasuries Tumble After ADP Employment Tops Highest Estimates

This note by Elizabeth Stanton for Bloomberg may be of interest to subscribers. Here it is in full:

Treasuries slumped, pushing 10-year yields to the highest level since December, after a measure of U.S. private-sector job growth for February exceeded the most optimistic expectations two days before the Labor Department’s monthly employment report.

Yields were higher by 4-6 basis points at about 9:10 a.m. in New York as the market priced in a faster pace of Fed rate increases following the one already expected next week. The 10- year climbed as much as 6.4 basis points to 2.582 percent, the highest level since Dec. 20.

Treasury plans to sell $20 billion of the 10-year note in an auction at 1 p.m. The new notes yielded 2.575% in when-issued trading, above 10-year auction stops since July 2014.

ADP Employment increased 298k in February vs 187k median est. in Bloomberg survey, in which highest est. was 255k; February employment report is forecast to show 190k increase in nonfarm payrolls based on median est., which may rise if economists revise higher based on ADP

Yields across the curve touched the highest levels this year, led by the 5Y, which climbed 6.2bp to 2.111%

5s30s yield curve flattened, touching 104.5bp, within 5bp of lowest levels of recent years
USD OIS pricing upgrades odds of 25bp March hike to 87% (versus 83% Tuesday), while odds of a second 25bp hike in September, based on 5th Fed dated OIS, climbed to 97% from 87%

IG credit issuance slate also in focus after nearly $40b priced over previous two sessions, weighing on Treasuries; United Health Group joins Wednesday’s slate with $benchmark 10Y and 30Y offering

 

Eoin Treacy's view -

The US economy has been on a recovery footing since 2010 and while the pace of the expansion has been modest it has delivered on job growth. The declining participation rate has flattered unemployment statistics but with more people being employed and upward pressure in the pipeline from higher minimum wages there is the potential for people to be attracted back into the workforce which could keep a temporary lid on inflation but would be unlikely to represent a long-term solution.



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March 07 2017

Commentary by Eoin Treacy

March 07 2017

Commentary by Eoin Treacy

Forget the Border Levy. Here's the Really Big GOP Tax Idea

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

Currently, when companies borrow money, a large portion of the interest they pay on those loans is tax-deductible. The House plan would eliminate that deduction. Like the border adjustment, this change was proposed by Berkeley economist Alan Auerbach in a famous 2010 paper, “A Modern Corporate Tax.”

How would companies finance themselves if interest payments weren’t tax deductible? They would take on less debt and issue more stock. That would require some big adjustments, but in the long term it would probably be a good thing for the stability of the economy.

 

Eoin Treacy's view -

Deducting interest on one’s mortgage is one of the primary tax incentives, along with long-term capital gain of home ownership in the USA. Eliminating the interest deductible on mortgages is a political non-starter as a result, however if such a measure is incorporated into any reform of the corporate tax code it would result in some considerable nuancing of the overall bullish outlook for the banking sector. 



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March 07 2017

Commentary by Eoin Treacy

Extend and Pretend

I found this interview with Yanis Varoufakis on Bloomberg interesting not least for the advice he offers to the UK. Here is a partial transcript:

For former Finance Minister Yanis Varoufakis, the lesson for May is “beware of what I call the euro zone run around.” He predicts British officials will receive conflicting messages from Berlin to Brussels, and that a lot of time will be spent discussing how to structure the negotiations rather than issues such as a free trade deal.

Varoufakis proposes the U.K. should file Article 50 and then immediately ask to join the European Economic Area, which allows access to the single market in return for free movement of people and some budget contributions. That would give Britain stability and time to assess how to properly engage with the EU, which is “really not interested in a mutually advantageous deal,” he said.

George Papaconstantinou, who ran Greece’s finance ministry from 2009 to 2011, is more optimistic.
While he anticipates the EU will adopt a “very hard bargaining” position and seek to safeguard the bloc by refusing to grant too many concessions, he sees Merkel as a political realist.

“She does look at the end of the day for decisions which are win-win,” he says. “There is an element of realism which the U.K. can hope for.”

 

Eoin Treacy's view -

The EU has become quite adept at controlling the narrative of negotiations by insisting on a very specific set of conditions that have to be met for negotiation. If the UK submits to the framework for negotiation and legalistic lexicon of discussion insisted upon by the EU then it will be going into the process starting at a disadvantage. 



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March 07 2017

Commentary by Eoin Treacy

Million dollar baby! Infant Reliance Jio set to give peers many sleepless nights

This article by Swati Verma for the Economic Times may be of interest to subscribers. Here is a section:

The telecom arm of Reliance IndustriesBSE -0.01 %, which debuted in September last year, has already set a benchmark by hitting a subscriber base of 100 million in record 170 days. And with aggressive plans in place, it looks set to raise the bar, giving sleepless nights to the incumbents. 

The company is heavily banking on building significant data capacity and triggering price elasticity for data demand. 

At Jio’s first analyst meet last week, the company management indicated that currently about 1b GB/month data is getting consumed on Jio and it will have the capacity to offer about 4b GB data per month by the end of FY17. According to the management, it should be able to cater to 60 per cent of estimated data demand at 6b GB per month by FY21. 

 

Eoin Treacy's view -

Reliance Industries has a footing in just about all of India’s biggest industries. It went through a significant capital expenditure program to build the nation’s most comprehensive 4G network and is now reaping the rewards. Considering that the vast majority of India now has the opportunity to move from 2G to 4G the potential for growth in ancillary services is considerable.  



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March 06 2017

Commentary by David Fuller

Let Us Have a Reforming Budget at Last

A number of measures have already been announced to come into effect this year, including a 2 percentage-point increase in the insurance premium tax and a cut in corporation tax. The Chancellor may well modify some of these measures.

He will surely concede some form of compensation for firms severely hit by the resetting of business rates. But, above all, he must keep current government spending under a very tight rein to allow the Government room for manoeuvre later.

Mind you, all this is going to seem pretty thin gruel. Could we please have some more? In particular, as I said last year, it would be good to have, if not a vision (and “Spreadsheet Phil” apparently doesn’t do “the vision thing”) then at least a glimpse of how the tax system is going to develop.

In fact, very few Chancellors find themselves able to embrace radical reform of the tax system. Usually, they are too busy grappling with the Government’s deficit to have either the resources or the time.

This is true now, and whatever energy is left is fully absorbed in preparing Britain for Brexit. Yet reform is badly needed. In so many ways, our current tax system is both irrational and inimical to economic growth.

Perhaps we can forgive Mr Hammond his first, and last, boring March Budget. But there should not be any more like it. Tax reform and making the most of Brexit are not alternatives. Indeed, as Britain faces its future outside the EU in a turbulent and risky world, one of the best things that a Chancellor can do is to ensure that the tax system does the most to attract and retain businesses in Britain, and encourages new business formation, innovation, investment and work.

Mr Hammond will not make progress towards these objectives by doing next to nothing, whichever month is graced with his inactivity.

David Fuller's view -

Given what we have seen of Theresa May’s government so far, and the uncertainty regarding Brexit and what she will be seeing from the EU during the next year or two, I think she and Philip Hammond will be very prudent with the Budget and economic policy generally, until the UK has effectively left the EU.  That will mark the start of bolder Budgets.

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



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March 06 2017

Commentary by David Fuller

Email of the day 1:

On the subject of time: 

“Time is the most valuable coin in your life.  You and you alone will determine how that coin will be spent.  Be careful that you do not let other people spend it for you.”

Carl Sandburg

David Fuller's view -

Many thanks for this wonderful quote which I had not previously seen. 

It was forwarded by an experienced investor and subscriber of my own generation and I think it will appeal to many other subscribers.

Here is a link to Carl Sandburg quotes.



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March 06 2017

Commentary by David Fuller

Email of the day 2

On crude oil:

 

Dear David,

I can’t see why in terms of fundamental oil itself, but the chart looks really like it’s going to shoot up, don’t you think?

Its got that look about it. And from what I’ve seen with oil over the years, sometimes, fundamentals are irrelevant.

Cheers

David Fuller's view -

Yes, that can happen, and to quote Benjamin Graham:

 “In the short run, the market is a voting machine but in the long run, it is a weighing machine.”

However, in response to your opening question, I think crude oil is unlikely to shoot up without some major production disturbance, although it could grind a little higher, which is what I have been saying for some time. 

This item continues in the Subscriber’s Area.



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March 06 2017

Commentary by David Fuller

Permain Shale Boom in Texas Is Devastating for OPEC

The Opec oil cartel is waking up to an unpleasant surprise. Shale output from the Permian Basin in Texas is expanding faster than the world thought humanly possible.

The scale threatens to neutralise output cuts agreed by Saudi Arabia and a Russian-led bloc last November, and ultimately threatens to break their strategic lockhold on the global crude market for a generation.

"People just don't seem to realise how big the Permian is. It will eventually pass the Ghawar field in Saudi Arabia, and that is the biggest in the world," said Scott Sheffield, founder of Pioneer Natural Resources and acclaimed 'King of the Permian'.

"We think it could produce 8-10m barrels a day (b/d) within ten years. We're telling our investors that Pioneer could reach one million," he said. Roughly 70pc of this would be crude oil, and the rest in gas and liquids.

And:

The beauty of the Permian rock is that it has up to twelve layers "stacked" on top of each other down to a depth of 12,000 ft, offering multiple seams and perfectly suited to horizontal drilling.

The reservoirs are not cursed by saltwater zones. They hold 75pc oil, compared to 40-50pc in other fracking regions. A nexus of pipelines is already in place. Pioneer can send crude to the Gulf coast for $2.50 a barrel in transport costs.

And:

There is no longer any question that US shale has profoundly disrupted the global oil markets. Saudi Arabia's campaign to break the fracking industry has been a costly war of attrition, depleting a quarter trillion dollars of the Kingdom's foreign exchange reserves without halting the juggernaut.

OPEC members face a Permian headwind that may cap crude prices far below levels needed to balance their budgets. In the end, the 40pc collapse in worldwide oil and gas investment over the last two years will lead to a supply crunch. But oil bulls betting on a return to $80 may have to be patient.

Mr Sheffield said the strategic blunder made by the Saudis was to let prices rise so high for so long in the great China boom. It gave US shale the window to reach critical mass and critical technology.

 "It was the $100 oil environment for four years that allowed us to do what we did. It they had kept oil down at $70 to $75, it would have been a helluva a lot slower," he said.

David Fuller's view -

The concluding sentence above is another example of the commodity adage: The cure for high prices is high prices.  They lead to a decline in consumption, substitution, and increased production.  Conversely: The cure for low prices is low prices.  They eventually lead to a decline in production, stockpiling, and increased consumption. 

I actually think AE-P is too optimistic in his excellent column above.  When he says that Permian Basin output “ultimately threatens to break their [OPEC’s] strategic lockhold on the global crude market for a generation”, that already happened in the second half of 2014. 

Almost a decade from now, output from Permian Basin and other leading shale fields is likely to be higher, provided oil prices have not fallen sharply from current levels.  Moreover, any developed country which wants to produce its own shale oil will be doing so if it has been able to overcome political objections.  The production of solar power will have increased enormously.  Electric vehicles will have made huge inroads into the market for petrol driven cars and trucks. 

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



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March 06 2017

Commentary by David Fuller

The Markets Now

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

March 06 2017

Commentary by Eoin Treacy

March 06 2017

Commentary by Eoin Treacy

Hammond to Offer $674 Million to Boost Innovation in Budget

This article by Svenja O'Donnell for Bloomberg may be of interest to subscribers. Here is a section:

U.K. Chancellor of the Exchequer Philip Hammond will use Wednesday’s budget to allocate more than 550 million pounds ($674 million) to boost innovation and technology, as he focuses on targeted measures while keeping back the Treasury’s firepower to offset any turbulence from Brexit. 

The money, from the National Productivity Fund, will support work in areas including electric vehicles, robotics and artificial intelligence, the Treasury said in a briefing note. Hammond will also set out details on work to boost 5G mobile phone coverage in Britain.

The plan comes as Hammond pledged on Sunday to set aside money to cushion the economy as Britain prepares to start negotiations to exit the European Union. He warned the budget would not include any spending commitments funded by borrowing as he seeks to balance the books in the next parliamentary term.

 

Eoin Treacy's view -

The UK needs a competitive advantage in how it navigates its post Brexit reality. The City, defence and the domestic oil business have all played a role in sustaining the UK’s independence in the past but some of the biggest questions posed by Brexit are whether these will be enough to sustain the economy in future. Streamlined common sense regulation and attractive tax policies are going to have to form part of the solution in order to delineate the UK from its neighbours. However intellectual property and the ability to leverage technological knowhow on a global scale are the hallmarks of successful enterprises and countries and will also be essential to plotting a success independent strategy of the UK. 



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March 06 2017

Commentary by Eoin Treacy

Tempting Turkish Stocks Close In on Record as Valuations Dazzle

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

When the previous record was set, the picture for investors was markedly different: the Turkish currency was 50 percent stronger against the dollar, the country was celebrating earning its second investment-grade credit rating and economic growth was stronger. The only piece of the puzzle that’s more attractive now are valuations that are still at a discount of about 30 percent to Turkey’s emerging-market peers.

Reasons to potentially avoid Turkish stocks were numerous: rising geopolitical risks, terror attacks, a coup attempt, and the prospect of higher U.S. interest rates. The spread between the valuation of Turkish stocks and its emerging market peers widened to more than a seven-year high in July and remained near those levels for almost six months.

This year’s rally developed from “a reaction to Turkey’s long-term under performance to peers and highly attractive valuations,” according to Haydar Acun, a fund manager at Istanbul-based Marmara Capital. “What usually happens in these kind of rallies is the market becomes overconfident after a while and starts forgetting what set the rally in the first place.”

Economic growth is expected to have slowed to 2.2 percent in 2016, according to data compiled by Bloomberg. That compares with 6.1 percent in 2015 and 8.5 percent in 2013 when stocks set their record, according to figures from Turkey’s statistical agency. Turkey lost its last-remaining investment-grade credit rating in late January this year.

 

Eoin Treacy's view -

Turkey doesn’t score particularly week on the governance scale not least because Erdogan has become increasingly volatile following last year’s failed coup attempt.  The Dollar hit an accelerated peak below TRY4 in January and pulled back to test the TRY3.5 region; unwinding about half its overextension relative to the trend mean in the process. Last week’s Dollar bounce takes the Lira back to being the world’s worst performing currency this year and a sustained move below the trend mean would be required to question medium-term Dollar dominance.  



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March 06 2017

Commentary by Eoin Treacy

IBM thinks it's ready to turn quantum computing into an actual business

This article by Mike Murphy for Quartz may be of interest to subscribers. Here is a section: 

As it stands, IBM’s largest quantum computer has five qubits. By contrast the average laptop has hundreds of millions of bits in its processors, although the two types of computers are not directly comparable. IBM hopes, however, to continue its research with the aim of building quantum computers with roughly 50 qubits. For comparison, an IBM spokesperson told Quartz, you can simulate the computational power of a 25-qubit quantum computer on a regular laptop. At about 45 qubits, you’d need the world’s fastest supercomputers, and above 50, “you couldn’t build large enough classical computing systems to simulate that size of a quantum system.”

In IBM’s vision of the future, quantum computers could be used for discovering new drugs, securing the internet, modeling the economy, or potentially even building far more powerful artificial intelligence systems—all sorts of exceedingly complicated tasks. One area the company is looking at right now is in chemistry, attempting to simulate what’s going on in a molecule. “Even for simple molecules like caffeine, the number of quantum states in the molecule can be astoundingly large,” the spokesperson said, “so large that all the conventional computing memory and processing power scientists could ever build could not handle the problem.”

When Quartz visited IBM’s quantum computing lab in Yorktown Heights in 2015, the work being done was viewed as fundamental—research for the sake of research—rather than anything tied to specific business goals. But then again, so was the research that has since led to the creation of Watson. Originally conceived of to take on the question-as-answers gameshow of Jeopardy!, which researchers saw as a “unique and compelling AI question,” Watson has become a set of machine-learning and AI services that IBM sells, and intends to invest $1 billion into.

 

Eoin Treacy's view -

IBM is still in the throes of a major transition from physical hardware manufacturing to an almost total focus on knowledge based services. Artificial intelligence (Watson), and the tools to leverage that technology (massive & fast processing power) represent the key areas of focus in what is a new era for the company. 



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March 06 2017

Commentary by Eoin Treacy

Email of the day on Continuous Professional Development credit at The Chart Seminar:

Can you please elaborate on the part of the sentence marked in red below taken from your advert in Fuller Treacy  Comment of the Day? Is this only for those who are members of the CFA or does it apply to delegates in general?

“The CFA Institute has once more agreed to co-host the Singapore event and I will also provide certificates for continuous professional development to anyone who wants one.” 

 

Eoin Treacy's view -

Thank you for this question which may be of interest to other subscribers. Financial regulators, particularly in the UK but just about everywhere these days require financial intermediaries to engage in continuous professional development. A number of subscribers over the years have told me they would have an easier time justifying the two days away from the office if they could get CPD credit for The Chart Seminar. 

With that in mind I approached the CFA in Singapore who are prepared to issue a CPD certificate to anyone attending the seminar. Since it is from the CFA it should be acceptable outside of Singapore. We can also issue a certificate from FullerTreacyMoney to confirm attendance at the seminar containing a summary of what was covered if you need it. 

I am also in discussions with a London based partner to get full CISI accreditation for the seminar in the UK which would allow delegates to fulfil almost 50% of their annual requirement in one sitting. 

 



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March 03 2017

Commentary by David Fuller

The Rise of the Useless Class

Here is the opening of a brief excerpt from this fascinating new book, Homo Deus, by Yuval Noah Harari, published by Harper Collins.

Historian Yuval Noah Harari makes a bracing prediction: just as mass industrialization created the working class, the AI revolution will create a new unworking class.

The most important question in 21st-century economics may well be: What should we do with all the superfluous people, once we have highly intelligent non-conscious algorithms that can do almost everything better than humans?

This is not an entirely new question. People have long feared that mechanization might cause mass unemployment. This never happened, because as old professions became obsolete, new professions evolved, and there was always something humans could do better than machines. Yet this is not a law of nature, and nothing guarantees it will continue to be like that in the future. The idea that humans will always have a unique ability beyond the reach of non-conscious algorithms is just wishful thinking. The current scientific answer to this pipe dream can be summarized in three simple principles:

1. Organisms are algorithms. Every animal — including Homo sapiens — is an assemblage of organic algorithms shaped by natural selection over millions of years of evolution.

2. Algorithmic calculations are not affected by the materials from which the calculator is built. Whether an abacus is made of wood, iron or plastic, two beads plus two beads equals four beads.

3. Hence, there is no reason to think that organic algorithms can do things that non-organic algorithms will never be able to replicate or surpass. As long as the calculations remain valid, what does it matter whether the algorithms are manifested in carbon or silicon?

True, at present there are numerous things that organic algorithms do better than non-organic ones, and experts have repeatedly declared that some things will “for ever” remain beyond the reach of non-organic algorithms. But it turns out that “for ever” often means no more than a decade or two. Until a short time ago, facial recognition was a favorite example of something that babies accomplish easily but which escaped even the most powerful computers. Today, facial-recognition programs are able to identify people far more efficiently and quickly than humans can. In 2004, professor Frank Levy from MIT and professor Richard Murnane from Harvard published research on the job market, listing those professions most likely to undergo automation. Truck driving was given as an example of a job that could not possibly be automated in the foreseeable future. A mere 10 years later, Google and Tesla can not only imagine this, but are actually making it happen.

In fact, as time goes by, it becomes easier and easier to replace humans with computer algorithms, not merely because the algorithms are getting smarter, but also because humans are professionalizing. Ancient hunter-gatherers mastered a very wide variety of skills in order to survive, which is why it would be immensely difficult to design a robotic hunter-gatherer. Such a robot would have to know how to prepare spear points from flint stones, find edible mushrooms in a forest, track down a mammoth, coordinate a charge with a dozen other hunters and use medicinal herbs to bandage any wounds. However, a taxi driver or a cardiologist specializes in a much narrower niche than a hunter-gatherer, which makes it easier to replace them with AI. AI is nowhere near human-like existence, but 99 percent of human qualities and abilities are simply redundant for the performance of most modern jobs. For AI to squeeze humans out of the job market it need only outperform us in the specific abilities a particular profession demands.

David Fuller's view -

I have mentioned Yuval Noah Harari and Homo Deus before, as have several subscribers, and the excerpt above from ideas.ted.com was provided by Mrs Fuller.  I have yet to finish reading Homo Deus, given all of life’s distractions, but it is the most interesting book that I have ever read. 

One does not have to agree with everything that Yuval Noah Harari says, and I imagine that some people may even be offended by Homo Deus.  Nevertheless it is very intelligently written and it challenges perceptions while making us think.  That is an invaluable gift.



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March 03 2017

Commentary by David Fuller

Janet Yellen Hints at March Rate Hike and More Later in Friday Speech

Here is the opening of this topical article from CBC News:

Federal Reserve chair Janet Yellen gave investors a pretty clear sign on Friday that the U.S. central bank is likely to raise its benchmark interest rate later this month — and more hikes to follow later this year.

In a speech on the central bank's economic outlook at the Executives' Club of Chicago on Friday, the Fed chair told the gathered audience that a slight increase to the federal funds rate would be "appropriate" when the bank next meets for a two-day policy meeting on March 14 and 15.

"At our meeting later this month, the committee will evaluate whether employment and inflation are continuing to evolve in line with our expectations, in which case a further adjustment of the federal funds rate would likely be appropriate," Yellen said.

In Fed terms, that's as close as it gets to a bright green light.

And more interest rate increases could follow, she said: "We currently judge that it will be appropriate to gradually increase the federal funds rate if the economic data continue to come in about as we expect."

Yellen noted that the U.S. economy is chugging along, cranking out an average of about 180,000 jobs a month at the moment. That's well above the range of between 75,000 and 125,000 that shold be expected just from growth in the labour force — and another sign the world's largest economy is heating up and finally ready to stand on its own two feet.

Yellen is the most recent Fed official to muse opening about rate hikes in recent days.

David Fuller's view -

Commentators have been asking: how could polls for a March 2017 rate hike have risen from the low 20% region last week to nearly 90% today?  I only watch a little TV in the home gym but none of the answers I heard from Bloomberg made any sense, at least not to me. 

I actually think the Fed was waiting for Trump’s speech before Congress on Tuesday, half expecting that it might be a meltdown.  Instead, “Trump hit a home run”, as US commentators said immediately following the speech.  A relieved Fed can now do its job before it falls further behind the curve.



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March 03 2017

Commentary by David Fuller

If Philip Hammond Cannot Deliver a Radical Conservative Budget Now, When Will He ever be Able to?

To be Chancellor of the Exchequer is, normally, to be the second most important politician Britain. The Blair-Brown years can be seen as a double act, followed by a catastrophic solo act. The Thatcher-Lawson years were an age of Tory radicalism, setting the conditions for the prosperity that followed. But no one speaks about a May/Hammond axis - in fact, not many speak about Philip Hammond at all. Our Chancellor has a gift for invisibility, honed throughout his political career. Unkind souls dismiss him a nodding dog, appointed for loyalty rather than ability.

Being underestimated in this way suits Mr Hammond rather well because over the last few months, he has been perhaps the most consequential member of the Cabinet, vetoing some of Theresa May’s stranger ideas. She has suggested making it harder for foreigners to buy British companies, for example, and capping the pay of chief executives. She raises such ideas in a sub-committee of her Cabinet members where Mr Hammond kills them off. I’m told that he is a sight to be behold in such meetings, speaking more bluntly than anyone else would dare. Outside No10 he’s seen as the dull-but-dutiful “spreadsheet Phil”. Inside, he has been Hammond the Hammer.

So it’s unfair to judge him by his first, rather underwhelming mini-Budget. His achievement so far lies in what he has saved us from: a 1970s-style industrial strategy, or a set of diktats forcing companies to put random workers on their boards. Barely a word of his resistance has leaked to the press, so the Prime Minister still trusts him and is guided by him. To her immense credit she’s serious about the Cabinet committee process, as is he. For mistakes not made, the record (so far) is excellent. But the record in radicalism? This is another matter entirely.

With the Labour Party a danger only to itself, there might never be a better time for Tory boldness. Instead, Mr Hammond seems fearful. He started his Chancellorship in the foetal position, waiting for the Brexit crash that he and other Cabinet Remainers warned about: the 500,000 job losses, the instant recession, the house price crash. Instead, economic growth accelerated and tax revenues have surpassed forecasts made even before the referendum. This hasn’t cheered him one bit. In the Cabinet Brexit committee, he rolls his eyes when Andrea Leadsom tries to suggest that everyone should lighten up because things will be fine. Even now, the Chancellor genuinely believes that they won’t.

To be sure, Britain faces plenty of uncertainty as we untie the knot with the European Union. It’s either thrilling or terrifying, depending on your point of view – calling for either daring or caution. And Mr Hammond is choosing caution: radicalism, he thinks, can wait.

This fits a depressingly familiar theme. Under David Cameron, the Conservatives were haunted by fear of the Labour Party and signed up to its ruinous levels of tax-and-spend. In government, Cameron was hamstrung by coalition with the Liberal Democrats. Even after winning a majority, Osborne somehow felt the need to implement Labour policies such as the minimum wage – almost as an apology for victory. It has been so long since we saw a confident Tory budget that even the Tories seem to have forgotten what one looks like.

The basics are pretty simple. Conservatism is a belief the countries and communities are stronger and fairer if more money and power are left in the hands of the people, rather than by government. That individuals take wiser decisions for themselves than any politician can take on their behalf. This isn’t an ideology, as such, just an observation that lower taxes, regulatory restraint and sound money is a formula that has worked everywhere that it’s been tried.

David Fuller's view -

I am grateful to Philip Hammond for his outspoken comments in cabinet meetings which have squashed some of the daft left-wing suggestions mentioned above. This government does not have to adopt senseless Labour Party policies to attract more Labour voters.  However, it does need to reawaken the aspirational interests of traditional Labour voters, which it can start doing by helping the economy in the manner of Margaret Thatcher.  Today’s equivalent would include more houses, lower taxes and sensible, competitive energy policies.

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



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March 03 2017

Commentary by David Fuller

The Markets Now

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

March 03 2017

Commentary by David Fuller

Email of the day

On Dyson, cats and dogs:

David:

The reporting and your comments about Dyson were interesting, but my wife said that her experience in the years when we lived in England was that the Dyson appliances were obviously brilliant in engineering terms and would last forever, but they were VERY user-unfriendly -- heavy and clumsy.

As South Africans, we thought that Brits (unlike us and Americans), often made the mistake of paying too highly for socially-highly-rated products (AGA is a good example), that were not worth it. I remember our disappointment at the poor range of "upper middle class" products (usually Japanese and German brands) that we were used to in Johannesburg. Our perception of what was on offer was an avalanche of cheap products (especially the cheapest and nastiest), topped off with very upper-class, overpriced status brands. Of course, that was a long time ago... ten years or more that we've lived in Chiangmai.

Trust you and family are now well... including Ishmael and Willow. Liz and I are now enslaved by an Asian lady we call Tong.

M

David Fuller's view -

Thanks for your thoughts. 

Liz was right.  With a big house we needed an effective vacuum cleaner so we bought the heavier of the initial Dysons.  It was effective but in the hands of cleaners was used like a wrecking ball on some of our furniture.  These days I would rather do it myself and Mrs Fuller is a big fan of the much improved Rombas. 

Dyson’s other products are certainly not cheap but they are very good and also have an aesthetic appeal which I am happy to pay for.  My favourite is the air purifier which is essential for London with all the horrific NOx (diesel) pollution.  However the air purifier obviously only works in the house, where I leave it on most of the time, on a low and virtually silent setting. 

The Burmese are fantastic companions although we nearly lost Ishmael a short while ago due to a sudden and unexplainably serious ear infection.  When we got them eight years ago the children were worried that we were more interested in the cats than our grandchildren of approximately the same ages, although that was not quite true.  I am glad you and Liz have Tong and can understand the feeling of enslavement.   



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March 03 2017

Commentary by Eoin Treacy

March 03 2017

Commentary by Eoin Treacy

US Economy: No recession in sight Policy uncertainty enormous

Thanks to subscriber for this report by Torsten Slok for Deutsche Bank. Here is a section:

1. The fact that the Fed wants to raise rates three times this year tells us that they are worried about the economy moving towards overheating
2. The economy is already at full employment, confirmed by anecdotes of higher minimum wages and labor shortages across industries
3. Average hourly earnings have trended higher since 2014
4. US may be reversing on the “strong dollar” policy to boost US exports
5. Import prices are trending higher
6. Producer prices are trending higher
7. Breakeven inflation expectations are trending higher
8. Lower corporate taxes will boost growth and hence also inflation
9. Increased infrastructure spending will lift growth and hence also inflation
10. Lower household taxes will raise growth and hence also inflation

All variables in the Fed’s model of inflation point to higher inflation in 2017:
Inflation = F(Inflation expectations, unemployment rate, oil prices, import prices

Eoin Treacy's view -

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

The USA’s legislative agenda for the next couple of years represents both an enormous opportunity for reform and unlocking growth but also an uncertainty since market expectations are now geared towards optimism and disappointments will likely be greeted with selling pressure. 



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March 03 2017

Commentary by Eoin Treacy

NBCUniversal Invests $500 Million in Snap IPO Amid Digital Push

This article by Gerry Smith and Alex Barinka for Bloomberg may be of interest to subscribers. Here is a section:

Comcast Corp.’s NBCUniversal invested $500 million in Snap’s initial public offering, expanding its reach into digital media by acquiring a stake in the $28 billion disappearing-photo service popular with millennials.

NBC Chief Executive Officer Steve Burke, in a memo to staff Friday, called the move a “significant milestone” in the media company’s partnership with Snap. The Comcast unit will be subject to a 12-month lockup period as part of its investment, meaning it can’t sell Snap’s shares for a year, according to a person familiar with the matter.

Snap surged 44 percent Thursday on their first day of trading, and gained another 12 percent Friday.

With the latest investment, NBC has now committed over $1.5 billion to digital businesses in the last 18 months, including two separate $200 million investments in BuzzFeed, and a $200 million investment in Vox Media, the online publisher of the Verge, Eater and Recode.

Last summer, NBC produced a Snapchat channel featuring Olympic content run by BuzzFeed, which generated over two billion views, Burke said in the memo. With the Snap investment, NBC will expand its partnership with the social-media network and BuzzFeed for the 2018 Winter Games in South Korea, and launch more shows with additional NBC brands in the coming weeks, he said.

 

Eoin Treacy's view -

Snap Inc. is another major venue for social media and particularly for the mid-teen to mid-20s demographic. One of the slides from the above report from Torsten Slok highlights the fact that the 26-year old demographic is the single largest in the USA so it is important both from a size and spending perspective which is why there is such interest in Snapchat from companies like NBC.  



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March 03 2017

Commentary by Eoin Treacy

Peso Surges After Ross Says Nafta Deal Could Fuel Recovery

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

U.S. Commerce Secretary Wilbur Ross triggered a rally in the peso when he said the currency could recover “quite a lot” if his country can reach a sensible agreement with Mexico on the North American Free Trade Agreement.

“The peso has fallen a lot, mainly because of the fear of what will happen with Nafta,” Ross, 79, said in an interview on CNBC on Friday. “I believe that if we and the Mexicans make a very sensible trade agreement, the Mexican peso will recover quite a lot.”

The peso surged 1.9 percent on Friday morning New York time in the wake of Ross’s comments, paring its depreciation over the past year. The 8.7 percent decline in the currency’s value since March 2016 has boosted the cost of imports into Mexico, while making its exports more competitive.

 

Eoin Treacy's view -

The Peso has been about the most unloved currency in the world but the speed of the decline spurred the central bank into action and short-term interest rates have been hiked on successive occasions over the last 18 months and a number of other measures to support the currency have also been implemented.



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March 02 2017

Commentary by David Fuller

Dyson Expands in U.K. With New Technology Campus

Here is the opening of this informative article from Bloomberg:

Dyson Ltd., the U.K. maker of high-end vacuum cleaners and hand dryers, said it's creating a new 517-acre campus in the English countryside to expand its research and development of robotics, batteries, vision systems and artificial intelligence.  

James Dyson, the company's founder, announced the expansion today at the new site in the Cotswolds, about 100 miles west of London on a former military barracks and flying school. Work will start with the restoration of a former World War II airplane hangar in May with the goal of it opening by the end of the year.  

U.K. Prime Minister Theresa May said in a statement that the company's expansion is a vote of confidence for the British economy following the country's decision to leave the European Union. "Dyson’s exporting strength and commitment to creating jobs in Britain is a real success story that demonstrates the opportunity that our plan to create a truly global Britain can present," May said. 

Still, Dyson said the U.K. lacks enough skilled workers. An additional 640,000 engineers are needed in the U.K. by 2020, according to the company. To fill the gap, the firm pledged 15 million pounds ($18.6 million) over the next five years to create an alternative to going to university. Talented engineers will be able to work and study at the company for four years to gain hands-on experience.

“The U.K.’s skills shortage is holding Dyson back as we look to increase the amount of technology we develop and export from the U.K.," Dyson said in a statement. "We are taking matters into our own hands." 

Dyson employs 3,500 people in the U.K. Its global headquarters is in nearby Malmesbury, a campus that in addition to research and engineering labs has a helicopter in the parking lot and a jet plane hanging from the cafeteria ceiling. The company also recently opened a technology center in Singapore where it employs 1,100 people. 

While best known for its vacuum cleaners, Dyson is expanding into new areas. A $400 hair dryer introduced in 2016 took four years and $70 million to develop. The company said it has committed 2.5 billion pounds to future technologies. In 2015, the company bought the battery startup Sakti3 for $90 million, and has pledged to spend 1 billion pounds on battery development. The work has contributed to speculation the company is working on an electric car.  

David Fuller's view -

James Dyson is a tireless genius who continues to expand his product range.  The Fuller household has numerous Dyson products which have the quality achieved by a true perfectionist. 

Dyson voted for Brexit because he was tired of Brussels’ red tape and the EU was a shrinking market. 



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March 02 2017

Commentary by David Fuller

AI Scientists Gather to Plot Doomsday Scenarios and Solutions

Here is a brief section from this topical article from Bloomberg:

The possibility of intelligent, automated cyber attacks is the one that most worries John Launchbury, who directs one of the offices at the U.S.'s Defense Advanced Research Projects Agency, and Kathleen Fisher, chairwoman of the computer science department at Tufts University, who led that session. What happens if someone constructs a cyber weapon designed to hide itself and evade all attempts to dismantle it? Now imagine it spreads beyond its intended target to the broader internet. Think Stuxnet, the computer virus created to attack the Iranian nuclear program that got out in the wild, but stealthier and more autonomous.

"We're talking about malware on steroids that is AI-enabled," said Fisher, who is an expert in programming languages. Fisher presented her scenario under a slide bearing the words "What could possibly go wrong?" which could have also served as a tagline for the whole event.

How did the defending blue team fare on that one? Not well, said Launchbury. They argued that advanced AI needed for an attack would require a lot of computing power and communication, so it would be easier to detect. But the red team felt that it would be easy to hide behind innocuous activities, Fisher said. For example, attackers could get innocent users to play an addictive video game to cover up their work.

To prevent a stock-market manipulation scenario dreamed up by University of Michigan computer science professor Michael Wellman, blue team members suggested treating attackers like malware by trying to recognize them via a database on known types of hacks. Wellman, who has been in AI for more than 30 years and calls himself an old-timer on the subject, said that approach could be useful in finance.

David Fuller's view -

Having read the article I am more certain than ever that scientists will be unable to control AI when it is capable of programming itself.  We have not yet reached that stage to any significant degree but we have had predatory software in action for the better part of a decade, particularly in more liquid financial markets.  I have written about it many times although not much recently.

Consider what I described as a version of sonar fishing, where high-speed computers could introduce and then pull orders in nanoseconds, enabling them to identify both large holdings in a narrow price range, or also vacuums of supply or demand. Once identified they were able to pressure large positions or front-run orders in a trending market. 

Smart, young Brad Fukuyama from the Royal Bank of Canada discovered what was going on and eventually created systems for slowing down High Frequency Trading (HFT).  He became a hero in the financial community and the star of Michael Lewis’ best seller, Flash Boys.

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March 02 2017

Commentary by David Fuller

Theresa May Honourable Brexit Deserves More Chivalrous Treatment

Here is the opening from this excellent column by Ambrose Evans-Pritchard for The Telegraph.

The relentless attempt to portray Theresa May's Brexit plan as extreme and provocatively hostile to Europe is degenerating into a systemic lie.

Even if you agree with Sir John Major that Brexit is a "historic mistake", it is hard to imagine steadier and more cautious leaders than the Prime Minister and her Chancellor.  Both are Remainers trying to play a very difficult hand as best they can.

This campaign – for that is what it has become – inflames a false debate about Brexit. It is fanning a constitutional crisis over Scotland and Northern Ireland that might otherwise be defused.

The sloganeering is picked up and echoed by the global media, perpetuating a dark legend of nativist tribalism on these islands, and depicting Brexit as hostile to free trade and a "rules-based" global system. It is poisonous and does great damage.

Sir John Major is right that some Brexiteers would advance their cause better with "a little more charm, and a lot less cheap rhetoric". Triumphalism is never attractive – though was it not he who claimed "game, set, and match" at Maastricht in December 1991?

Yet one must rebut his insinuation that the British people are being lured into a trap of complacency by dishonest promises. For months the Cameron government used the machinery of the state to warn them of a Gothic fate if they voted "Leave" – but vote "Leave" is what they did.

The campaign against Mrs May rests on the false dichotomy of soft and hard Brexits, an issue on which I have shifted my view. As readers may know, I wanted the Norwegian option temporarily, to preserve access to the single market while we forged new trade deals. But it is not worth dying in a ditch for the European Economic Area (EEA).

Even those most hurt are not categorical about this. The British Bankers' Association (BBA) is wary of an EEA deal since it would leave the City at the mercy of a regulatory system controlled by others, and the totemic right to "passporting" is overstated. The concept is not a legal term. It is City argot.

Nor does the BBA want "equivalence", another term bandied around. "It would never do for us. It is insecure and one side can withdraw on a political whim at any time," said the BBA's chief, Anthony Browne.

What the City wants – given that Brexit itself cannot be reversed – is a bilateral deal with a dispute tribunal outside the clutches of the European Court. Broadly speaking, that is what the Government is pushing for. There is nothing reckless about it.

David Fuller's view -

This is one of AE-P’s best columns and very insightful.

I certainly agree with him about Mrs May and I hope he is right about EU attitudes towards Brexit becoming more constructive for both Europe and the UK.  Obviously Europe’s elections this year will be important factors.  Generally, I think new blood is more practical than old blood in politics and I hope the roles of unelected EU bureaucrats are downsized.

 A PDF of AE-P’s column is posted in the Subscriber’s Area.



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March 02 2017

Commentary by David Fuller

The Markets Now

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

March 02 2017

Commentary by Eoin Treacy

March 02 2017

Commentary by Eoin Treacy

Meet the weaponized propaganda AI that knows you better than you know yourself

I read a lot of articles and reports every day but this one by Jessica Hall for ExtremeTech is one I found fascinating and thought might also be of interest to subscribers. Here is a section:

More data meant a better guess, of course. Seventy “likes” were enough to make the AI’s prediction of a person’s OCEAN score better than their friends could do, 150 made it more accurate than what their parents got, and 300 “likes” could do better predicting a person’s OCEAN score than the best human judge of a person: their spouse. More “likes” could even surpass what a person thought they knew about themselves, by predicting their OCEAN score closer than the person’s own best estimate of what their score would be.

It goes the other way, too. To a database, a person’s name and entries from their profile are just nodes in an n-dimensional space, and the connections between nodes aren’t necessarily directional.  You can class individuals by similarities in the data, or you can search the data for individuals who fit into a class. It’s as simple as doing an alphabetical sort in an Excel sheet.

 

Eoin Treacy's view -

Was granularity in marketing the deciding factor in the US presidential election? It is often said that presidential elections are won by those who master new media whether that was JFK’s use of television or Obama’s use of social media. Trump certainly appears to have employed highly targeted messages aimed at very specific demographics to sway voter intentions in pivotal states. This also helps to answer the question which baffled onlookers during the campaign, how was he getting such traction by underspending his rival? 



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March 02 2017

Commentary by Eoin Treacy

Introducing Handle

This YouTube video highlighting the latest achievements from Boston Dynamics’ robotics team is another tour de force for the Alphabet owned company. 

Eoin Treacy's view -

Perhaps the most important point is not so much what the robot can achieve today but how much better it is than recent iterations. The pace of innovation is as important as the end result in many respects. The leaps being made in robotics are being enabled by the pace of innovation in artificial intelligence, computing power, optics, batteries and hardware. Could we then think about robots as the physical manifestation of the pace of technological innovation?



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March 02 2017

Commentary by Eoin Treacy

Greece's Latest Drama Imperils Banks' Baby Steps Toward Recovery

This article by Edward Robinson and Marcus Bensasson for Bloomberg may be of interest to subscribers. Here is a section:

That said, the plan hinges on a robust economy, said Mantzarvas. Almost half the reductions in non-performing mortgages and bad business loans are slated to come in the second half of 2019. The structure is designed to provide enough time for a recovery to lift the country’s fortunes. That could be a gamble given the fundamental weaknesses in Greece’s economy, which has shrunk by a quarter since 2008.

Moreover, if European officials and the IMF can’t reach an agreement with Athens, Greece may not receive a vital payment from the rescue package. That would be a severe blow for a country that still can’t borrow from bond markets at affordable rates. And the clock is ticking: Greece must pay about 6 billion euros in sovereign bond principal by July.

The memories of the brush with “Grexit” in 2015 are still fresh, and a new crisis could fan populist anger across Europe just as French voters are going to the polls in April and May, and before German elections in September.

For all their efforts, the Greek banks don’t control their own fate. The politics around the country’s bailout are what’s shaping their immediate future. As negotiations take place in Athens, veteran bankers are hoping for the best.

“The review has to close soon because delays will hold back the spending and investment activity that the economy needs,” said Michalis Sallas, the former executive chairman of Piraeus. “We won’t get the sense that we’re out of the crisis until the review is done.”

 

Eoin Treacy's view -

The timing for when Greece is next due to run out of money represents a serious inconvenience for Angela Merkel’s re-election campaign, At the end of July, the European silly season will be in full swing, millions of people will be getting ready for holidays and by the time they get back in September it will be difficult to get anyone to change their minds ahead of the election in October. Against that background it is Germany’s interests for the EU to come to an agreement with the IMF about what to do about Greece’s debt and ability to repay sooner rather than later. That’s quite apart from the Dutch election later this month and the French election next month. 



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March 01 2017

Commentary by David Fuller

Viewers Strongly Approve of Trump Speech to Congress

Here is the opening of this topical report from CBS News:

Viewers nationwide strongly approved of President Trump’s speech Tuesday night, with many Democrats joining Republicans in calling it “presidential” and positive in tone. Republicans and Independents found it “unifying,” though Democrats were slower to come around on that measure.

The President gained support for his policy plans among viewers: Interviewed before and after the address, they came away from it more positive on his ideas for the economy, immigration, terrorism, crime and Obamacare.

As is often the case in addresses to Congress, those who watched were more likely to be from the president’s party – in this case, Republicans. And they described a president they felt was keeping campaign promises and offering an “inspiring” message.

While half of Democrats found the speech “divisive,” about one-third of them also said Mr. Trump was “specific” and “knowledgeable”; neither label drew a majority, but nonetheless sizeable numbers compared to the more negative reactions Democrats have had to other aspects of his presidency.

And viewers of all stripes described the speech as at least somewhat positive in tone.

Overall, most watchers approved of the speech. Republicans did tune in to watch it in much greater numbers than Democrats (as a president’s party typically does) which bolstered those approval numbers. Forty percent of Democrats at least somewhat approved; 18 percent strongly approved.

The president moved opinion among viewers on his plans for a number of policy issues, comparing their views before and after the speech. The percent favoring his plans for fighting terrorism, addressing crime, improving the economy, handling illegal immigration, and dealing with Obamacare all jumped. 

Republicans and Democrats did see the president’s description of the country quite differently. Most Republicans think Mr. Trump’s depiction of the state of America is accurate, while six in 10 Democrats think the President’s description is worse than the country really is.

There is agreement across party lines that Mr. Trump is trying to do what he said he’d do during the campaign.

David Fuller's view -

Rub your eyes, gently pinch your cheek – yes, you are not dreaming – Trump actually gave a good presidential speech.  He deserves credit for this, and I think those behind the scenes, probably including sensible daughter Ivanka and Reince Priebus, Chairman of the Republican National Committee, deserve even more credit for keeping Trump focussed and on track.

Interestingly, the real, politically moderate Trump featured in this speech.  I assume Bernie Sanders loved his promise of a $1trillion infrastructure bill, presumably over two terms.  I imagine the Democrats’ Trump impeachment files will quietly be placed in boxes for at least the short term.     

What about the markets?

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March 01 2017

Commentary by David Fuller

Dimon Says U.S. Future Very Bright If Trump Can Enact Reforms

Here is the opening of this topical article from Bloomberg:

JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon expressed broad optimism for U.S. growth and his own industry if Donald Trump’s administration succeeds in reshaping taxes and regulation. Still, he said, international crises could pose risks.

Addressing investors in New York on Tuesday, Dimon predicted banks will lend more to small businesses, and that employers will raise wages and lure millions of people back into the job market, if the government eases rules and cuts corporate taxes. The nation’s biggest lenders are strong and poised to expand operations into more countries, he said.

“The future is very bright,” said Dimon, who is both CEO and chairman of the nation’s biggest bank. “If you have tax reform, regulatory reform, infrastructure reform, I believe you could see the United States growing much faster.” He said he joined a panel of business leaders advising the president because “the U.S. needs better policy.”

Read More: Trump turns to Dimon, Schwarzman for policy advice

The embrace marked a shift from October, before the election, when Dimon signaled disagreement with Trump’s comments on immigration and Muslims. At the time, the banker emphasized that all people are “completely welcome” at JPMorgan, mentioned his Greek grandparents, and set off loud applause by subtly predicting Americans were about to elect the first woman to the presidency. Those topics didn’t arise on Tuesday.

Instead, Dimon echoed Trump’s frustrations with a maze of regulations that hold back business investments and infrastructure projects.

“Do you know that this country hasn’t built an airport for 40 years?” Dimon asked. “We haven’t put a tunnel or a bridge in New York City for I think maybe even longer than that. You hear the horror stories of how long it takes to build a highway, a road, a grid, a tunnel, an airport.”

David Fuller's view -

Fair points from Dimon on infrastructure and Trump clearly agrees.  The question for markets is, will they hold let alone extend current gains if Trump’s stimulative measures are delayed well into 2017, let alone 2018? 

Probably not because that would be like running over the cliff in terms of expectations. Trump’s team will not be able to do everything at once.  Therefore they need to be realistic and practical in terms of what can be achieved on a step by step basis, outlining a clear plan in terms of what is achievable.  



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March 01 2017

Commentary by David Fuller

No Brexit Deal Is a Scenario U.K. Must Prepare for, Davis Warns

Here is the opening of this informative article from Bloomberg:

U.K. Brexit Secretary David Davis told cabinet colleagues to prepare for the possibility of Prime Minister Theresa May failing to reach a divorce deal with her European counterparts in the two years allowed by European Union rules.

Describing talks to quit the bloc as the “most important peacetime operation,” Davis called on government departments to “support a smooth exit from the EU” at the weekly cabinet meeting on Tuesday, May’s spokesman Greg Swift told reporters in London.

The Brexit secretary underlined “the need to prepare not just for a negotiated settlement but also for the unlikely scenario in which no mutually satisfactory agreement can be reached,” Swift said. “It’s important departments understand the challenges ahead.”

There was also a plea for optimism from May.

“She reiterated the need for an orderly process but stressed we must be optimistic, that our message is we’re not going to fail,” Swift said.

Separately, Foreign Secretary Boris Johnson told delegates at the British Chambers of Commerce annual conference that a deal can be done within the two-year window allowed by Article 50 of the Lisbon Treaty. May has pledged to trigger the process by the end of March.

David Fuller's view -

For Brexit ministers, the challenges are immense but the opportunity to regain sovereign independence could not be more important for this country’s long-term development.  They have to deal with everything from querulous, angry Lords motivated by hubris - to nervous foreign corporate investors in search of reassurances - and disillusioned, bitter Eurocrats who cannot see or think beyond their own collective panic.

The UK team is doing well, led by our increasingly assured Prime Minister Theresa May, ably supported by the highly experienced wise heads of David Davis, the articulate Iain Duncan Smith and many others.

Assuming Article 50 is invoked this month, it is impossible to tell how long discussions will persist given Europe’s many elections.  Nevertheless, I maintain that the UK’s position is stronger than ever.



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March 01 2017

Commentary by David Fuller

Economists May Be Underestimating How Fast the Robots Are Coming

Here is the opening of this informative article from Bloomberg:

Economists may be underestimating the impact on labor markets of increasing automation and the rise of artificial intelligence, according to a post published on the Bank of England’s staff blog on Wednesday.

“The potential for simultaneous and rapid disruption, coupled with the breadth of human functions that AI might replicate, may have profound implications for labor markets,” BOE regional agents Mauricio Armellini and Tim Pike wrote in the Bank Underground post. “Economists should seriously consider the possibility that millions of people may be at risk of unemployment, should these technologies be widely adopted.”

Robots and intelligent machines threaten to replace workers in industries from finance to retail to haulage, with BOE Chief Economist Andrew Haldane estimating in 2015 that 15 million British jobs and 80 million in the U.S. could be lost to automation. Past periods of technological upheaval, such as the industrial revolution, may not be a useful guide as the pace of change was slower, giving society longer to mitigate the potential consequences of increasing job displacement and inequality, according to Armellini and Pike.

“Economists looking at previous industrial revolutions observe that none of these risks have transpired,” they wrote. “However, this possibly underestimates the very different nature of the technological advances currently in progress, in terms of their much broader industrial and occupational applications and their speed of diffusion.”

“It would be a mistake, therefore, to dismiss the risks associated with these new technologies too lightly,” they said.

David Fuller's view -

It is easy to overlook the speed of technological innovation which is occurring.  After all, we have not experienced it previously and we have also lived through eight difficult years of slow GDP growth due to the severe credit crisis recession commencing in 2008.

Nevertheless, just consider for a moment the dramatic technological changes that you have witnessed and often benefited from over the last decade.  Consider just three of many examples which may be personal to you: 1) changes in your mobile phone over the last decade; 2) improvements in your computer software; 3) the advanced technology in your car if you purchased a new one in the last year or two.

Think how few of the technologies which you take for granted today were not available only twenty years ago.  Ten years from now the changes will be even more dramatic because we are living in an era of accelerating technological innovation, which will not end because we run out of new ideas. 

Yes, it will include many more robots.  However, very few of them will have visually human characteristics.  The big robots will be ever smarter industrial machines.  Many others will be miniature and all but invisible.  Most of these will be in the form of smart, fast chips or processors in computers and also larger machines.  There is no limit to their usefulness.  



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March 01 2017

Commentary by David Fuller

March 01 2017

Commentary by Eoin Treacy

March 01 2017

Commentary by Eoin Treacy

European Stocks Surge on Fed Hike Bets With FTSE 100 at a Record

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

European stocks jumped the most since the U.S. election, led by banks and miners, as increasing prospects for a Federal Reserve rate increase and robust China factory data boosted optimism about global growth.

The Stoxx Europe 600 Index added 1.4 percent at the close, as all 19 industry groups gained. The benchmark extended gains in afternoon trading as U.S. equities scaled new peaks. The U.K’s FTSE 100 Index and FTSE 250 Index rose to all-time highs, while Germany’s DAX Index rallied 2 percent to close above 12,000 for the first time since April 2015.

Traders are betting there’s an 82 percent chance of a rate increase at the Fed’s March 15 decision, about double the odds from Friday, after two influential officials from the central bank signaled a greater willingness to tighten monetary policy.

 

Eoin Treacy's view -

With President Trump’s first speech to Congress out of the way attention has returned to the prospect of additional Fed tightening this year and when the first of three anticipated rate hikes is likely to occur? 



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March 01 2017

Commentary by Eoin Treacy

March 01 2017

Commentary by Eoin Treacy

A Patent Decision on Crispr Gene Editing Favors MIT

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

Someone is going to make a lot of money licensing Crispr. And someone is going to make lot of money on therapies based on Crispr. That’s why, the day before the decision, the National Academy of Sciences released a long document laying out what kind of Crispr-based human therapies were kosher—so no one goes the full Gattaca.

In fact, the moneymaking part has already begun. Startups are getting funding based on Crispr-based business plans. Editas Medicine, which licenses the Broad patents to work on treatments for genetic disorders in human beings, had a 30 percent stock bump on word of the patent decision. “It certainly caused some concerns, because depending on how the courts were going to rule on the two claims, if you went with one, you could lose, right?” says Edison Liu, CEO of the Jackson Laboratory, a major source of genetically modified mice used in research. Jackson Labs has licenses from both sides, and since it aims at academic uses, gets better terms than a Silicon Valley biotech startup might.

 

Eoin Treacy's view -

The acrimonious patent battle over exactly who controls the intellectual property relating to CRISPR-Cas9 DNA editing has been dragging on for a year. Since the three main protagonists are well funded there is ample scope for additional suits and counter suits since the potential rewards are so large. 



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March 01 2017

Commentary by Eoin Treacy

Email of the day on the rollout of 5G

I would very much appreciate your thoughts about Sierra Wireless (NASDAQ:SWIR) who are also involved in this space.

I continue to be a big fan of your service and your daily video commentary is a welcome addition.

 

Eoin Treacy's view -

Internet connectivity is as essential to the modern economy as electricity and water and bandwidth needs to increase in order to cater to the number of additional connected devices coming on stream. 

If you think about how many devices in your home connect to your modem and compare that to how many used it a decade ago you’ll likely notice a big change. My children barely watch TV. When they want to see something they go on YouTube or Netflix both of which are streaming services. 

 



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March 01 2017

Commentary by Eoin Treacy

Email of the day on a US venue for The Chart Seminar:

Are you planning a USA chart seminar? Thanks

Eoin Treacy's view -

Thank you for your interest in The Chart Seminar and I’d be more than happy to organise a seminar in the US if there is sufficient interest. So far we have received the most interest for venues in Singapore and the UK which is why we have scheduled events at those locations. 



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February 28 2017

Commentary by David Fuller

These 12 Superbugs Pose the Greatest Threat to Human Health, WHO Says

Here is the opening of this worrying article from The Washington Post and numerous other newspapers:

The World Health Organization announced its first list of antibiotic-resistant “priority pathogens” on Monday, detailing 12 families of bacteria that agency experts say pose the greatest threat to human health and kill millions of people every year.

The list is divided into three categories, prioritized by the urgency of the need for new antibiotics. The purpose is to guide and promote research and development of new drugs, officials said. Most of the pathogens are among the nearly two dozen antibiotic-resistant microbes that the U.S. Centers for Disease Control and Prevention warned in a 2013 report could cause potentially catastrophic consequences if the United States didn't act quickly to combat the growing threat of antibiotic-resistant infections.

“This list is not meant to scare people about new superbugs,” said Marie-Paule Kieny, an assistant director-general at WHO. “It's intended to signal research and development priorities to address urgent public health threats.”

[The superbug that doctors have been dreading just reached the United States]

Superbugs that the WHO considers the highest priority are responsible for severe infections and high mortality rates, especially among hospitalized patients in intensive care or using ventilators and blood catheters, as well as among transplant recipients and people undergoing chemotherapy. While these pathogens are not widespread, “the burden for society is now alarming,” she said.

Included in this highest-priority group is CRE, or carbapenem-resistant Enterobacteriaceae, which U.S. health officials have dubbed “nightmare bacteria.” In some instances, it kills up to 50 percent of patients who become infected. An elderly Nevada woman who died last year contracted an infection caused by CRE that was resistant to all 26 antibiotics available in the United States.

David Fuller's view -

This a serious problem and your fellow subscriber Dr David Brown had some interesting comments on it recently.

As I understand it, one of the problems is that pharmaceutical companies have been expected to discover new, effective antibiotics.  However, this is an extremely expensive and uncertain proposition, which can involve many years of research for little reward.  If a successful new antibiotic is created, pharmaceutical companies will find it difficult to recover their development capital as many infections will require only a short period of treatment, unlike long-term treatments for many diseases, including cancers.  Moreover, if pharmaceutical companies charge a commercial rate, they will be accused of heartless price gouging. 

A practical solution to this problem, I suggest, is a three-pronged approach in which government laboratories, work in cooperation with university medical schools and also pharmaceutical companies to produce new antibiotics for specific medical conditions.  This would increase the research effort, share the developmental costs and also the rewards for successful products. I would be surprised if measures along these lines were not already underway.  



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February 28 2017

Commentary by David Fuller

Be Nice to the UK in Brexit Talks, $85 Billion Investor Pleads

Here is the opening of this topical article from Bloomberg:

Europe’s fifth-largest manager of pension assets is urging European Union governments not to punish the U.K when it negotiates its way out of the bloc.

“My worry is that attitudes will be too harsh,” said Magnus Billing, chief executive officer at Alecta, which manages 770 billion kronor ($85 billion) worth of pensions. “We need the U.K. even after its exit. It’s an important economy, it’s an important partner," Billing said in an interview in Stockholm.

Sweden will lose a major ally in the EU when the U.K. leaves. Both countries are free market fans, have opted out of the European single currency, are net contributors to the EU budget and oppose ceding too much power to Brussels. The U.K. is also Sweden’s third biggest export destination outside the Nordic region, behind Germany and the U.S.

There are growing concerns that the looming Brexit talks may turn ugly as remaining member states seek to deter others from leaving the bloc.

David Fuller's view -

Magnus Billing of Alecta is right to speak out and many more people from the European private sector should follow his lead.  If the EU’s negotiations are left in the hands of unelected bureaucrats and politicians likely to be thrown out at the next election, their crash and burn mentality will not be in anyone’s interests.  



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February 28 2017

Commentary by David Fuller

French Industry Shuts Le Pen Out of Debate on Economic Policy

Here is a brief section of this topical article from Bloomberg:

“I think I know why I wasn’t asked to speak,” Le Pen said in a statement on her website. “There’s total panic in a system that is off the rails.”

Also excluded was Jean-Luc Melenchon, the far-left candidate who has promised to review all of France’s commitments to the European Union.

Le Pen’s National Front team was left off the guest list because the discussion was focused on competitiveness within the EU and she is opposed to French membership of the bloc, according to Michel Grandjean, head of the Federation for Mechanical Industries, which represents 629,000 employees and 30,200 companies including trainmaker Alstom SA. Le Pen and Melenchon’s demand for more protection for French companies also ran counter to the focus of the debate, he added.

“Competitiveness implies free trade, which is not an option that Le Pen or Melenchon have supported,” Grandjean said, describing the National Front leader’s response as “sharp.” He said he’s open to discussing protectionist measures with both Le Pen and Melenchon.

And:

One group that was happy to meet the candidate on Tuesday were farmers. Le Pen spent an entire day at the country’s annual trade fair, drawing large crowds everywhere she went as she chatted with cattle and pig farmers. An Ifop study released Feb. 27 said 35 percent of farmers would vote for Le Pen in the first round on April 23, up from 19.5 percent in 2012.

David Fuller's view -

Everyone who seems to know anything about French elections and French polls remains united in the belief that Le Pen will be easily defeated in the second election.  Indeed, the various mainstream parties from both the left and right of centre have united to achieve this result. 

Nevertheless, Le Pen remains upbeat and confident, as her opening words shown above confirm.  Is this because she prefers the fringe role of the party in perpetual opposition?  Possibly, and that was her Father’s role, but I doubt it.  Marine Le Pen nudged him out of the party years ago and has worked tirelessly to improve its image. 

Today, Le Pen is the only political leader of a party in France which represents a genuine protest vote against the EU.  That did not matter a few years ago but today, the EU is less popular in France than it was in the UK when the Brexit vote was cast.  That may not matter to French businesses mentioned in the article above, but it could be a different story for French voters.

Moreover, even if the pollsters are right and Le Pen is defeated in the second election this May that will not be the end of the story.  Anti-EU parties are now a force across Europe as disillusion increases and ‘project fear’ loses its grip.

(See also Monday’s Comment of the Day)



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February 28 2017

Commentary by David Fuller

February 28 2017

Commentary by Eoin Treacy

February 28 2017

Commentary by Eoin Treacy

The World's Most Radical Experiment in Monetary Policy Isn't Working

This article by John Lyons and Miho Inada for the Wall Street Journal may be of interest. Here is a section:

Automobile, beer and cosmetics firms have slashed young-adult advertising and market to retirees instead, says Yohei Harada, head of the youth-marketing unit at Tokyo advertising agency Hakuhodo Inc. “The role of parents and children is getting reversed, where the parents from the bubble generation still act like children and want to buy the fancy car, while their children in the post-bubble generation worry about their parents’ spending,” he says.

Takashi Saito, a 33-year-old unmarried entrepreneur, was living in group apartment in Tokyo in 2015 when he decided to start a business. His idea: an online clothing-rental company for women who want a varied wardrobe but don’t want to pay for it. For $45 a month, clients rent three articles of clothing at a time, which they can return for others when they like.

Mr. Saito thought it would be easy to get a loan because Japan’s low-rate policies are meant to spur banks to lend more to small businesses. It wasn’t.

He asked Japan Finance Corp., a state-owned institution set up to lend to small businesses, for $200,000. After much haggling, he got less than $50,000. A year later, as the business grew, he asked for more. He was rejected. Japan Finance Corp. declined to comment.

Bank analysts say Japanese lenders have become more conservative, particularly with startup companies that have no collateral, because low rates cut into profits. In the 11-months after Japan’s rates went negative last year, Japan Finance Corp.’s loan portfolio shrank. 

 

Eoin Treacy's view -

Negative interest rates are sharply deflationary and central banks are finally coming to that realisation after an embarrassing foray last year. The Bank of Japan was the most visceral advocate of the policy and has been forced to backtrack. The commitment to holding JGB yields close to but below zero is a reflection of fears about refinancing costs following a splurge on new debt issuance but even that appears to have been abandoned with the yield currently at 0.05%. 



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February 28 2017

Commentary by Eoin Treacy

10 mines still making good money if the gold price falls 50%

This article by Frik Els for mining.com may be of interest to subscribers. Here is a section:

IntelligenceMine ranked the mines on an all-in sustaining costs or AISC per ounce basis rather than cash costs, a measure that excludes many overhead outlays and sustaining capital for mine development and ongoing exploration.

The ranking also excludes mine complexes and gold operations where the precious metal is produced as a byproduct (where through some clever accounting gold can be mined at negative costs) or companies that report gold-equivalent output.

The ranking is based on annual costs for 2015 since 2016 mine-level cost breakdowns are not yet available from most of the miners in the top rankings. Quarterly reported costs at the same mine can also vary widely so in order to find the consistent winners annual data was used.

These are the 10 mines – and there are only 10 in the world – that mine gold for less than $600 an ounce:

 

Eoin Treacy's view -

The gold mining sector has gone through a lengthy rationalisation with the result that it is now easier to compile a list of low all-in cost miners. That has also contributed to the ability of the sector to offer leverage to gold prices since early last year. 



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February 28 2017

Commentary by Eoin Treacy

The Seven Deadly Myths of U.S. Defense Spending

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

Greater defense spending will provoke arms races. This argument holds that more military funding would be self- defeating, by spurring America’s adversaries to undertake their own buildups. But there are already arms races underway; U.S. rivals just happen to be the ones racing the hardest. China has been increasing its military spending by double-digit annual increments for roughly two decades. Russia, even with its economy in a shambles, has been pouring money into a buildup meant largely to offset traditional U.S. and allied strengths.

And Iran, with its nuclear program on ice, is testing new missiles and doing whatever else it can to shift the balance in the Persian Gulf. Failing to counter those buildups, and to limit the opportunities for successful coercion or aggression, would be the more destabilizing course.

 

Eoin Treacy's view -

The US public have seen hundreds of billions spent on two wars with questionable outcomes and have little appetite for spending on more adventurism. On the other hand most people understand the benefits that accrue from having the world’s most powerful military and maintaining a sufficient deterrent against adversaries which appear to do nothing but seek comparative advantage. 



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February 28 2017

Commentary by Eoin Treacy

Warren Buffett's Best Investment

This note by Bill and Melinda Gates may be of interest to subscribers. Here is a section on female empowerment: 

Bill: Poverty is sexist. The poorer the society, the less power women have. Men decide if a woman is allowed to go outside, talk to other women, earn income. Men decide if it’s acceptable to strike a woman. The male dominance in the poorest societies is mind-blowing.
"The male dominance in the poorest societies is mind-blowing."

Melinda: It’s also crippling. Limiting women’s power keeps everyone poor. Fortunately, as a society becomes better off, a woman’s position in that society improves. But what good is that for a young woman in a poor country who doesn’t want to wait? How can she get more power now?

Bill: Melinda and I have seen over and over again that social change comes when people start talking to each other—and that’s the magic of women’s groups. If you go out in the village, you’re rarely going to find a men's group where they all share information. You’ll find a big man of the village, and the key aides to the big man, and people who work for the key aides. That hierarchy stifles conversation. It keeps people from talking about what matters. Women’s groups don’t get as caught up in that, so they’re better at spreading information and driving change.

Melinda: Right now approximately 75 million women are involved in self-help groups in India alone. We want to drive that number higher. The groups might form to help women get loans or share health practices, but after things get started, the women take it in the direction they want to go. That is empowerment!

Bill: The most touching thing we’ve ever done was to help create community groups in India where sex workers had a place to go and talk about HIV prevention. We did it so they could help each other insist on condom use from their clients. But our vision was way too narrow. What the groups did from a human point of view for those women was phenomenal, independent of HIV prevention.

Melinda: One of the first things the groups did was ease stigma. These women were excluded by everyone except each other—and softening the stigma started the healing. That’s why when Bill told me a few years ago that he had scheduled a meeting with a group of prostitutes, I was proud of him. I had done the same. I never imagined, as a Catholic school girl growing up in conservative Dallas, Texas, that I would ever have a meeting with sex workers and come away admiring them. But I did.

 

Eoin Treacy's view -

Governance Is Everything has been a maxim at this service for decades but it is hard to imagine governance improving when countries insist on trying to compete while holding back at least half the population. Female empowerment correlates positively both with lower birth rates, improved health outcomes, better educational engagement and economic growth. Sometimes it is the simple answers that require the most explanation.  



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February 27 2017

Commentary by David Fuller

Good-Cop, Bad-Cop Diplomacy May Pay Off

Here is this interesting syndicated column by Charles Krauthammer for the Washington Post and many other newspapers:

At the heart of Donald Trump’s foreign policy team lies a glaring contradiction. On the one hand, it is composed of men of experience, judgment and traditionalism. Meaning, they are all very much within the parameters of mainstream American internationalism as practiced since 1945. Practically every member of the team — the heads of State, Homeland Security, the CIA, and most especially Defense Secretary James Mattis and national security adviser H.R. McMaster — could fit in a Cabinet put together by, say, Hillary Clinton.

The commander in chief, on the other hand, is quite the opposite — inexperienced, untraditional, unbounded. His pronouncements on everything from the “one China” policy to the two-state (Arab-Israeli) solution, from NATO obsolescence to the ravages of free trade, continue to confound and, as we say today, disrupt.

The obvious question is: Can this arrangement possibly work? The answer thus far, surprisingly, is: perhaps.

The sample size is tiny but take, for example, the German excursion. Trump dispatched his grown-ups — Vice President Pence, Defense Secretary Mattis, Secretary of Homeland Security John Kelly and Secretary of State Rex Tillerson — to various international confabs in Germany to reassure allies with the usual pieties about America’s commitment to European security. They did drop a few hints to Trump’s loud complaints about allied parasitism, in particular shirking their share of the defense burden.

Within days, Germany announced a 20,000-man expansion of its military. Smaller European countries are likely to take note of the new setup. It’s classic good-cop, bad-cop: The secretaries represent foreign policy continuity but their boss preaches America First. Message: Shape up.

John Hannah of the Foundation for Defense of Democracies suggests that the push-pull effect might work on foes as well as friends. Last weekend, China announced a cutoff of all coal imports from North Korea for the rest of 2017. Constituting more than one-third of all North Korean exports, this is a major blow to its economy.

True, part of the reason could be Chinese ire at the brazen assassination of Kim Jong Un’s half-brother, who had been under Chinese protection. Nonetheless, the boycott was declared just days after a provocative North Korean missile launch — and shortly into the term of a new American president who has shown that he can be erratic and quite disdainful of Chinese sensibilities.

His wavering on the “one China” policy took Beijing by surprise. Trump also strongly denounced Chinese expansion in the South China Sea and conducted an ostentatious love-in with Japan’s prime minister, something guaranteed to rankle the Chinese. Beijing’s boycott of Pyongyang is many things, among them a nod to Washington.

This suggests that the peculiar and discordant makeup of the U.S. national security team — traditionalist lieutenants, disruptive boss — might reproduce the old Nixonian “Madman Theory.” That’s when adversaries tread carefully because they suspect the U.S. president of being unpredictable, occasionally reckless and potentially crazy dangerous. Henry Kissinger, with Nixon’s collaboration, tried more than once to exploit this perception to pressure adversaries.

Sometimes an off-center comment can have its uses. Take Trump’s casual dismissal of a U.S. commitment to a two-state solution in the Middle East. The next day, U.S. policy was brought back in line by his own U.N. ambassador. But this diversion might prove salutary. It’s a message to the Palestinians that their decades of rejectionism may not continue to pay off with an inexorable march toward statehood — that there may actually be a price to pay for making no concessions and simply waiting for the U.S. to deliver them a Palestinian state.

To be sure, a two-track, two-policy, two-reality foreign policy is risky, unsettling and has the potential to go totally off the rails. This is not how you would draw it up in advance. It’s unstable and confusing. But the experience of the first month suggests that, with prudence and luck, it can yield the occasional benefit — that the combination of radical rhetoric and conventional policy may induce better behavior both in friend and foe.

Alas, there is also a worst-case scenario. It needs no elaboration.

David Fuller's view -

This is well stated by Charles Krauthammer and there will be no shortage of fiscal conservatives who hope he is right.  Putting myself in that category, a lot of us are hoping that Trump can’t be as clueless as some of his public statements and press conferences suggest. 

But just in case, don’t miss the last two sentences in the article above.



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February 27 2017

Commentary by David Fuller

Trump Singles Out Tunnels in New York as Among the Worst in the Nation

President Trump on Monday warned that the nation’s highways, bridges and tunnels are unsafe — and he singled out New York’s Lincoln and Midtown tunnels as among the most dangerous.

“I mean, we have tunnels in New York where the tiles are on the ceiling and you see many tiles missing and you wonder, you’re driving 40, 50 miles per hour through a tunnel,” the president told a gathering of governors at the White House.

“Take a look at the Lincoln Tunnel and the Queens Midtown tunnel, you’re driving and you see all this loose material, and it’s heavy, it was made many years ago, it’s heavy. Today it’s light. It used to be better. The problem is you have to hold it [in place].”

The president then contemplated the number of people who might have suffered injuries as a result of the falling tiles.

“Say, man, I wonder how many people are hurt or injured when they’re driving at 40, 50 miles an hour through a tunnel and a tile falls off. And there are so many missing tiles. And such loose concrete. So we have to fix our infrastructure,” he said.

Trump is expected to announce details of his infrastructure spending plan — a key campaign promise, during his speech to Congress Tuesday night, which he said had been neglected for decades while the US frittered away trillions on wars.

“I’m going to have a big statement tomorrow night on infrastructure. We spend $6 trillion in the Middle East and we have potholes all over our highways and our roads,” he said.

He then told an anecdote about a friend to make his point.

“I have a friend who is in the trucking business. He said, my trucks are destroyed going from New York to Lost Angeles.

The roads are so bad that by the time we make the journey from New York to Los Angeles or back, he said the equipment is just beat to hell,” the president said.

“I said, ‘When has it been like that before?’ He said, ‘It’s never’ — he’s been in business for 40 years. He said,

‘It’s never been like that.’ Forty years, never been like that. So we’re going to take care of that infrastructure.

We’re going to start spending on infrastructure, big. And not like we have a choice,” he said.

‘It’s not like, ‘Oh, gee, let’s hold it off.’ Our highways, our bridges are unsafe. Our tunnels — it’s not like we have a choice. We have no choice, and we’re going to do it. And it also happens to mean jobs, which is a good thing.”

Officials did not immediately respond to requests for information about the number of people injured by falling tiles or loose concrete in the tunnels.

The trashing of New York infrastructure is bipartisan. Former Vice President Joe Biden once referred to La Guardia Airport as a “third world” facility.

David Fuller's view -

Trump is certainly making a sensible point about US infrastructure.  This also raises the question: Why were recent Presidents increasingly irresponsible about deteriorating US infrastructure?   



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February 27 2017

Commentary by David Fuller

Trillions of Dollars Are at Stake When Trump Speaks to Congress

Here is the opening of this topical article from Bloomberg:

Donald Trump’s address to Congress on Tuesday is taking on the importance of a State of the Union speech when it comes to U.S. financial markets.

For investors relying on more than a year of campaign promises of a pro-growth agenda to push U.S. stocks to record highs, the dollar surging and bond yields climbing, the prime-time speech to House and Senate lawmakers couldn’t come any sooner.

“We need to see some details within all the policy talk,” said Sean Simko, who manages $8 billion in fixed-income assets at SEI Investments Co. in Oaks, Pennsylvania. “More specifics in terms of numbers or even a more defined timeline. If there aren’t specifics there, the risk trade might be ending.”

Though new life was given to some faltering Trump reflation trades by the president’s promise of a “phenomenal” tax plan earlier this month, investors say more is needed, especially with the administration designating the repeal and replace of Obamacare as its first priority ahead of a tax overhaul.

While it isn’t considered a State of the Union address since it falls within Trump’s first year, the initial speech to Congress has been no less important to presidents in the modern era. Barack Obama first spoke before both legislative bodies in February 2009 about the financial crisis.

Trump will propose boosting defense spending by $54 billion in his first budget plan and offset that by an equal amount cut from the rest of the government’s discretionary budget, according to administration officials. During a speech to governors Monday, Trump called his plan a "public safety budget" and promised that “we’re going to start spending on infrastructure, big,” without giving details.

David Fuller's view -

Tuesday’s speech on the last day of February will be revealing in terms of both sentiment and liquidity.

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February 27 2017

Commentary by David Fuller

February 27 2017

Commentary by Eoin Treacy

February 27 2017

Commentary by Eoin Treacy

Short-term Overbought Conditions

Eoin Treacy's view -

Wall Street has been rallying impressively on consecutive weeks as optimism about the scale of the reforms that could potentially be introduced by the Trump administration has increased. 

There is no denying the prospect of deregulation represents a powerful bullish factor for the banking sector. Likewise lower corporate taxes, simplifying the tax code and infrastructure spending all represent potentially bullish outcomes in their own right, but in aggregate would represent a sea change in US economic policy. 

 



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February 27 2017

Commentary by Eoin Treacy

Wal-Mart launches new front in U.S. price war, targets Aldi in grocery aisle

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

The big box retailer also held meetings last week in Bentonville, Arkansas with food and consumer products vendors, including Procter & Gamble (PG.N), Unilever PLC (ULVR.L), Conagra Brands Inc (CAG.N), and demanded they reduce the cost they charge the retailer by 15 percent, sources said.

Wal-Mart also said it expects suppliers to help the company beat rivals on head-to-head pricing 80 percent of the time, these vendor sources said. The wide-ranging meeting with suppliers - where Wal-Mart discussed other topics - was also attended by Johnson & Johnson (JNJ.N) and Kraft Heinz Co (KHC.O), among others, sources told Reuters. The consumer goods companies did not respond to Reuters requests seeking comment.

These Wal-Mart moves signal a new front in the price war for U.S. shoppers, as the pioneer of everyday low pricing seeks to regain its competitive pricing advantage in traditional retailing.
For more than a year, Wal-Mart said it is investing in price while not sharing specifics. When asked by Reuters about the test and demands on grocery suppliers, Wal-Mart spokesman Lorenzo Lopez said the company is "not in a position to share our strategy for competitive reasons."

Germany-based discount grocer Aldi is one of the relatively new rivals quickly gaining market share in the hotly competitive grocery sector, which already boasts Kroger, Albertsons Cos Inc and Publix Super Markets as stiff competitors on price. A second Germany-based discount grocer, Lidl, is planning to enter the U.S. market this year, and together the German discounters pose a serious threat to Wal-Mart's U.S. grocery business.

 

Eoin Treacy's view -

Wal-Mart is investing heavily to take on Amazon in the online arena but faces attacks on its home turf of low cost retailing from interlopers like Aldi and Lidl which it has little choice but to outbid for custom. With progressively more competition in the consumer sector major producers of packaged goods are likely to come under increasing pressure to trim margins. That suggests they will invest even more heavily in technology and branding to protect their market shares. 



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February 27 2017

Commentary by Eoin Treacy

Super-smart robots will outnumber humans by FOUR BILLION within three decades, Softbank CEO says

This article appeared on the Daily Mail’s site today and may be of interest. Here is a section:

Mr Son said the growing number of microchip 'brain cells' opens up a huge opportunity for smart and connected objects.

'This is why I spent $32 billion (£26 billion) to acquire ARM,' Mr Son said, explaining his 30-year-vision of a world where the artificial computer brain will have 10,000 intelligence quotient (IQ) capabilities compared with 100 for the average human.

Jennifer Belissent, an analyst at Forrester Research who attended Son's keynote speech, said the numbers he mentioned were very dramatic.

'The greater connectivity and new artificial IQ capabilities offer so much potential. It sets the scene for a Marvel movie,' she said.
'Now, the key question is how to make that new technology available to everyone.

'It's not the number of new devices that is relevant but what you make out of it in terms of analytical capabilities.

Eoin Treacy's view -

Connectivity remains a secular theme. 4G has just been rolled out in India, enabling the economy to jump several stages of web development and Verizon is now introducing 5G in the USA. As the speed with which we can access the internet increases the range of potential applications for web-enabled functions multiplies.  The Internet of Things is a logical iteration of that evolution and suggests the number of connected devices is only going to increase as the relative cost of connectivity trends lower. 



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February 24 2017

Commentary by David Fuller

It Is Time for Luddites to Relax: Robots Will Not Take Over the World

Ever since the Industrial Revolution, the great fear has always been that automation would create mass, permanent unemployment. The most famous early scare came shortly after James Hargreaves, a brilliant innovator, came up with a multi-spindle spinning frame in 1764. Hargreaves, one of an army of free-thinkers who drove an explosion in economic growth, was born near Blackburn, a cotton producing part of Lancashire.

The local textiles industry couldn’t cope with demand, and Hargreaves’ innovation allowed a massive increase in productivity. But our inventor kept his device secret, using it only for his own production. He was right to be prudent: after his output helped depress prices – and hence deliver consumers a windfall – angry textile workers eventually broke into his property and vandalised his machines, forcing him to flee to Nottingham.

But progress wasn’t to be stopped, and automation has gone hand in hand over the past 250 years with an explosive increase in wages and employment. The reason? Machines increase output per person, and thus the demand for labour and wages. New jobs are created to replace old jobs, and then as these are automated even newer jobs emerge to replace the next lot of losses, and so on, ad infinitum. The main problem is one of mismatching skills: the process of creative destruction requires capital and labour to adapt constantly.

Yet there are many today who doubt that this overwhelmingly benign process will continue, especially with the advent of artificial intelligence, robotics, self-driving cars, drones and a new generation of learning machines. They are convinced that this is a new phase, and that millions of middle class jobs are about to be wiped out, with nothing to replace them.

David Fuller's view -

Allister Heath is one of the brightest, most upbeat and creative journalists out there.  I always read his prolific columns and often publish them. 

So, do I agree with this column above?  I think he will be right for the next few years, and possibly a decade or so.  However, the accelerating rate of technological innovation which I have written about for a number of years is clearly evident if you think about the changes you have witnessed over the last ten or twenty years.  Moreover, we are only in the foothills of this acceleration which has no natural ending.  In other words, it could continue indefinitely.   

Once intelligent machines have the capacity to develop and reproduce themselves, they will evolve much more quickly than our organic human brains.  The best projections suggest this will occur before the end of this century.

Don’t take my word for it – see what Bill Gates, Stephen Hawking, Elon Musk and many others are saying.  Here is a sample from Tech World

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



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February 24 2017

Commentary by David Fuller

UK Tories Lash Out at EU $63 Billion Brexit Bill

Here is the opening of this provocative article from Bloomberg:

U.K. lawmakers in Prime Minister Theresa May’s Conservative party hit back at claims from Austrian Chancellor Christian Kern that Britain will be charged 60 billion euros ($63 billion) to leave the European Union as tensions surge ahead of Brexit talks.

In a Bloomberg interview on Thursday, Kern became the first EU leader to put a value on the size of the U.K.’s Brexit bill. While May’s office was muted in its public comments, Kern’s warning that there would be “no free lunch” for the U.K. sparked a furious response from senior members of Parliament.

“This figure is a nonsense that’s been conjured up by EU officials who are behaving like children,” former cabinet minister Iain Duncan Smith said in an interview. "For the Austrian chancellor to even refer to it is quite absurd. As for saying there’s going to be no free lunch for Britain, we paid so much into the EU budget over the years, we pretty much bought the damned restaurant."

Haggling over the Brexit bill looks like it will mark a testy start to the negotiations once May invokes Article 50 of the Lisbon Treaty, something she has said she’ll do before the end of March. Britain’s Trade Secretary Liam Fox has called the very idea of a charge “absurd” and the government in London is adamant it won’t pay for any EU projects signed after November.

David Fuller's view -

This is a sign of weakness and will have no impact on UK Brexit considerations.  The EU has a budget problem and is not known for its spending cuts.  Therefore, this financial threat is a loud if indirect warning to French and Italian voters not to consider leaving the EU.  



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February 24 2017

Commentary by David Fuller

Email of the day

On gold, interest rates and inflation:

David, Eoin or you have made the point a number of times that a key point in tracing the rising direction of gold was when rates of inflation were ahead of interest rates. Do you have a chart which gives a picture of this phenomena? Best regards,

David Fuller's view -

Thanks for your interesting email. I do not have that chart at hand but we know that interest rates in most developed economies remain near record lows and that central banks are trying to increase inflation to 2%.

I think of gold as a non-yielding hedge investment in relatively short supply, with some unique properties including beauty, which have caused it to be regarded as ‘hard money’ throughout human history.  

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February 24 2017

Commentary by David Fuller

The Commercial Realities of Brexit

My thanks to a subscriber for this very informative report by Daniel Foe for Asia Research.  This is so interesting that I was torn with choices in finding a brief sample to show readers: 

The other significant area that Theresa May mentioned was a desire to maintain security ties.

The current EU Commissioner for Security is British and was appointed in August 2016. Despite the UK’s lead in this field by EU standards, he was described by the chairman of the EU Parliament’s foreign affairs committee as “a type of junior commissioner”. As if that was not clear enough, Gianni Pittella, leader of the European Parliament centre-left socialists and democrats, said, “it is a little, technical portfolio”, adding that there should be “no prize, no award” for voting to leave the EU. https://www.ft.com/content/bc9bb68a-589e-11e6-8d05-4eaa66292c32

Britain is the EU’s largest military power, and for a number of years Britain alone has been reaching its target in terms of defence spending (Britain is estimated to have spent about 2.1% of its GDP in 2016 against a target of 2.0%). However most of the countries in the EU, especially the large ones, are falling well short of the target. For Germany in 2016, the expected expenditure is only 1.2% (ironically, perhaps, Greece’s is 2.6%, but given that they are largely funded by German money,  perhaps Germany is a little closer to their benchmark than they are given credit for!). http://www.nato.int/nato_static_fl2014/assets/pdf/pdf_2016_07/20160704_160704-pr2016-116.pdf

Thus, in dollar terms, Germany would need to spend an additional USD 27.7 billion in 2016 alone to reach their defence spending target. This has been a source of significant irritation to the US, and mentioned by all of the candidates in the recent US elections, but Donald Trump appears more likely to make waves over this matter, despite his view of the obsolescence of NATO. Thus the UK leaving the EU will draw further unwelcome attention to this deficit. http://money.cnn.com/2016/04/15/news/nato-spending-countries/

Whilst much comment has been directed at the UK–EU relationship, little comment has been directed at the EU27’s internal relationships post-Brexit.

The matter of the UK’s nett contribution to the EU budget, which was €8.5 billion in 2015, will highlight this area, as the deficit will need to be made up by the rest of the cash-strapped EU27 or there will be the prospect of services needing to be cut.

Like any relationship that breaks down, the discussion of the future relationship can degenerate into bickering and irrational behaviour as the parties struggle to focus on the best outcome for the new reality. Helpfully, Theresa May has taken a powerful overview of the requirements and levers that both sides have. https://www.theguardian.com/politics/2017/jan/30/uk-eu-economic-cold-war-italian-minister-mario-giro

Britain, as the second largest importer of EU goods in the world, will have significant leverage over the setting of tariffs for manufactured goods and will be able to use this in settling the overall trade agreement, but it is always possible that an emotionally blinded EU—especially where Juncker, Head of the European Parliament holds some sway—could make an emotional decision rather than one guided by getting the best solution for all concerned.

Theresa May hinted that, if an acceptable deal is not reached, she could turn the UK into a regional tax haven in order to retain business in the UK: a sort of ‘supersized Singapore’ in Europe.

You will be able to hear pronouncements about progress from various sources. Elections in France, the Netherlands, and Germany this year may change the way talks evolve, but we believe that the issues discussed above represent the key underpinnings. https://www.bloomberg.com/politics/articles/2017-01-26/france-s-neighbors-sound-alarm-over-election-catastrophe-risk

David Fuller's view -

I commend this article to subscribers but if you are in a hurry, just read the paragraph which I have emboldened above.  We have already seen plenty of evidence of “an emotionally blinded EU”.  Riven with uncertainty and crises wherever they turn, EU bureaucrats are operating under a siege mentality. 

The UK is only a symptom of this problem; it is not the cause.  The UK electorate had the common sense to vote to get out of the EU.  The real problem is the collective hubris and incompetence of this project, which built a Tower of Babel in Brussels while undermining the economic competence of a great continent.   

(See also Thursday’s Comment of the Day) 



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February 24 2017

Commentary by David Fuller

The Markets Now

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

February 24 2017

Commentary by Eoin Treacy

February 24 2017

Commentary by Eoin Treacy

British Airways Poised to Join Long-Haul Narrow-Body Craze

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

Walsh spoke a day after Norwegian Air presented details of flights from five locations in Britain and Ireland to three low- fee airfields in New York state, Rhode Island and Connecticut, to be served by Boeing Co.’s 737 Max 8 model from June with one- way fares starting at 69 pounds or 69 euros ($86/$73).

While the Boeing jets will be operating close to the limits of their range, Norwegian Air has also ordered 30 A321neoLRs with which it could connect dozens of smaller cities either side of the Atlantic in the medium term.

Aer Lingus already operates long-haul flights with a fleet of Boeing 757s, the only narrow-body model to see regular use on non-stop Europe-U.S. services, but which ceased production in 2004. The seven A321s on order will serve as replacements while also adding new routes. The Irish unit began serving Hartford from Dublin last year and IAG has said that several other smaller U.S. airports are keen to attract flights with competitive fees.

Walsh said on a conference call with analysts that the introductory fares offered this week by Norwegian Air aren’t sustainable. “Norwegian has a very small margin of profitability and the fares that they’ve launched are clearly just designed to get some headline media coverage,” he said.

 

Eoin Treacy's view -

Michael O’Leary at Ryanair has been talking about initiating Trans-Atlantic flights for years but to no avail so far. That is a testament to how difficult it is to achieve sustainable economics for what is a long flight for a narrow body aircraft. Nevertheless, technology has improved, aircraft are more fuel efficient and Europe has a much lower fares than the USA which raises the prospect of disruption when it could well cost less to fly to the UK than Florida over the summer. 



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February 24 2017

Commentary by Eoin Treacy

Italexit is not a solution for Italy's problems

Thanks to a subscriber for this article by Lorenzo Codogno and Giampaolo Galli which may be of interest. Here is a section from the conclusion:

The euro is irrevocable. It was designed as Hotel California: “you can check out any time you like, but you can never leave!” However, we know that it would be wrong to take it for granted. Italexit could still happen as the unwilling and messy result of an unbearable deterioration in public finances and economic performance, combined with misguided political will and financial market turmoil. It would be a huge mistake. Much better, and less costly, would be to address the underlying problems, allowing Italy to survive and thrive within the euro by enhancing potential growth and economic resilience. 

It would be wrong to conclude that Italexit, or exit from the monetary union by any other Member State, is going to be an easy process that can be evaluated with a straight cost-benefit analysis and smoothly managed in an orderly way. While Roger Bootle, one of the advocates of the return to national currencies, came to somewhat different conclusions, he acknowledged that the exit merely being the reverse of the construction process does not make it easy: “it would be the equivalent of unscrambling an omelette”.

In the case of Italexit, redenomination and default would become very likely and would cause a number of side effects and negative spillovers into the economy. Exit without redenomination would lead the debt-to-GDP ratio to reach 190%, assuming 30% devaluation, making default even more likely. Hence, Italexit would not address the issues its proponents claim it would address, while producing significant financial instability. Just mentioning it as a viable solution as part of a political platform would imply risks of making it a self-fulfilling prophecy. The economic, social, and political consequences would be enormous and last for a number of years.

Eoin Treacy's view -

Links to the full reports are posted in the Subscriber's Area.

It has been my view for some time that the sustainability of the Eurozone is predicated on the assumption previously sovereign populations will accept any set of policies imposed by the European Commission. 

The Eurozone’s sovereign debt crisis arose because private sector loans made by banks in ‘creditor’ countries were at risk of being defaulted upon which would have caused a financial catastrophe for their home nations. The solution was to insist private sector debts be absorbed by the governments of the countries in which they were taken, with the result that sovereign debt-to-GDP ratios exploded. Massive fiscal austerity was imposed on the populations of peripheral countries which contributed to lower standards of living and deflation. 

 



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February 24 2017

Commentary by Eoin Treacy

The second stage of disruption

This article by Alex Pollak for Loftus Peak appeared in Australia’s Livewire letter and may be of interest to subscribers. Here is a section:

But it’s what inside that counts. Autos and components are a significant part of consumer discretionary, as are media, retail and staples including food. A major component of Industrials is transport – road, rail, marine, airline, construction material and heavy trucks.

Virtually all the automakers have electric and self-driving models in the works. But, as we have noted before, the more successful they are with these, the more the potential for write-offs in their internal combustion engine business – which is basically the whole business.

Banking disruption has started but hasn’t hit the mainstream – yet.

But fund managers typically invest looking to the existing make-up of the global economy, through the GIC’s sectors, which are composed of the companies in those industries. So the fund manager will have investment in oil, automakers, energy and transport, at time when those sectors are heading for massive disruption. In essence, the fund manager is investing by looking backwards!
This is a poor long-term strategy, and one which has already begun to cause drag in portfolios which are underweight ‘technology’ shares (because they form a small part of the index, at the expense of sectors like basic materials and utilities, which are large now but are de-weighting as disruption takes hold.)

We are at a particular point in the economic history where disruptive companies are moving into industries which were previously considered inviolable, companies which couldn’t be damaged because demand for the underlying physical good was thought to stretch out to the horizon. In fact, the demand may still be there, but the way it is delivered, because of technological change, is affecting virtually all industries.

It's why we invest in disruption, and the reason our returns have been solid.

 

Eoin Treacy's view -

Technological innovation is accelerating at an exponential rate and it is having a transformative effect on just about everything. That is why we concentrate so heavily on the sector. Technology is deflationary in many respects but it is perhaps better to think about that influence in terms of lower costs contributing to better margins. That gives a clear advantage to the originators of disruptive technology as well as early adopters. 



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February 23 2017

Commentary by David Fuller

Unpayable Debts and an Existential EU Financial Crisis; Are Eurozone Central Banks Still Solvent?

Vast liabilities are being switched quietly from private banks and investment funds onto the shoulders of taxpayers across southern Europe. It is a variant of the tragic episode in Greece, but this time on a far larger scale, and with systemic global implications.

There has been no democratic decision by any parliament to take on these fiscal debts, rapidly approaching €1 trillion. They are the unintended side-effect of quantitative easing by the European Central Bank, which has degenerated into a conduit for capital flight from the Club Med bloc to Germany, Luxembourg, and The Netherlands.

This 'socialisation of risk' is happening by stealth, a mechanical effect of the ECB's Target 2 payments system. If a political upset in France or Italy triggers an existential euro crisis over coming months, citizens from both the eurozone's debtor and creditor countries will discover to their horror what has been done to them.

Such a tail-risk is real. As I write this piece, four out of five stories running on the news thread of France's financial daily Les Echos are about euro break-up scenarios. I cannot recall such open debate of this character in the Continental press at any time in the history of the euro project.

As always, the debt markets are the barometer of stress. Yields on two-year German debt fell to an all-time low of minus 0.92pc on Wednesday, a sign that something very strange is happening. "Alarm bells are starting to ring again. Our flow data is picking up serious capital flight into German safe-haven assets. It feels like the build-up to the eurozone crisis in 2011," said Simon Derrick from BNY Mellon.

The Target2 system is designed to adjust accounts automatically between the branches of the ECB's family of central banks, self-correcting with each ebbs and flow. In reality it has become a cloak for chronic one-way capital outflows.

Private investors sell their holdings of Italian or Portuguese sovereign debt to the ECB at a profit, and rotate the proceeds into mutual funds Germany or Luxembourg. "What it basically shows is that monetary union is slowly disintegrating despite the best efforts of Mario Draghi," said a former ECB governor.

The Banca d'Italia alone now owes a record €364bn to the ECB - 22pc of GDP - and the figure keeps rising. Mediobanca estimates that €220bn has left Italy since the ECB first launched QE. The outflows match the pace of ECB bond purchases almost euro for euro.

Professor Marcello Minenna from Milan's Bocconi University said the implicit shift in private risk to the public sector - largely unreported in the Italian media - exposes the Italian central bank to insolvency if the euro breaks up or if Italy is forced out of monetary union. "Frankly, these sums are becoming unpayable," he said.

David Fuller's view -

This is not just ‘right-wing press’, as some may think.  AE-P is monitoring the European press for financially sentient views and people are openly talking about a breakup of the EU.  This was always probable at some point because no shared currency has survived for long without a federal system.  This has never held much appeal for Europe’s diverse cultures and only the EU’s bureaucrats would favour it today. 

Interestingly, among the French presidential candidates, only Marine Le Pen will benefit from increasing anti-EU sentiment.  This will do her no harm either – Why Marine Le Pen did a great thing by refusing to wear a headscarf.

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



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February 23 2017

Commentary by David Fuller

We Must Leave the EU Quickly; It is Falling Apart Faster Than I Thought

Hand over a €60 billion ransom or we won’t even start to discuss a trade deal: that, if Jean-Claude Juncker is to be believed, will be the European Union’s opening gambit ahead of Brexit.

Bring it on, I say: the best way to expose a very weak adversary who is pretending to be very strong is to call their bluff. Yet it may never even get to that. At this rate, what is left of the EU could soon be begging us for a trade deal, not the other way around.

The reality is that the EU is edging ever-closer to the abyss: it is at its weakest, most vulnerable since its creation, and it is now touch and go whether it survives 2017 or whether it is swept away in a catastrophic populist revolt.

Trouble is not only brewing in France, where Marine Le Pen keeps gaining ground, but also in the Netherlands, in Greece, in Italy and in eastern Europe.

Even if the dissidents fail, for now, the EU will soon be crippled by Britain’s departure, robbing it of its financial centre and billions of pounds a year in net contributions.

The EU’s modus operandi has always been to buy support with German and British money, especially in poorer regions and in France’s agricultural heartlands: when the cash runs out, or is replaced by some euro-tax, tensions will flare up again.

We keep worrying about how Brexit will affect Britain. But the real question is how Brexit will debilitate Brussels, shift the balance of power and ideology on the continent, with smaller, more pro-market nations losing their British champion, and trigger a new dash to yet more unpopular centralising treaties, fuelling more rage and anger. Yet the Eurocrats in Brussels and some Remainers in Britain keep on talking as if nothing has changed, as if the UK were leaving some powerful, eternal, economically successful superpower. The status quo is gone, forever, and what is left could be smashed further in just three months’ time.

David Fuller's view -

‘Those whom the gods wish to destroy, they first make mad’, including driving them into the EU.  It will be a rude awakening for political Remainers, from the House of Lords to Scottish Nationalists.

It is hard to see how the breakup of the EU could not be disruptive, not least because it is the last outcome that many people have expected.  They bought into the concept of an EU gravy train, without questioning the flawed economics of this reckless experiment.  This will be the focus of many books and university economics courses for decades to come.

Allister Heath feels that we should leave quickly.  I have long favoured a rapid exit from the EU but the UK Government appears to have felt that this was too controversial and risky, not least in terms of public opinion, plus UK businesses and also foreign businesses with divisions in Britain. This view may be correct.

At this point, time may work in the UK’s favour, although there are certainly plenty of risks, mainly in the form of EU bad debts.  This will all be very contentious, although I maintain that over the longer term, Europe including the UK will be far better off as a trade association of independent, self-governed countries with their own currencies.  For convenience, they can also maintain a separate commercial currency, such as a version of the euro or bitcoin, if they wish.  This trade association would be for mutual convenience within Europe but the individual countries should also be free to trade with other countries, where there are mutual interests and trade synergies.  The last thing Europe should want or need is more trade barriers. 

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



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February 23 2017

Commentary by David Fuller

The Markets Now

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

February 23 2017

Commentary by Eoin Treacy

February 23 2017

Commentary by Eoin Treacy

Renewed Love for Gold into Early 2017

Thanks to a subscriber for this report from RBC, dated February 13th, which may be of interest. Here is a section:

Through the first month of 2017, global commodity AUM flows have shifted course as funds have returned to precious metals and out of energy. This was a reversal in pattern from that seen through Q4/16, which saw total outflows of $20.5B in precious metals holdings and inflows of $8.4B into energy. This corresponded to a 0.7% increase in TSX weighting for precious metals to 7.3% and a 1.3% decline in energy in January. However, despite the promising start to the year for precious metals, total commodity AUM still sits 13% below the $123B seen in September 2016 and the current TSX weighting of 7.75% still sits 1.9% below the high of 9.6% seen in July 2016.

This month, we have seen an acceleration of inflows into physical gold ETFs, which we view as a positive sign fundamentally, and believe that we will continue to see inflows due to geopolitical concerns, persistence of low real rates globally, and growing US inflation expectations. We would recommend that investors focus on companies with attractive margins, solid balance sheets, organic growth opportunities and a consistent operating strategy.

Eoin Treacy's view -

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

Following an impressive rally in early 2016 Total Known ETF Holdings of Gold followed the trajectory of the gold price and pulled back below the trend mean. A rally back towards 60 million ounces is currently underway and a sustained move above that level would lend credibility to the view that a low of more than temporary significance has been found. 



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February 23 2017

Commentary by Eoin Treacy

NVidia to fall nearly 20% on increasing competition from AMD, high valuation, analyst says

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

Instinet lowered its rating on NVidia to reduce from buy, saying the company's earnings will come in below expectations this year due to a more difficult gaming graphics market.

"We believe consensus is underappreciating a slowdown in gaming and the potential negative impact to the multiple," analyst Romit Shah wrote in a note to clients Wednesday. "We recommend investors take profits."

NVidia shares are up 251 percent in the past 12 months due to better-than-expected sales results from its graphics card segment.

 

Eoin Treacy's view -

Acceleration is a trend ending and NVidia definitely accelerated last year so reversion towards the mean, at least, is a distinct possibility. 



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February 23 2017

Commentary by Eoin Treacy

Saudi Arabia $2 Trillion Aramco Vision Runs Into Market Reality

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

Even within the Saudi government, doubts are emerging. A person familiar with the flotation, who asked not to be named, said last week Aramco in its current form would probably be worth about $500 billion because a lot of its cash goes toward taxes and future investors won’t have a say on investments in non-core areas. Another person familiar with IPO talks put the figure at a little less than $1 trillion if investors base the valuation on Aramco’s ability to generate cash.

Selling a 5 percent stake would therefore raise at least $25 billion, still enough to match Alibaba Group Holding Ltd.’s unparalleled 2014 offering and dole out millions of dollars of fees to the advisers hired to manage the sale, namely JPMorgan Chase & Co., Moelis & Co. and independent consultant Michael Klein.

The $2 trillion estimate was initially put forward by Deputy Crown Prince Mohammed bin Salman last March. There are two key issues, according to interviews with a dozen industry analysts, investors and executives, who asked not to be named because of the sensitivity of the matter.

The first is that it’s premised on a simple calculation: Take the 261 billion barrels of reserves Saudi Arabia says lie under oil fields like the onshore Ghawar and offshore Safaniya, and multiply by $8 (a benchmark used to value reserves). An independent auditor is assessing Saudi reserves, the second- biggest worldwide, before the IPO.

Eoin Treacy's view -

When is the best time to IPO your company? When you can get more for it than you think it is worth. Saudi Arabia is one of the only participants in the oil business which has to have a really long-term perspective. Exxon Mobil and BP put out long-term forecasts for the energy market stretching into the 2030s but Saudi Arabia tends to think in 50-year timeframes. 



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February 23 2017

Commentary by Eoin Treacy

NASA Telescope Reveals Largest Batch of Earth-Size, Habitable-Zone Planets Around Single Star

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

NASA's Spitzer Space Telescope has revealed the first known system of seven Earth-size planets around a single star. Three of these planets are firmly located in the habitable zone, the area around the parent star where a rocky planet is most likely to have liquid water.

The discovery sets a new record for greatest number of habitable-zone planets found around a single star outside our solar system. All of these seven planets could have liquid water – key to life as we know it – under the right atmospheric conditions, but the chances are highest with the three in the habitable zone.

“This discovery could be a significant piece in the puzzle of finding habitable environments, places that are conducive to life,” said Thomas Zurbuchen, associate administrator of the agency’s Science Mission Directorate in Washington. “Answering the question ‘are we alone’ is a top science priority and finding so many planets like these for the first time in the habitable zone is a remarkable step forward toward that goal.”

 

Eoin Treacy's view -

One of the biggest mistakes we can make when looking at charts is to succumb to myopia. We can become so interested in the short-term gyrations of what we are personally invested in that we ignore the bigger picture of what is happening in the wider market. 

I personally find the study of planets, beyond our own, fascinating not least because everything we know is terra-focused and there is a universe of information beyond Earth which we tend to interpret through our experience of our home.  

 



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February 22 2017

Commentary by David Fuller

Le Pen Wins Over Women Voters Who Feel Left Behind in France

Here is the opening of this topical article from Bloomberg:

French women are starting to picture their next president as a divorced mother of three.

The anti-euro, anti-immigrant candidate Marine Le Pen has been playing up her gender as she seeks to convert a likely first-round victory into an overall majority in the run-off on May 7 -- and it’s paying off. The 48-year-old National Front leader has already rallied some 2 million additional female voters to her cause since her last run for president in 2012 and she’s betting more will follow.

“Women are the key,” said Nonna Mayer, a researcher at the Sciences Po institute in Paris who has studied the National Front for 25 years. “These women often abstain and now they are backing Le Pen to protect their jobs and their security.”

While women make up just over half of the electorate in France they are far less likely to turn out than men, offering a well of untapped support for the candidate who manages to tune into their concerns. Le Pen’s pitch weaves together concerns about immigration, security, and the economic decline of many white French communities into a potent populist brew that borrows freely from U.S. President Donald Trump, blaming “the elite” for the problems of ordinary voters.

In 2012 Le Pen lagged behind with female voters, winning 17 percent compared with 20 percent of men’s ballots. Now she’s closed that gender gap, attracting 26 percent of voters of both sexes, according of pollster Ifop. That makes her the favored candidate among women for the first round.

“What she is proposing is really different, just like Trump offered something really new,” said Cindy Blain, a 27-year-old pharmacist in the rural north east of France. “Maybe if we see Trump succeed, then voters will give her a chance.”

The prospect of a populist president committed to taking France out of the single currency pushed the spread between French 10-year bonds and similar-maturity German bunds to its widest in more than four years on Wednesday. The risk premium dropped 3 basis points to 76 basis points at 5:24 p.m. Paris time after earlier reaching 84 basis points.

Asked if she was concerned about the risks involved in Le Pen’s plan to leave the euro, Blain brushed the question off with a flick of her hand, as if swatting away a fly.

Le Pen’s bid for women’s votes is clear: on Feb. 4 she began distributing 4 million copies of a glossy, magazine-style brochure that set out her plan to “defend French women” as the country’s first female president. The pamphlet was interspersed with pictures of her navigating “the world of men” as a sister, mother, lawyer, sailor and political leader and included a promise to be a shield against Islamic fundamentalists who, she said, want to stop women “wearing a skirt, going to work or to the bistro.”

“This is not a feminist vote,” Mayer said.

Le Pen sent another signal to the voters Tuesday on a visit to Beirut, when she refused to wear a head scarf to meet with a senior Muslim official, who insisted she don one. With neither side backing down, she left without seeing him.

David Fuller's view -

This is a fascinating situation, partly because Le Pen is the candidate for a protest vote, not least because she is the only anti-EU candidate at a time when it is less popular than ever in France, and also because she is a single woman via divorce and the mother of three children.  If Le Pen can attract the woman’s vote (and why not?) the second May election may be a lot closer than pundits currently think.   Presumably all the other candidates who are pro-EU will do everything they can, by hook or by crook, to stop her.  That may backfire.    

(See also: Markets Are Right to Take a Le Pen Presidency Seriously, also from Bloomberg, plus Tuesday’s lead article)



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February 22 2017

Commentary by David Fuller

Trump Eyes Easing Obama Rules for Sprawling Pipeline Network

Here is the opening of this article from Bloomberg:

The hints of a pipeline spill are subtle: the hiss of rushing fluid, a streak of rainbow sheen. Tucked far below ground, a ruptured line can escape notice for days or even weeks, especially in the backcountry, where inspectors rarely venture. 

Regulators in the waning hours of the Obama era wrote rules aimed at changing that, and the industry is looking forward to the new administration rolling them back. The Pipeline and Hazardous Materials Safety Administration “has gone overboard,” said Brigham McCown, a former head of the PHMSA who served on President Donald Trump’s infrastructure transition team. “They built a Cadillac instead of the Chevrolet that Congress told them to build.”

The oversight agency, an arm of the U.S. Department of Transportation, is just one of many where Barack Obama’s policies are in the Trump team’s sights. The battle lines are predictable, with companies on one side and safety and environmental activists on the other. What’s particularly worrying the latter is timing, because the rules could be upended as new shipping routes go into service across the country.

The president, a fan of fossil fuels, has revived two controversial pipelines, TransCanada Corp.’s Keystone XL and Energy Transfer Partners LP’s Dakota Access. They would add 2,300 miles (3,700 kilometers) to the U.S. network with room to transport 1.1 million barrels a day. As it is, there are more than 200,000 miles of pipe cutting across the country carrying crude, gasoline and other hazardous liquids -- about 18 billion barrels worth annually. Many other projects are on the map; in Houston alone, planned lines are expected to increase capacity by 550,000 barrels a day in the next few years.

“I’m terrified about what is going to happen under Trump,” said Jane Kleeb, president of the Bold Alliance, a coalition of groups opposing Keystone XL. “My worry is that they will just budget-starve PHMSA.”

Read More: Why Keystone counts

While Obama was president, the PHMSA budget grew by 61 percent. Then, seven days before Trump’s inauguration, the agency finalized a ruletoughening up inspection and repair demands, mandating, for example, that companies have leak-detection systems in populated areas and requiring they examine lines within 72 hours of flooding or another so-called extreme weather event. The American Petroleum Institute, the oil and gas industry’s main trade group, characterized it all as overreaching and unnecessary.

David Fuller's view -

The extraction of industrial resources from the earth has always been a messy business.  Pollution risks remain although they are declining in the 21st Century, thanks to technology, regulation and more sensible management. 

Effective energy independence is a key aspect of the USA’s long-term GDP growth potential.  It means that the USA can produce more energy domestically when prices are higher, perhaps even selling some excess capacity, or increase imports of energy when they are lower.  An effective pipeline system is necessary for energy efficiency in a large country such as the USA.    



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February 22 2017

Commentary by David Fuller

The Weekly View: Ride the Bull, But Do Not Chase It

My thanks to Rod Smyth for his excellent timing letter, published by RiverFront Investment Group.  Here is a brief sample:

Our advice to investors is to “ride the bull” but not to chase it.  We believe the bull market in global stocks reflects the recovery in global economic and earnings growth, which we think will continue in 2017.  Our strategic allocation process recently reaffirmed our strategic preference for stocks over bonds, and this is currently reflected across our asset allocation portfolios. 

That said, we do not see this as a time to take above-normal risk by chasing the current bull market.  Our strategic process reminds us that US stocks are above trend, and with sentiment so optimistic, we think the pace of returns is likely to moderate.  As you can see from the chart above, the 200-day moving average is rising (a good thing, in our view), but the index is now at the top of its rising band, with the 200-day moving average at the bottom of the band.  Our balanced portfolios are close to their strategic targets and have sufficient cash and bonds to take advantage of a pullback should it occur.

David Fuller's view -

This strategy makes sense to me.

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



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February 22 2017

Commentary by Eoin Treacy

February 22 2017

Commentary by Eoin Treacy

Big Batteries Coming of Age Prompt Bankers to Place Bets

This article by Joe Ryan and Brian Eckhouse for Bloomberg may be of interest to subscribers. Here is a section: 

“Having big money come in is the first step to widespread deployment,” Brad Meikle, a San Francisco-based analyst for Craig-Hallum Capital Group LLC, said in an interview.

That’s a shift from many of the storage projects we’ve seen to date as expensive components and unproven revenue potential made commercial lenders leery. Developers typically have financed systems from their own balance sheets, cobbling together revenue from short-term utility contracts or wholesale electricity markets.

“We see an opportunity in the space,” Ralph Cho, Investec’s co-head of power for North America in New York, said in an interview. “We’re attempting to be a first mover.”

Storage contracts to date in the U.S. and Canada rarely exceeded three years, said Bryan Urban, head of North American operations for the Yverdon-les-Bains, Switzerland-based storage developer Leclanche SA. Now utilities are signing agreements for three to seven years, and sometimes as long at 10 years, he said. And in the U.K., National Grid Plc is signing four-year contracts for storage services

 

Eoin Treacy's view -

One of the most popular statistics quoted is that solar cells are rapidly approaching competitiveness even with coal. However that does not solve the intermittency problem. A better question is when will batteries be competitive with the cost of maintaining coal fired backup supply for inevitable demand surges? That is a question we should be able to answer soon as the number of utility scale batteries in operation increases. 



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February 22 2017

Commentary by Eoin Treacy

The Mark Zuckerberg Manifesto Is a Blueprint for Destroying Journalism

This article by Adrienne Lafrance for The Atlantic may be of interest to subscribers. Here is a section:

In other words, Facebook is building a global newsroom run by robot editors and its own readers.

This strategy may be right for Facebook, which has a strong track record of predicting what its users want. You certainly don’t rake in nearly $9 billion a quarter by building something people aren’t interested in. But if journalism is an indispensable component of the global community Zuckerberg is trying to build, he must also realize that what he’s building is a grave threat to journalism.

“A strong news industry is also critical to building an informed community,” Zuckerberg wrote in his manifesto. “There is more we must do to support the news industry to make sure this vital social function is sustainable—from growing local news, to developing formats best suited to mobile devices, to improving the range of business models news organizations rely on.”

There is more Facebook must do. But what? Lip service to the crucial function of the Fourth Estate is not enough to sustain it. All of this is the news industry’s problem; not Zuckerberg’s. But it’s also a problem for anyone who believes in and relies on quality journalism to make sense of the world.

 

Eoin Treacy's view -

I’ve been ruminating over the last couple of weeks on the role of journalism in modern society. This bell curve of where news organisations fall on the political spectrum is a testament to the tendency of journalists to write for well-defined demographics in service to the maxim “Give the people what they want”, or at least some of the people. 



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